[Senate Hearing 113-519]
[From the U.S. Government Publishing Office]
S. Hrg. 113-519
MID-SESSION HEARINGS FOR FISCAL YEAR 2015
=======================================================================
HEARINGS
before the
COMMITTEE ON THE BUDGET
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
April 1, 2014-OPPORTUNITY, MOBILITY, AND INEQUALITY IN TODAY'S ECONOMY
APRIL 8, 2014-SUPPORTING, BROAD-BASED ECONOMIC GROWTH AND FISCAL
RESPONSIBILITY THROUGH A FAIRER TAX CODE
MAY 1, 2014-INVESTING IN WHAT WORKS: EXPLORING SOCIAL IMPACT BONDS
MAY 13, 2014-EXPANDING, ECONOMIC OPPORTUNITY FOR WOMEN AND FAMILIES
JUNE 4, 2014-THE IMPACT OF STUDENT LOAN DEBT ON BORROWERS AND THE
ECONOMY
JULY 29, 2014-THE COSTS OF INACTION: THE ECONOMIC AND BUDGETARY
CONSEQUENCES OF CLIMATE CHANGE deg.
MID-SESSION HEARINGS FOR FISCAL YEAR 2015
------
S. Hrg. 113-519
MID-SESSION HEARINGS FOR FISCAL YEAR 2015
=======================================================================
HEARINGS
before the
COMMITTEE ON THE BUDGET
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
----------
April 1, 2014-OPPORTUNITY, MOBILITY, AND INEQUALITY IN TODAY'S ECONOMY
APRIL 8, 2014-SUPPORTING, BROAD-BASED ECONOMIC GROWTH AND FISCAL
RESPONSIBILITY THROUGH A FAIRER TAX CODE
MAY 1, 2014-INVESTING IN WHAT WORKS: EXPLORING SOCIAL IMPACT BONDS
MAY 13, 2014-EXPANDING, ECONOMIC OPPORTUNITY FOR WOMEN AND FAMILIES
JUNE 4, 2014-THE IMPACT OF STUDENT LOAN DEBT ON BORROWERS AND THE
ECONOMY
JULY 29, 2014-THE COSTS OF INACTION: THE ECONOMIC AND BUDGETARY
CONSEQUENCES OF CLIMATE CHANGE
______
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COMMITTEE ON THE BUDGET
PATTY MURRAY, WASHINGTON, CHAIRMAN
RON WYDEN, OREGON JEFF SESSIONS, ALABAMA
BILL NELSON, FLORIDA CHARLES E. GRASSLEY, IOWA
DEBBIE STABENOW, MICHIGAN MICHAEL B. ENZI, WYOMING
BERNARD SANDERS, VERMONT MIKE CRAPO, IDAHO
SHELDON WHITEHOUSE, RHODE ISLAND LINDSEY O. GRAHAM, SOUTH CAROLINA
MARK R. WARNER, VIRGINIA ROB PORTMAN, OHIO
JEFF MERKLEY, OREGON PAT TOOMEY, PENNSYLVANIA
CHRISTOPHER A. COONS, DELAWARE RON JOHNSON, WISCONSIN
TAMMY BALDWIN, WISCONSIN KELLY AYOTTE, NEW HAMPSHIRE
TIM KAINE, VIRGINIA ROGER F. WICKER, MISSISSIPPI
ANGUS S. KING, JR., MAINE
Evan T. Schatz, Staff Director
Eric Ueland, Republican Staff Director
(ii)
C O N T E N T S
__________
HEARINGS
Pages
April 1, 2014-Opportunity, Mobility, and Inequality in Today's
Economy........................................................ 1
April 8, 2014-Supporting, Broad-Based Economic Growth and Fiscal
Responsibility Through a Fairer Tax Code....................... 57
May 1, 2014-Investing in What Works: Exploring Social Impact
Bonds.......................................................... 113
May 13, 2014-Expanding, Economic Opportunity for Women and
Families....................................................... 193
June 4, 2014-The Impact of Student Loan Debt on Borrowers and the
Economy........................................................ 329
July 29, 2014-The Costs of Inaction: The Economic and Budgetary
Consequences of Climate Change................................. 411
STATEMENTS BY COMMITTEE MEMBERS
Chairman Murray
Senator Sessions
Senator Warner................................................... 113
Senator Ayotte................................................... 116
senator Whitehouse............................................... 117
Senator Johnson.................................................. 332
WITNESSES
Heather Boushey, Ph.D., Executive Director and Chief Economist,
Washington Center for Equitable Growth, and Senior Fellow,
Center for American Progress
John L. Buckley, Former Chief Tax Counsel, House Committee on
Ways and Means, and Former Chief of Staff, Joint Committee on
Taxation
Raj Chetty, PH.D., William Henry Bloomberg Professor of
Economics, Harvard University
Rohit Chopra, Assistant Director and Student Loan Ombudsman,
Consumer Financial Protection Bureau
Annmarie Duchon, Associate Director of Accommadion Services,
University of Massachusetts, Amherst
Mark Fisher, CBE, Social Justice Director, Department for Work
and Pensions, United Kingdom
Mark Fisher, Delegate, Maryland House of Delegates
Diana Furchtgott-Roth, Senior Fellow, Manhattan Institute for
Policy Research
Alfredo Gomez, Director of Natural Resources and Environment, US
Government Accountability Office
Sherri W. Goodman, Executive Director, CNA Military Advisory
Board
Jane G. Gravelle, PH.D., Senior Specialist on Economic Policy,
Congressional Research Service
Keith Hall, PH.D., Senior Research Fellow, Mercatus Center
Brittany Jones, Former President, Student Virginia Education
Association
Jeffery B. Liebman, Malcolm Wiener Progessor of Public Policy and
Director, Social Impact Bond Technincal Assistance Lab, John F.
Kennedy School of Government, Harvard University
Bjorn Lomborg, Adjunct Professor at Copenhagen Business School
and Director of the Copenhagen Consesus Center
Mindy Lubber, President, CERES
Kyle McKay, Analyst, Texas Legislative Budget Board
David Montgomery, PH.D., Senior Vice President, NERA Economic
Consulting
Sabrina L. Schaeffer, Executive Director, Independent Women's
Forum
Joseph Stiglitz, PH.D., University Professor of Economic,
Columbia University
Richard K. Vedder, PH.D., Distinguished Professor, Emeritus of
Economics, and FacultY Association, Contemporary History
Institute, Ohio University, and Director, Center for College
Affordability and Productivity
QUESTIONS AND ANSWERS AND ADDITIONAL MATERIALS
Questions and Answers
OPPORTUNITY, MOBILITY, AND INEQUALITY IN TODAY'S ECONOMY
TUESDAY, APRIL 1, 2014
United States Senate,
Committee on the Budget,
Washington, D.C.
The committee met, pursuant to notice, at 10:06 a.m., in
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray,
chairman of the committee, presiding.
Present: Senators Murray, Sanders, Whitehouse, Merkley,
Kaine, King, Sessions, Crapo, and Johnson.
Staff Present: Evan T. Schatz, Majority Staff Director; and
Eric M. Ueland, Minority Staff Director.
OPENING STATEMENT OF CHAIRMAN MURRAY
Chairman Murray. This hearing will come to order.
I want to thank my Ranking Member, Senator Sessions, and my
colleagues who are joining us here today, and I especially want
to thank our panel of distinguished witnesses for being here,
Nobel Laureate Joseph Stiglitz and Senior Research Fellow at
Mercatus Center, Dr. Keith Hall. We have a third witness. He is
John Bates Clark Medal Recipient Dr. Raj Chetty. His flight was
canceled coming in today. I believe he is landing at National
shortly, so he will join us as soon as he can get here.
Today's hearing is really going to focus on mobility,
inequality, and opportunity, but really at the heart of the
discussion is the basic promise of America, the idea that no
matter where you come from or who you are or your
circumstances, if you work hard and play by the rules, you have
the chance to live out the American dream.
That basic promise is why I sit in this chair today. When I
was 15, my father was diagnosed with multiple sclerosis, and
within just a few years, he could not work anymore and all of a
sudden, without any warning, my family fell on very hard times.
But the country did not turn their back on us. For several
months, we relied on Food Stamps. With the help of a government
program, my mom was able to attend Lake Washington Vocational
School so she could get a job, help put food on the table, and
take care of my dad. My brothers and sisters and I were all
able to go to college and stay in college because of student
loans and support from what we now call Pell Grants. We had
lost our footing, but because of this great country, we never
lost hope that with hard work, we would have the opportunity to
live out that American dream.
But, something happened to our economy over the last three
decades or so. Instead of rewards from hard work and innovation
being shared broadly, those rewards began to flow
overwhelmingly to those at the very top while everyone else was
getting left behind. But stagnant economic mobility and soaring
inequality are not inevitable. We can expand opportunity to
more Americans and ensure people have the tools that they need
to succeed, and that is what Congress should be focused on in
the coming years.
We know that our economy thrives when America's middle
class can earn enough to raise a family and save up for their
kids' college and put some money away for a secure retirement.
But in recent decades, the middle class has been squeezed.
Wages have stagnated. Workers cannot find jobs. Homeowners
worry about making their next mortgage payment. That has
happened even as incomes for the country's top earners have
increased. That trend is simply unsustainable and unhealthy for
our economy.
A recent study by the International Monetary Fund shows
that countries with higher inequality have slower growth and
more turbulent business cycles. As you have written, Dr.
Stiglitz, the United States has one of the highest levels of
inequality among the advanced industrial countries.
Making matters worse, as inequality has grown, it has not
gotten any easier for people to climb the economic ladder, as
we will hear from Dr. Chetty, who is joining us as we speak.
Thank you very much for being here. That research finds that
the birth lottery, or a child's parents' socio-economic
standing, matters more today than it used to because economic
mobility is stagnant while inequality is on the rise.
That is a very alarming trend because it goes against
America's basic promise. Right now, there could be a child with
the potential to go on to make new medical breakthroughs or
start a new business or innovate new technologies, but even if
she did not win that birth lottery, our economy and the world
might never benefit from her talents and skills. But, Dr.
Chetty, you also found in your research that some areas in the
U.S. have greater economic mobility, notably places that have
less inequality and good school systems.
So, we can overcome these challenges. Government alone
cannot solve the problem of inequality. Of course, businesses
that create good-paying jobs help people reach the middle class
and build a stable and secure life. But we in Congress can
create the conditions so that all Americans, from the top
income earners to those in the middle class and those
struggling to get there, can succeed, and to do that, we need
to do some foundational things to help today's workers.
I believe that starts a with a minimum wage increase.
Working full time should not leave a family in poverty.
Congress can and should act to ensure that hard work pays off
by raising the minimum wage for millions of workers.
Last week, I introduced the 21st Century Worker Tax Cut.
That bill would update our tax code to help today's workers and
families keep more of what they earn. It would give working
families with children a 20 percent deduction on a second
earner's income and expand the Earned Income Tax Credit, or
EITC, for workers without dependent children who are just
starting out or whose children have already left home. Based on
estimates from the Treasury Department and
the Joint Committee on Taxation, those simple changes to
our tax code would help more than 13 million childless workers
and more than seven million working families climb the economic
ladder.
My bill is paid for by closing corporate tax loopholes that
both sides have proposed closing. I know there are differences
when it comes to our parties, how we would use those savings.
My bill would close those loopholes to give workers and
families some tax relief, while Chairman Camp has proposed
closing those loopholes to pay for lower rates for
corporations. I am hopeful that, especially when they consider
the kinds of challenges we are discussing today, my Republican
colleagues will rethink their approach and join our effort to
give a tax break to struggling workers who really need it.
We also need to address all of our deficits fairly and
responsibly. Our country faces serious long-term fiscal
challenges. So while this year our deficit is expected to be
about a third of what it was just five years ago, I want to
continue to build on the $3.3 trillion in deficit reduction we
have already put in place. But at the same time, creating
opportunity means we cannot lose sight of the other deficits
that our country faces. Too many people cannot find work. Our
economy is still recovering after the worst economic downturn
since the Great Depression. So, we have to do more for people
who are struggling to find a job.
We have to also address our infrastructure deficit.
Infrastructure is what makes our economy move. It helps our
businesses grow. It makes our communities thrive. We need to
make those investments to spark economic growth and to create
more jobs for more workers.
We have to also give our kids the best education and
training they need to compete and lead the world, and that
means investing in early learning all the way up to college and
job training programs.
And, we have to maintain a strong safety net. Programs like
food assistance and affordable housing help make sure families
do not fall into deep poverty or hunger or homelessness.
Instead, it gives families more opportunity to climb the
economic ladder.
And the last point I will mention is the need to reform our
tax code. Our system is riddled with tax loopholes and special
interest carve-outs that benefit the wealthiest Americans and
biggest corporations, and that is unfair. Instead of spending
billions on those tax loopholes, we should be investing in
national priorities that benefit American families.
We have lots of work to do for families in our country, and
in our divided government, getting anything done is going to
take bipartisanship and compromise. Thankfully, here in
Congress, we proved just a few months ago that is possible.
Democrats and Republicans can break through the bitterness and
rancor, work together, and reach an agreement.
When Chairman Ryan and I sat down together after the
government shutdown last year, we faced a lot of skepticism
that we would be able to get anything done. But, we listened to
each other, we searched for common ground, and we made some
compromises. We knew we were never going to agree on
everything, but we did not think that should mean that we could
not agree on anything. And when we got a deal just a few months
ago, the vast majority of the Congress put partisanship aside
to do the right thing for the American people.
Our two-year budget deal was a strong step in the right
direction. It rolled back some of the damaging across-the-board
cuts and prevented a government shutdown. It restored some
certainty by setting budget levels, not just for 2014, but also
for 2015, so our Appropriations Committees in the House and
Senate can do their work on time using bipartisan numbers.
Now, we need to build on that. We should not relitigate our
bipartisan budget deal or create needless uncertainty again in
a budget process that should finally be free of crisis. And I
will certainly fight back against any attempts to move our
country backwards, with deeper cuts to investments for our
families and seniors or unfair and irresponsible budget
proposals that protect the wealthiest Americans and biggest
corporations from paying a penny more of their fair share.
But, we do owe it to our constituents to keep working
together towards policies that create jobs, increase economic
mobility, and gives more people opportunity. Every child
growing up today deserves the same shot at the American dream
that my family had, and I am ready to work with anyone,
Democrat or Republican, to get that done.
With that, I will turn it over to my counterpart, Senator
Sessions, and then we will hear from our experts on this.
OPENING STATEMENT OF SENATOR SESSIONS
Senator Sessions. Well, thank you. Thank you very much,
Senator Murray, and for your leadership.
This is an important discussion, an important issue that we
are facing, and I would note that the Ryan-Murray spending
limits that we agreed on was violated again yesterday, $6
billion more spent in 2014 than we agreed, to in that
legislation that you worked hard on to pass.
So, a sober review of the data reveals that the economic
situation for too many Americans remains unacceptable.
Household incomes have declined for five years. The number of
households at the lower end of the distribution grew by 1.7
percent, while the number of households in the middle income
decreased by 0.7 percent. In other words, the middle class lost
members to the lower-income group. That is not the trend we
want. I think we do need to understand that and recognize it.
Our unemployment rate remains stuck around seven percent,
but this statistic obscures much of the real picture. Millions
of Americans have left the workforce entirely, bringing the
workforce participation rate to its lowest level since 1978. We
were told that massive debts accumulated over the last five
years would lead to prosperity, but we are now left with none
of the prosperity and all of the debt. Growth last year was
half what the White House predicted it would be, and the White
House estimates have consistently been too high.
So, I agree, Dr. Stiglitz, with one of the remarks that you
have in your statement that what matters is whether citizens
see their living standard rise year after year. A pure GDP
analysis is not sufficient. We are government officials. We
have responsibilities to the people of this country and it is
appropriate to consider what is happening and what policies
might be exacerbating this condition.
Both the President and Chairman Murray have proposed as one
remedy to expand the Federal support for adults without
children. However, the President's proposal to expand the
Earned Income Tax Credit--and this is a real tax subsidy,
colleagues, not a tax deduction--it interacts with the
Obamacare subsidies in a way that surely would, contrary to
expectations, penalize work. Because the Earned Income Tax
Credit and the Affordable Care Act phase-out schedules
correspond with one another, an adult without children whose
income goes from $14,700 to $17,700 would lose 75 cents in
higher taxes and reduced benefits for every dollar they earn.
So, this creates an incentive not to earn. To grow employment,
we need to affirm work rather than punish it.
So, it is time for a compassionate reform, indeed. First,
EITC would appear to be a better method of helping the poor
than straight government assistance. I agree with that. This
can be a point of bipartisan agreement. But, it cannot be one
more program that traps Americans in poverty, and we do not
have the money to create a new welfare program, colleagues. We
do not have the money. So, any new program can and should be
paid for out of savings from existing welfare programs.
The government spends more than $750 billion a year on a
maze-like welfare bureaucracy. This money is spread across more
than 80 programs in dozens of agencies with little oversight
and no guiding vision. Imagine how much better it would be if
we combined these programs into a single credit with strong
oversight and a greater emphasis on job training and work
placement, where an individual prosperity plan could be
developed for each unemployed or underemployed worker that
would help move them into a better life financially.
So, we continue to hear about many of the government
spending projects our friend on the other side would like to
fund. But, a major reason there is no money for these new
projects is because of the huge rising interest payments on our
massive debt. We have squandered our financial inheritance and
are fast moving to destroy the American self-reliance and work
ethic that has made our nation so dynamic.
Let us put things in perspective. Last year, we paid out
$221 billion in interest, but the Congressional Budget Office
says that payment will rise in 2024 to $880 billion. The
President says it will rise in his budget to $812 billion. That
single year's interest payment is 300 times what we spend today
on our National Parks. It is 20 times what we spend today on
highways. It is enough to fund our Federal education programs
for ten years. And the President and many in the Senate, in a
time of slow growth and low job creation, want to double the
number of guest workers to take jobs that are needed for our
unemployed. If we care about economic growth, if we care about
prosperity, than we have got to recognize these rising interest
payments threaten to drown our economy.
We need to create more growth, more jobs, and better pay.
Some, I think, in this country believe higher wages are bad. I
do not believe higher wages are bad. It seems to me we have a
surplus of labor because wages are falling. In this economy, if
we actually have a shortage of labor, a tight labor market,
wages would be going up.
Here is how to get this economy on the right track, it
seems to me, without adding to the debt. Produce more American
energy, creating jobs right here in America, keeping wealth at
home. Eliminating all costly and non-productive regulations,
and there are lots of them. Make the tax code simpler and more
growth oriented. Ensure fair trade for U.S. workers by holding
our foreign trading partners accountable. We cannot allow this
continued massive currency manipulation, either. Adopt an
immigration policy that serves our national interests and the
interests of working poor in America. And last week, our House
Democrats endorsed a plan that would double the flow of new
immigrant workers into America--double the flow--which would
further reduce wages and job prospects.
We need to turn the welfare office into a job training
center. Streamlining the government itself, make our government
leaner and more productive to lessen the wealth it extracts
from America. And, finally, let us balance the Federal budget
and create confidence in our financial future and security for
our children.
All of these steps would create jobs and growth without
adding to the debt. All of these steps would create rising
incomes and wages. All of these steps would grow the middle
class, not the government.
Thank you, Madam Chair.
Chairman Murray. Thank you.
With that, we are going to turn to our three witnesses, and
again, thank you all for coming here today.
Dr. Stiglitz, we will begin with you.
STATEMENT OF JOSEPH STIGLITZ, PH.D., UNIVERSITY PROFESSOR OF
ECONOMICS, COLUMBIA UNIVERSITY
Mr. Stiglitz. Well, thank you very much. It is a great
pleasure for me to discuss with you one of the critical issues
facing our country is growing inequality, the effect it is
having on our economy, and the policies that we might undertake
to alleviate it.
America has achieved the distinction, as you pointed out,
of becoming the country with the highest level of income
inequality among the advanced countries. Matters have become
worse in every dimension. More money, more than a fifth of all
income, goes to the top. More people are in poverty at the
bottom. And the middle class, long the core strength of our
society, has seen its income stagnate. Median household income
adjusted for inflation today is lower than it was a quarter-
century ago. There is a vicious circle. Our high inequality is
one of the major contributing factors to our weak economy and
our low growth.
Data describing the other dimensions of America's
inequality are even worse. Inequalities in wealth are even
greater than income, and there are marked inequalities in
health. The most invidious aspect of U.S. inequality, however,
is the inequality of opportunity that you referred to earlier.
America has become the advanced country not only with the
highest level of inequality of outcomes, but is among those
with the least equality of opportunity. The statistics show
that the American dream is a myth. The life prospects of a
young American are more dependent on the income and education
of his parents than in other advanced countries. We have
betrayed one of our most fundamental values. The result is that
we are wasting our most valuable resource, our human resources.
Millions of those at the bottom are not able to live up to
their potential.
This morning, I want to make eight observations concerning
this inequality. The first is that this inequality is largely
the result of policies, of what we do and do not do. The laws
of economics are universal. The fact that in some countries,
there is so much less inequality and so much more equality of
opportunity, the fact that in some countries, inequality is not
increasing, it is even decreasing, is not because they have
different laws of economics. Every aspect of our economic,
legal, and social frameworks helps shape our inequality. In
virtually every domain, we have made decisions that help enrich
the top at the expense of the rest.
The second observation is that much of the inequality at
the top cannot be justified as just desserts for the large
contributions that these individuals have made.
Disproportionately, they are those who have excelled in rent
seeking and wealth appropriation, in figuring out how to get a
larger share of the nation's pie rather than enhancing the size
of that pie.
Thirdly, the idea that one should not worry about
inequality because everyone will benefit as money trickles down
has been thoroughly discredited. While the top has been doing
very well, the rest has been stagnating.
Fourthly, this recession has, in turn, made inequality much
worse. Ninety-five percent of the gains since the so-called
recovery have gone to the top one percent.
Fifth, it is not the case that our economy needs this
inequality to continue to grow. One of the popular
misconceptions is that those at the top are the job creators
and giving more money to them will, thus, create more jobs.
America has both creative and entrepreneurial people throughout
the income distribution. What creates jobs is demand. When
there is demand, America's firms will create the jobs to
satisfy that demand. This growing inequality is, in fact,
weakening demand, one of the reasons that inequality is bad for
economic performance.
Sixth, we pay a high price for this inequality, for the
extremes to which inequality has grown in the nature of
inequality in America, both in outcomes and opportunities. A
divided society does not function well. Our democracy is
undermined as economic inequality translates into political
inequality. America's politics are increasingly better
described as a result of a system not of one person, one vote,
but of one dollar, one vote.
Greater inequality leads to lower growth and more
instability. These ideas now have become mainstream. Even the
IMF, as you mentioned, has embraced them. We used to think of
there being a trade-off. We could achieve more equality, but
only at the expense of giving up on overall economic
performance. Now, we realize that greater equality and improved
economic performance are complements.
This is especially true if you focus on appropriate
measures of growth, focusing not on what is happening on
average or to those at the top, but how the economy is
performing for the typical American, reflected, for instance,
in median income. For too many, perhaps even a majority, the
American economy has not been delivering.
And if our economy is not delivering, it not only hurts our
people, it undermines our position of leadership in the world.
Will other countries want to emulate an economic system in
which most individuals' incomes are simply stagnating? We pay a
price, not only in terms of weak economy today, but lower
growth in the future. With nearly one in four American children
growing up in poverty, many of whom face a lack of access to
adequate nutrition and education, the country's long-term
prospects are being put into jeopardy.
The seventh observation is that the weaknesses in our
economy have important budgetary implications. The budget
deficits of recent years are a result of our weak economy, not
the other way around.
The final observation I want to make is that the role of
policy in creating inequality means there is a glimmer of hope.
There are policies that could reduce the extremes of inequality
and increase opportunity. In the last chapter of my book, The
Price of Inequality, I outline 21 such policies affecting both
the distribution of income before taxes and transfers and
after. Most of the policies are familiar: More support for
education, including preschool; increasing the minimum wage;
strengthening the Earned Income Tax Credit; giving more voice
to workers in the workplace, including through unions; more
effective enforcement of anti-discrimination laws; better
corporate governance; financial regulations and antitrust laws
more effectively enforced; and a fairer tax system.
The special provisions for capital gains and dividends not
only distort the economy, but with the vast majority of the
benefits going to the top, increase inequality. At the same
time, they impose enormous budgetary costs of the kind that Mr.
Sessions has emphasized, almost $2 trillion, if we include the
provisions of step-up of basis from the special provisions for
capital gains and dividends. If we are to avoid the creation of
a new plutocracy in the country, we have to retain a good
system of inheritance and estate taxation. We need to make sure
that everyone who has the potential to go to college can do so,
no matter what the income of his parents, and to do so without
undertaking crushing loans.
In the past, when our country reached these extremes of
inequality at the end of the 19th century, in the Gilded Age or
in the Roaring '20s, it pulled back from the brink. It enacted
policies and programs that provided hope that the American
dream could return to being a reality. We are now at one of
those pivotal points in history. I hope we once again will make
the right decisions. You and your committee and the budget
decisions that you will be making play a vital role in setting
the country in the right direction.
I would like to also submit for the record the paper that I
wrote on reforming taxation to promote growth and equity, where
I show that we can actually raise the revenue that we need to
address the problems of inequality and address the problems of
the budget deficit in ways, as I say, that will reduce
inequality and promote economic growth.
Chairman Murray. Okay. Thank you very much. Without
objection.
[The prepared statement of Mr. Stiglitz follows:]
[GRAPHIC] [TIFF OMITTED]
Chairman Murray. Dr. Chetty, thank you very much.
STATEMENT OF RAJ CHETTY, PH.D., WILLIAM HENRY BLOOMBERG
PROFESSOR OF ECONOMICS, HARVARD UNIVERSITY
Mr. Chetty. Chair Murray, Ranking Member Sessions, and
members of the committee, it is my pleasure to speak to you
today about opportunity and inequality in the United States.
As you know, America is often hailed as the land of
opportunity, a society in which children can succeed regardless
of their family background. However, opportunities for upward
income mobility in the U.S. are actually lower than in other
countries.
To take one statistic, a child born to parents in the
bottom fifth of the income distribution in America has a 7.5
percent chance of reaching the top fifth of the income
distribution, as you see here on the slides. In contrast, if
you look at Denmark, a child born in the bottom fifth of the
income distribution there has an 11.7 percent chance of
reaching the top fifth. So, that is, children in Denmark have a
50 percent higher rate of realizing the American dream than
children growing up in America.
Now, this low social mobility in the U.S. is not a new or
temporary problem. Mobility has been low in the U.S. for the
past several decades. However, because of the increase in
inequality discussed by Professor Stiglitz, the lack of
mobility is a much more pressing problem today. In a society
without much inequality, mobility would not matter very much
because everyone would have similar incomes regardless of
whether they moved up or not. But in a society with very high
levels of inequality, a lack of opportunity is a severe problem
and can substantially hamper economic growth.
Now, the stability and mobility over time has led some to
question whether social mobility can be meaningfully influenced
by policy. I think the answer to this question is, yes,
mobility can be improved by changes in policies that you can
shape. The reason I am confident that mobility is malleable is
that there are substantial differences in mobility across
communities within America, as illustrated in this map here,
which I am going to turn to next.
So, this is a heat map which shows you the chance that a
child born to parents in the bottom fifth of the distribution,
the income distribution, reaches the top fifth across areas of
the United States. Lighter colors are areas with higher levels
of upward mobility. So, what you can see from this map is that
in some parts of the U.S., such as the Southeast or the Rust
Belt, children who are born in the bottom fifth of the
distribution have less than a five percent chance of reaching
the top fifth. In contrast, in other areas, such as the Great
Plains and the West Coast, the odds exceed 15 percent.
Now, one thing you have to remember is no matter what
policies you enact, you are never going to have more than 20
percent of people in the top 20 percent, right. So, the fact
that you have odds of 15 percent versus five percent, you know,
these are really big differences in rates of upward mobility
across places within the U.S.
Now, there is substantial variation in upward mobility even
among the largest cities. So, to take some examples here shown
in this table, in cities like Salt Lake City and San Jose, you
have rates of mobility that are comparable to Denmark and the
most mobile countries in the world. But in contrast, if you
look at other cities, like Milwaukee or Charlotte, North
Carolina, the odds of reaching the--rising from poverty to the
upper parts of the income distribution are much, much lower,
lower than any developed country for which we currently have
statistics.
Now, this variation in economic mobility across areas in
the U.S., in my view, is actually some reason for optimism,
because if we can make every city in America have mobility
rates like San Jose or Salt Lake City, the United States would
become one of the most upwardly mobile countries in the world
and this would dramatically change economic growth and the
structure of the economy.
So, this naturally leads to the next question which we have
investigated in our research. What makes some places in America
have much higher rates of upward mobility than others? So, we
find five key factors that are correlated with differences in
upward mobility across areas.
The first is segregation. Areas with more racially
integrated neighborhoods and more mixed-income neighborhoods
tend to have higher rates of upward mobility.
The second, as Senator Murray mentioned, is inequality.
Areas with greater inequality, in particular, a smaller middle
class, have less opportunity for mobility, as well.
Third, as you might expect, areas with better schools, for
instance, better teachers, smaller classes, better funding,
tend to have higher levels of upward mobility.
Fourth, areas with greater social capital, which are
proxies for the strength of social networks and community
involvement in an area, also tend to have higher levels of
upward mobility.
And finally, mobility is much higher in areas with stronger
family structures, areas with fewer single parents, for
example. Now, a very important thing to note there is that even
children of married parents have higher rates of upward
mobility if they live in a community with fewer single parents.
So, this is something about the structure of the community and
not, per se, whether you have single or married parents.
So, these correlations do not necessary tell us what causes
the differences in mobility across areas, but the results of
the research that I have been describing point to certain types
of policy solutions, and that is the last set of issues that I
would like to discuss.
First, since rates of upward mobility vary widely across
cities, as I have shown you, place-based initiatives that focus
on specific areas, for instance, improving mobility in
Charlotte or Milwaukee, may be more effective than addressing
the problem at a national level. Such policies might include
targeted tax credits, efforts to revitalize local communities
such as Promise Zones, or funding for improvements in local
schools and investments in infrastructure.
Second, much of the spatial variation in children's
outcomes emerges before they start working. We find that
children in areas with low-income mobility also have higher
teenage birthrates and lower college attendance rates. So, by
the time they are in their teenage years, you are seeing
children in Charlotte and in Milwaukee falling behind if they
are from disadvantaged families. This tells me that it is
important to improve childhood environments rather than
focusing exclusively on providing jobs and ladders for
opportunity as adults. I think both are very important.
Third, there is clear evidence that improving primary
education can have substantial effects on mobility. For
example, in a recent study tracking one million students over
25 years, my colleagues and I find that a high-quality,
excellent teacher generates more than $1.4 million in earnings
gains for a single classroom of students over their lives.
Hence, programs that increase teacher salaries and provide
incentives for local school districts to retain and recruit
higher-quality teachers are likely to have very large payoffs.
Importantly, such investments in education have substantial
returns throughout childhood, not just in the earliest years.
Finally, perhaps the simplest and most cost effective way
to improve mobility may be to construct and publicize local
statistics on economic mobility. For instance, offering awards
or grants to areas that have substantially improved their rates
of upward mobility could spark local policy changes. I think
that shining a spotlight on the communities where children do
have opportunities to succeed can enable others to learn from
their example and increase opportunities for economic mobility
throughout America.
Thank you.
[The prepared statement of Mr. Chetty follows:]
[GRAPHIC] [TIFF OMITTED]
Chairman Murray. Thank you very much.
Dr. Hall.
STATEMENT OF KEITH HALL, PH.D., SENIOR RESEARCH FELLOW,
MERCATUS CENTER
Mr. Hall. Chairwoman Murray, Ranking Member Sessions, and
members of the committee, thank you for the invitation to
discuss income and equality and today's economy. I appreciate
the opportunity to testify today.
Nearly five years after the end of the Great Recession, the
labor market today is still far from full recovery. The share
of the working-age population with employment remains lower
today than at the end of the recession in 2009. At the heart of
this poor labor market recovery lies weak economic growth.
I want to talk about three things in my testimony. First, I
want to talk about disengagement from the labor force. I
believe that our unprecedented disengagement from the labor
force is the biggest ongoing economic challenge that we face
today.
Second, I want to talk about jobs and income inequality.
Because of the impact of employment on income inequality,
particularly on poverty, I believe that our current
disengagement from the labor force is a real concern for income
inequality in the U.S. in the near term and we should not lose
sight of this fact.
Third, I want to talk about economic policy and income
inequality. We need to be keenly aware of what impact current
policies and proposed policy changes are likely to have on the
size of the U.S. labor force and, therefore, on income
inequality in the United States, and this is in the near term,
in particular.
First, labor force disengagement. We have had an
unprecedented disengagement from the labor force in the United
States. This is, I believe, the biggest ongoing economic
challenge that we face today. We should, therefore, be very
cautious about how our current policy choices may contribute to
this problem.
Since the beginning of the recession, participation in the
labor force has fallen to a 35-year low of just 63 percent.
While some of this decline was expected and is due to an aging
population, most was not. In 2013, labor force participation
was at a 20-year low or longer for every age range between 20
and 54 years old. If you look at my written testimony and see
Figure 1, you will see the data on that.
The adverse effects of this are real for American families.
It is well established that individuals experiencing job loss
will have large and persistent earnings losses for years
afterwards. Also, the young graduating from school into a bad
labor market will remain behind in their careers for well over
a decade. Further, the longer an individual is out of the labor
force, the less likely they are to return to employment. With
four million long-term unemployed and likely millions more
long-term jobless, this disengagement may already be
permanently affecting the size of our labor force going
forward.
Fully eliminating the effect of our aging baby boomers
reaching retirement, I estimate that the labor force is
currently short over 4.5 million people. Last year alone, this
amounted to a loss of $500 billion in potential national
income.
Second, jobs and income inequality. Let me start with a
simple statement. Government spending does not move people out
of poverty. Jobs do. I am not suggesting that the government
social safety net is not important. However, despite a dramatic
increase in government spending on means tested programs, there
were a record 46 million people living in poverty in 2012. Lack
of employment is the primary cause of this poverty. Most of
those aged 18 to 64 years old who were in poverty did not have
as much as a single week of employment during 2012. Only about
11 percent had full-time employment.
Further, we have never had a decline in the poverty rate
that was not associated with a rise in the rate of employment.
And, since the late 1990s, employment appears to be the only
thing that reliably reduces poverty. If you look again at my
written testimony, Figure 2 shows this relationship. For this
reason, I believe that this disengagement from the labor force
is our biggest threat to improving income inequality in the
United States in the near term.
Third, I want to talk about economic policy and income
inequality. Because of the current state of the labor market
and its impact on income inequality in the short run, I want to
emphasize that policies that either raise the cost of hiring or
make it more difficult for individuals to return to the labor
force are counterproductive to our labor market recovery. They
can even contribute to income inequality through encouraging
continued disengagement from the labor force.
I want to briefly mention three examples. First, the
proposal to raise the Federal minimum wage from $7.25 to $10.10
an hour may have the perverse and unintended effect of
increasing income inequality. It is, of course, a laudable goal
to see wages increase, particularly for those who could benefit
the most from the raise. However, forcing employers to pay more
to low-skilled workers could mean job losses for a group that
is already having trouble finding work and fewer hours for a
sector of the labor market that mainly works part-time.
No matter what you have heard about the effects of raising
the minimum wage, there is a significant amount of economic
research that finds raising the minimum wage only benefits some
workers at the expense of jobs for others, particularly the
least skilled and experienced workers.
The current proposal represents a huge 39 percent increase
in the hourly wage cost of hiring for many. Common sense
dictates that raising the cost of hiring the least skilled
workers will force employers to look to substitutes like higher
skilled workers or rapidly advancing technology. The
Congressional Budget Office recently agreed, estimating that
half-a-million people will lose their jobs as a result. The
least skilled and experienced workers will pay this price in
job loss.
A second example is the Affordable Care Act. CBO's recent
finding that the Affordable Care Act will significantly reduce
the incentive to work by the equivalent of more than two
million full-time workers in just a few years is deeply
concerning.
And, third, a broader example of a counterproductive policy
is raising the regulatory burden for companies while we still
have a struggling labor market. While new regulation may be
important, they raise the cost of production and, therefore,
the cost of hiring production workers. Many of those workers
have below-average wages to begin with, and in a bad labor
market, job loss is much costlier for affected families.
So, in conclusion, our current very low rate of labor force
participation needs to be a central focus of policy makers. We
should focus on what the government is doing that makes it
harder for companies to increase hiring and avoid policies that
discourage individuals from reentering the labor force.
Government assistance to the low-income and jobless is
important, but the reemployment of the jobless is what we need
to reduce poverty and lower income inequality.
Thank you.
[The prepared statement of Mr. Hall follows:]
[GRAPHIC] [TIFF OMITTED]
Chairman Murray. Well, thank you, all of you, for your
testimony today.
I want to start with a question about the types of policies
that we here in Congress should consider if we want to create
more opportunity and improve economic mobility and strengthen
our middle class.
Over the last several years, we have made significant
progress towards addressing our medium-term budget deficits,
and while I certainly believe that we need to build on the
foundation we laid with the Bipartisan Budget Act and continue
to address our long-term debt challenges, I also really worry
that we have not done nearly enough to address the many other
deficits that our country faces today, which I believe are a
big part of the reason why economic opportunity is so scarce
for so many families these days. I know my colleagues on the
other side of the aisle tend to argue that rather than invest
in education or fix our crumbling infrastructure or patch the
holes in our social safety net, that we should reduce taxes for
those at the top and cut back on those services.
So, Dr. Stiglitz, I want to ask you your thoughts today on
the importance of public investments--education,
infrastructure, scientific research--and ask you if these types
of public investments are an important part of improving
economic mobility in this country.
Mr. Stiglitz. Yes, I very strongly believe they do. Let me
try to emphasize a couple points. One, if we focus--we need to
focus on both sides of the nation's balance sheet. When we talk
about the debt, every company looks at both its liabilities,
what it owes, and its assets. And the fact that in the
government, you only look at one side, is a big mistake. We
should be looking not only at what we owe, but also the assets.
And what are the assets? The assets are human capital, the
investments in people, our infrastructure, investments in
technology.
So, if we were looking at this like a company, it would be
clear that these were good investments. We can borrow today at
a negative real interest rate, and there are lots of studies
that show that the returns on these investments are enormous.
So, that is one aspect.
The second one is that in making those investments, we
would create demand. The real problem today with our economy is
lack of aggregate demand. That is why there are not jobs. In
the sectors of our economy where there is demand, jobs are
being created. So, it is lack of demand that is really holding
the economy back.
So, if we started investing in areas like you mentioned,
infrastructure, education, we would increase demand in those
areas. We would create jobs. And that would strengthen our
economy.
Now, what is very clear is that one of the sources of
inequality is the lack of demand. It is hurting the poor,
people in the middle, because both directly because of the
unemployed, but indirectly, the unemployment is driving down
wages. It is one of the things. But we have to remember, this
is a quarter-century problem. It is not just something that has
been post the recession. It has gotten worse. That is what I
emphasize. But, it has been there for a long time.
And part of the reason it is there for a long time is the
under-investment in education. Professor Chetty pointed out the
importance of, for instance, those childhood investments,
preschool education, recognized by Professor Heckman in his
research.
So, it is the failure to make these investments that both
lead to the weak economy today, will contribute to a weak
economy tomorrow, and both through the macroeconomic and
through the effects on the children, are going to create more
inequality.
Chairman Murray. Dr. Chetty, you have been studying the
relationship between different factors in economic mobility.
Let me ask you sort of the same question, and in your research,
have you found that lowering taxes for the wealthiest Americans
helps improve mobility?
Mr. Chetty. Thank you. No. So, we have studied, as I
mentioned, various factors that are correlated with differences
in mobility across areas and over time, and we do not find any
evidence that lowering tax rates on the wealthiest Americans
would increase mobility. In fact, I would say to the contrary,
as Professor Stiglitz was saying. You have got to think about
where you are spending the revenue that you collect.
So, if you raise taxes and collect additional revenue that
you then invest in better schools or better infrastructure,
given the rates of return that we found on such investments, I
would think, actually, precisely the opposite, that in a
situation such as the one we are in today, where many people
think we are under-investing in basic infrastructure that is
going to have a huge long-term payoff for the American economy,
we need to find, as Senator Sessions said, we need to fund
those investments in some way. And, on net, I would say,
increasing the taxes on the wealthiest and closing certain
loopholes, for instance, in the corporate tax system, as you
suggested, would, if invested well, have very large returns.
Chairman Murray. Okay. Thank you. My time is up.
Senator Sessions.
Senator Sessions. Thank you.
Dr. Hall, I did not realize that your chart shows something
surprising to me, and that is that the dropout or the decline
in the workforce participation is much higher from the
historical average among younger workers than it is among the
older workers. You actually have, from 60 to 65 and over, about
a two percent increase in participation, whereas from age 20 to
24, there is a 6.7 percent decline in workforce participation.
From 50 to 54, a four percent decline in workforce
participation. You expressed concern about all this. Would you
share with us a little more your thoughts on those numbers.
Mr. Hall. Well, sure. You know, there has been lots of talk
about the effect of the aging baby boomers, that that is the
reason for labor force--
Senator Sessions. Madam Chairman, Senator Johnson needs to
go, and I told him I would let him go first and I just blithely
went right on in asking questions. Could I yield to him, and I
will try to reduce my time by a minute when I get to my time?
Chairman Murray. Absolutely. Of course.
Senator Sessions. He has another meeting, and I am glad he
could be here.
Senator Johnson. Thank you, Senator Sessions and Madam
Chair.
I would like to go to Mr. Hall right off the bat, a similar
type of question. Mr. Hall, you talked about our workforce
being 4.5 million people short. Can you just tell me where you
are getting that from and explain that.
Mr. Hall. Well, sure. If you look at what is typical
participation rates by age, for example, the participation
rates in 2007 were rather different than they are right now,
and so, really, what I just did is I look at every single age
and look at what the participation rate was in 2007 and what
the participation rate is right now, and you find that we are
short in terms of the average participation at every single age
rage between 20 and 54 right now, and this is pretty
significant.
So, the part of the issue, I think, that we really need to
face is getting people back engaged in the labor force. It is
not just baby boomers that are retiring. This is every age. The
young in particular, actually, have really dropped out of the
labor force, and I think that is a real concern going forward.
Senator Johnson. Okay. You are just talking about a
shortage in the labor force. You are not saying that there are
4.5 million jobs available that are not being filled.
Mr. Hall. Well, that is right. That is right. In fact, if
you were to look at where we are short in jobs, we are short in
jobs probably 10.5 million people--jobs, actually.
Senator Johnson. We had a pretty interesting witness before
the Budget Committee here last year, Gary Alexander, who is the
Secretary of Public Welfare in Pennsylvania. He had a pretty
interesting study that he conducted on single moms which showed
the disincentive nature--disincentivizing nature of all the
assistance programs. Basically, his conclusion was that a
single mom was better off only earning up to $29,000 because
her combination of earnings plus benefits, a total of $57,000,
versus earning $69,000 where her combination income and
benefits would be the same amount, basically, $57,000 after
tax. In other words, she had a 100 percent maximum tax rate
from $29,000 to $69,000 with increased taxes as well as
reduction in benefits. Can you just speak to that type of
problem in terms of the incentives not to continue working.
Mr. Hall. Sure. You know, I do not want to--we need a
social safety net. That is an important thing. But we need to
be very aware of what sort of incentives that creates with our
policies. Keeping people--making it hard for people to reenter
the labor force and making it hard for businesses to rehire
people, I think, really creates a problem. And so many people
out of the labor force for so long is a problem because the
longer people are out, the less likely they are to ever return
to the labor force. So, to some degree, we can make people
unemployable by keeping them out of the labor force for a long
period, like we have seen.
Senator Johnson. You know, I agree. We are a compassionate
society. We all want a strong social safety net. But the
problem is, how do you design that social safety net where it
really stays confined to those people that really need it and
does not start creeping into populations where it creates this
kind of disincentive for participation in the labor force.
My final question really has to do with mobility. We are
always talking about income mobility. What about geographic
mobility and what effect--there are jobs going wanting up in
North Dakota, up in those energy fields. In the State of
Wisconsin, we have 18,000 welding jobs that are unfilled. So,
what is the effect--I mean, why do we no longer have that
mobility? Why do people feel like they really should not go to
the areas where there really are lucrative jobs for the taking?
Mr. Hall. Well, certainly, sort of fiscal location mobility
would be something that would slow down a recovery and make it
difficult for folks to recover, and that is really a good
point, that we have a very weak labor market, but not
everywhere in every industry. There are industries where you
can see some real issues with difficulty finding workers,
qualified workers. That is the sort of thing we ought to worry
about, is mobility of all different types, because that is a
real strength for an economy.
Senator Johnson. I would just like to ask the other
witnesses, do you have any comment on that lack of mobility, or
the fact that we simply--people are not moving to where the
jobs are.
Mr. Stiglitz. Yes. One of the problems is that when people
have very little wealth, because the people at the bottom have
no wealth--in fact, a lot of them have negative wealth--they
cannot afford to just take the risk of moving somewhere else.
There is a piece of legislation, I do not know whether it is in
the House or the Senate, that has been introduced to try to
provide assistance to help people move, mobility assistance,
and it has gotten bipartisan support and I think it is an
important kind of measure, because people do not have the
resources to up and move.
Part of the reason is the severity of the housing crash.
People at the bottom had a very large fraction of their wealth
in their housing--always--but then the house prices came down.
They were over-indebted. They had been sold wrong mortgages.
And so this has exacerbated, which is something that is always
a problem--the Great Recession has exacerbated, and the data
that has recently come out from the Fed about the wealth at the
bottom has really highlighted this particular problem, and I
think it is something that Congress ought to be doing something
about.
Senator Johnson. Okay. Well, thank you.
Thank you, Madam Chair and Senator Sessions.
Chairman Murray. Thank you very much.
Senator Kaine.
Senator Kaine. Thank you, Madam Chairwoman, and to the
witnesses, thank you for your testimony.
We are in an interesting centennial that I just discovered
this morning, and I just want to read something before I ask a
couple of questions. Quote, ``After the success of the moving
assembly line, Henry Ford had another transformative idea. In
January 2014 [sic], he startled the world by announcing that
Ford Motor Company would pay $5 a day to its workers. The pay
increase would also be accompanied by a shorter workday. While
this rate did not automatically apply to every worker, it more
than doubled the average auto worker's wage. Henry Ford had
reasoned that since it was now possible to build inexpensive
cars in volume, more of them could be sold if employees could
afford to buy them. The $5 day helped better the lot of all
American workers and contributed to the emergence of the
American middle class. In the process, Henry Ford had changed
manufacturing forever.'' That is from a Ford Motor Company
press release issued earlier this year celebrating the 100th
year anniversary of that wage increase.
The question I want to ask all of you is really about tax
policy. As a general matter, we have made the policy decision
to tax salary from labor at significantly higher rates than
earnings from investments. To what extent does that contribute
to inequality, and to what extent does it affect our economy? I
would like to hear from all of you about that.
Mr. Stiglitz. Okay. Well, very briefly, it obviously
creates a lot of--contributes to inequality, because the
distribution of capital, wealth, is much more concentrated than
the distribution of wage income. So, what you are doing--if you
look at the data in the CBO study that recently came out, if
you look at the data of who benefits from that lower taxes of
capital gains, who benefits from the lower preferential
treatment of dividends, who benefits from the step-up of basis
on death, it is disproportionately money all at the top. So,
this is a provision that creates more inequality.
At the same time, the next one I referred to, the cost over
ten years of these special provisions is basically $2 trillion.
That is a lot of money that would go a long way to putting our
budget in better shape.
The evidence that this leads to more investment just is not
there. You know, when they are keeping their money in the
Cayman Islands or, you know, it is not there because of the
greater sunshine makes the money grow faster than for the lack
of sunshine, and they often take that money and are not
reinvesting it in America. So, we could have a tax program that
would incentivize investment in America, job creation in
America, but that is not what these special provisions are
really doing.
Senator Kaine. Dr. Chetty.
Mr. Chetty. Yes. I would agree with everything Professor
Stiglitz said. I think the key issue here is that capital
income is much more concentrated than labor income.
Another point that adds onto that is because you have to
meet a given budget, if you have lower capital income tax
rates, you naturally have to have higher labor income tax rates
and that potentially leads to more of the disincentive effects
that were mentioned before, where people feel like their net
return to working is smaller and it is harder--it is more
costly for companies to hire workers.
So, in my view, a reform that moved towards increasing
capital income tax rates, either investing that money, again,
coming back to infrastructure, education, or lowering labor
income tax rates, would likely improve the strength of the
American economy.
Senator Kaine. Dr. Hall.
Mr. Hall. I am not an expert in tax policy. I will not
speak too much on it, other than I do feel like we try to do
too much with our tax policy. You know, I think when you try to
conduct policy through taxes, you create a lot of incentives
and you create a lot of problems with that.
Just in general for me, I think, I would rather see tax
policy there to generate revenue and not try to manipulate
things in the economy. Just simplify the tax code. Get rid of
loopholes. Make it basic.
Senator Kaine. You know, I think the history would show
that we taxed earnings from capital at higher rates than
earnings from labor for a very long time, and then we attempted
to begin to manipulate and moved the taxation on capital and
labor to approximately an equivalent, and now we have moved the
taxation on earnings from capital to significantly less. So, I
think there has been a manipulation of the tax code in the ways
you described.
The traditional answer has been that education is one of
the great lifters and levelers in that opportunity. What are
the barriers to that being the case today, and answer quickly,
because I have pretty much used up my time.
Mr. Stiglitz. Okay. I mean, really, we focus on higher
education. It is getting very expensive, particularly with the
recession, the cutback in State aid. Tuition has soared. We
mentioned before that median income is at a quarter-century
low, so incomes are going down. Tuition is going up. The only
way to make it is debt. And the form of debt the United States
has is really crushing, because bankruptcy law, you cannot get
forgiveness of that even in bankruptcy. Other countries, like
Australia, have come up with really good proposals like income-
contingent loans, where the amount you repay depends on your
income. So, it is not the crushing effect, and it has worked
very well. It is one of the reasons why they have succeeded in
getting more equality of opportunity in Australia than in the
United States.
Senator Kaine. Thank you, Madam Chairwoman.
Chairman Murray. Thank you very much.
Senator Sessions, we will go back to you.
Senator Sessions. All right. Thank you.
Dr. Hall, you indicated three things that would actually--I
think it is indisputable--would reduce jobs in America. That is
the minimum wage increase that the CBO has told us. There is no
doubt, I think, that the Affordable Care Act has been a
detriment. Two-thirds of the jobs last year that were created
were part-time. Some of that clearly was Affordable Care Act.
And that more regulations, excessive regulations. Maybe
regulation is good for one industry, but it applies to too many
industries. That is unhealthy.
Let me ask you a few things that might be healthy and
helpful without adding to our debt. If the United States were
to exploit this new ability to produce energy, both onshore and
offshore and on Federal lands, would that help create jobs and
wealth in America and tax revenue for the government?
Mr. Hall. Absolutely, and actually, it already has. The job
growth in, for example, the natural gas industry has really
been pretty impressive, despite the job loss in the rest of the
private sector since 2006.
Senator Sessions. And you mentioned the tax code simpler,
and I agree with that. It needs to be more growth oriented and
simpler, it seems to me. Can we do that? Could we retain this
current level of revenue and create a tax code that is, in
fact, simpler and help create more growth than we are seeing
today?
Mr. Hall. Well, absolutely. I do not want to go too far
beyond my expertise, but I think that is right. I think the
efforts to look at the tax code and look at just sort of
simplifying it, getting rid of loopholes and getting a simpler
basic tax code whose real goal is just to collect taxes, not to
do all sorts of things, has real potential benefit.
Senator Sessions. Dr. Stiglitz, the problem about loopholes
is something we have gone around about a good bit here. I think
there is not support in Congress to close loopholes to fund new
spending, but there is a belief that we can create a tax code
that is more growth oriented. In fact, Chairman Baucus was
clear that we ought to close loopholes, have a simpler system,
but use that to keep the rates more competitive worldwide. How
would you analyze that issue?
Mr. Stiglitz. Actually, mean, obviously, we need a better
tax system. I referred to the special provisions on capital
gains and dividends that, I think, do not lead to stronger
growth. The way we treat foreign income of multinationals and
American companies that operate abroad, that they can keep the
money abroad, reinvest the money abroad and not bring it in the
United States, is an incentive to create jobs abroad. So, we
have a perverse tax system which encourages job creation
abroad.
But, the actual effect of the corporate income tax,
lowering that would not help, I believe, because, remember, at
the margin, firms can borrow and debt on the part of firms is
tax deductible. In fact, most evidence is that most firms
finance the marginal investment by debt. It is tax deductible.
So, the income is taxed at the same rate that the interest is
tax deductible. There is no significant adverse effect, in
fact, from the corporate income tax. So lowering the corporate
income tax would provide no benefit.
What we should do is to say, if you invest in America, you
can get a lower rate. If you do not invest in America, you
actually should pay a higher rate. So, I would argue that get
rid of the corporate loopholes, raise the corporate income tax,
but give a break for those who invest in America.
Senator Sessions. Well, that is pretty much the government
directing a lot of things that I am not sure we are able to do.
Dr. Chetty, thank you for your participation. I do think
moving from the bottom quintile to the top is a big move, and
maybe culturally, we have already done so much of that that we
will not expect to see that. I would like to see people move
from lower income levels to middle income levels, the middle
income level to move up a level or two in a system that is
fair. I think that would be better for America, and it was
within our grasp. My time is up, but--
Mr. Chetty. If I could just say one thing on that, I
absolutely agree. So, the statistics I presented were just one
example, focusing on moving from the bottom fifth to the top
fifth. But you see exactly the same patterns that I showed you
if you look at, say, moving from the bottom fifth to the middle
class. The places that look better in terms of helping kids
move up all the way to the top also are better in terms of
helping kids reach the middle class. And I agree that that
would be a great goal. The U.S. falls behind other countries in
achieving that goal, as well.
Senator Sessions. Well, our numbers that I just said show
we are dropping from middle income to lower income,
unfortunately, a little bit.
Chairman Murray. Senator Sanders.
Senator Sanders. Thank you, Madam Chair, and thanks for
holding this important hearing, and thank you very much for our
guests for being here.
I do not have a whole lot of time. Let me just focus very
briefly, if I could, on three issues. While we are dealing
today with economics and finances, ultimately, we are dealing
with a moral issue of what kind of nation we want to become.
From a moral perspective, Dr. Stiglitz and other members of the
panel, do you have a problem that the top one percent owns 38
percent of the financial wealth of America while the bottom 60
percent owns all of 2.3 percent? Do we have a problem that one
family, the Walton family of Wal-Mart, owns more wealth than
the bottom 40 percent of the American people, one family?
Should Congress begin to address income and wealth inequality
from a moral perspective? Dr. Stiglitz, very briefly, because I
have a couple of other questions. Yes or no, do you think?
Mr. Stiglitz. Yes. Yes, but it also has strong economic--
Senator Sanders. I am going to get to that in a second,
within my two minutes here.
Dr. Chetty.
Mr. Chetty. Yes. I certainly agree that inequality, and to
the extent it creates inequalities in opportunity, which I
believe it does, it is a moral issue.
Senator Sanders. Okay. Dr. Hall.
Mr. Hall. My expertise is in economics, but I will just
say, I think we should be focusing more on raising the incomes
of the low and focusing on those, increasing mobility for the
low. That should be the focus and not so much worrying about
whether the wealthy make a lot or not.
Senator Sanders. So, you do not have a concern that the top
one percent own 38 percent--
Mr. Hall. Well, what I want is I want to see a better
outcome. I want to see a better outcome for the low-income
folks, and I think the way to do that is to focus on their
situation.
Senator Sanders. Let me ask this, and again, I know I am a
little bit off subject here and I apologize for that, but it is
important. I think, Dr. Stiglitz, you touched on this. When we
talk about unfair distribution of wealth and income, what we
are seeing, especially in recent years, is the wealthiest
people in this country are not simply reinvesting their money
in business or putting it under their mattress. They are, in a
very significant way, putting that money into politics, to
elect politicians who will represent their interests.
Do you have a concern with, say, the Koch family spending
what we think will be hundreds and hundreds of millions of
dollars on the political process, that Sheldon Adelson just the
other day had a primary which he brought potential Republican
candidates to audition in front of him? Is that a problem for
American democracy?
Mr. Stiglitz. Very much so, and I think it also is a
problem for America's confidence in its political system. If
Americans come to believe that the political system is bought,
they will lose faith in one of our fundamental values.
Senator Sanders. Right. Dr. Chetty, is that a problem, do
you think?
Mr. Chetty. Yes, I certainly agree with that view.
Senator Sanders. Dr. Hall, is that a problem?
Mr. Hall. Well, first of all, again, it is not my area of
expertise--
Senator Sanders. I do realize that.
Mr. Hall. --but this has always been an issue. This has
always been part of free speech, is people get to do what they
want to do to impact politics and outcomes in government.
Senator Sanders. Okay. So, you think free speech is the
ability to buy elections?
Mr. Hall. Well, I did not say buy elections.
Senator Sanders. But that is the practical implication of
that--
Mr. Hall. No, and--
Senator Sanders. I appreciate it. Okay.
Mr. Hall. And singling out people--you know, there are lots
of folks who contribute--
Senator Sanders. There are.
Mr. Hall. and lots of folks who try to have an influence.
Senator Sanders. There surely are.
Third question, which is something you guys do know
something about, and that is economics. When so few--my
understanding is that about half the American people have less
than $10,000 in savings. It is rather extraordinary. That means
one car accident, one illness, you are in financial ruin. But,
the bottom line is, when so few have so much and so many have
so little, can you create--and when 70 percent of the GDP is
based on consumer consumption, can you create the jobs you
need, or is this really--this inequality an impediment to job
creation? Dr. Stiglitz.
Mr. Stiglitz. Yes. As I said before, one of the major
problems in the United States right now is a lack of adequate
demand, insufficiency of demand, and people at the top spend
less than those at the bottom. And it is one of the problems,
not only in the United States but globally, that is
contributing to the weak recovery that we are experiencing.
Senator Sanders. That so many folks have just no money to
buy anything and--
Mr. Stiglitz. Exactly.
Senator Sanders. Yes.
Mr. Stiglitz. And before the crisis, remember, what we--the
way we kept our economy going was on an artificial life support
of a bubble.
Senator Sanders. Right.
Mr. Stiglitz. And it was only the bubble that was able to
offset the adverse inequality--
Senator Sanders. That was debt, borrowing money and--
Mr. Stiglitz. Exactly.
Senator Sanders. Right. Dr. Chetty, what do you think?
Mr. Chetty. Yes. So, I think the low savings rates of low-
income people is potentially a problem. And coming to your
question about what would stimulate jobs and aggregate demand,
there is good evidence that if you give a dollar to a person
with below-median income, much more of that is spent than if
you give a dollar to a person at the top end of the income
distribution. So, if you are trying to raise aggregate demand,
these things are intricately linked--
Senator Sanders. Such as extending long-term unemployment,
putting money in the hands of people who desperately need that
money.
Mr. Chetty. The marginal propensity to spend out of
unemployment benefits is extremely high, so that, I think,
would have a stimulative--
Senator Sanders. Dr. Hall.
Mr. Hall. Well, the thing I want to emphasize is the
inverse of that relationship. Economic growth helps reduce
income inequality. You do not change the poverty rate unless
people get jobs and you get stronger economic growth. That
relationship, I think, is clear.
Senator Sanders. But, let me ask you this on that point. If
95 percent of all new income generated in recent years went to
the top one percent, is that, in fact, true, that economic
growth is going to impact poverty?
Mr. Hall. Well, let me just talk about just the general
facts, okay, about economic growth. We have had very weak
economic growth. The last three years, new growth has averaged
about 2.2 percent a year, all right. We have been very lucky to
get 190,000 jobs a month over that time period. That is
actually very strong job growth given that weak economy.
So, I still think at the heart of our labor market problems
is a weak economy. It is not--
Senator Sanders. I think you are right, but my point would
be that even if you had more economic growth, if you had this
kind of incredible inequality in terms of income, if 95 percent
of all new income went to the top one percent, you can have six
percent growth and still see an increase in poverty.
Mr. Hall. The sort of thing I am worried about is that we
have a very large number of long-term unemployed or long-term
jobless and these folks are not just long term, they are very
long-term jobless. These folks are going to have a really,
really hard time getting back into the labor market unless we
focus on these focus and get stronger growth. Actually, what
really happens in a typical business cycle is once you get
stronger growth, once you get three percent-plus economic
growth, then you finally rehire those long-term unemployed--
Senator Sanders. Do we extend long-term unemployment
benefits to help those folks?
Mr. Hall. I do not object to a long-term unemployment
benefit. I do not object to that. That is part of the safety
net. Now, there are some effects, of course, disincentive
effects of that, but you have got to sort of weigh the two
things. I am worried about other policies, though, that really
do impact this cost of hiring and incentive to work.
Senator Sanders. Okay. Thank you very much.
Chairman Murray. Thank you.
Senator King.
Senator King. Thank you, Madam Chair.
A couple of quick observations. One is, this is important.
It is important for economics, this distribution, because the
middle class are the customers. And the biggest problem with
this economy now is a lack of demand, and it is because the
middle class does not have money. They masked their declining
standard of living in the 1980s and early 1990s by women going
into the workplace. It was then masked by debt in the late
1990s and early 2000s and there are no masks left and we are
stuck with an economy that is stagnant because of a lack of
demand.
It is also important because of an issue of social
stability. We do not want to become a country of gated
communities, a country where the rich live behind walls with
barbed wire. You go to some Latin American countries and that
is exactly what you see.
Senator Kaine mentioned Henry Ford. Henry Ford was the
ultimate capitalist, but who realized he needed customers. And
I worry today that with the concentration of wealth, that those
at the top have forgotten that they need customers. So, I think
there are very serious implications of this for the long-term
strength not only of our economy, but of our political economy,
of our political system, which is based on the premise that
people have hope of moving up. And if people lose that hope and
decide that the system is entirely rigged against them, that is
going to produce instability and a level of political and
economic resentment that we have never seen in this country and
I think it is very dangerous.
Secondly, I want to identify myself with Senator Sessions,
his points about interest costs. I think we are whistling by
the graveyard on interest costs right now. It is two percent.
If it goes to 4.5 percent, just the cost of interest is going
to exceed the entire defense budget. It is going to sink all of
the priorities of everybody sitting around this table.
Finally, I want to get to a couple of honest to goodness
questions, and I do not expect answers now, but I would like to
see, Mr. Hall, particularly, data on what is causing lower
labor force participation. You know, what are the factors? And,
by the way, I believe that is a problem. I talk to tradesmen in
Maine, people, plumbers, carpenters. They cannot get help even
in a time of high unemployment. They say these guys come to
work, they work three days, and then they do not show up on
Thursday and they wonder why I fire them. There is a problem.
There is a subterranean problem going on about people,
particularly young people, who do not seem--now, there are
millions that want to work, that desperately are looking for
jobs, but there is a problem there and I would love to see some
data or studies, at least, on what is causing that.
Second, I am a great believer in regulatory reform and the
cost of regulation to our society. It would really help me to
have data on that. If you guys could do some case studies or
know of studies in real live cases where regulatory drag has
significantly impaired economic growth, profitability, ability
to hire, I think that is very important.
Mr. Hall, a question for you. I go to a lot of--I am all
over Maine on weekends, talk to a lot of people. Put yourself
in my shoes. I am at the gates of Bath Iron Works. There is a
guy there who works hard every day. It is really backbreaking
work, and he pays 35, almost 38 percent on his income tax. And
a guy down the street who is getting dividends pays 20. How do
you explain to that guy why he is paying almost twice as much
taxes as this guy that gets his money out of the mailbox?
Mr. Hall. Well, I will just go back to my general comment
about tax policy. Tax policy should be for revenue generation
and we should be collecting revenue with that. We should not be
trying to do all sorts of little manipulations--
Senator King. So, does that not argue for the same rate on
all forms of income?
Mr. Hall. It does. You know, like I say, I am not a tax
expert--
Senator King. Did you hear him say, ``It does.'' Let the
record show.
[Laughter.]
Senator King. Go ahead.
Mr. Hall. You know, I just--for example, I do not know what
the facts are, for example, on tax rates. I could not tell you
how much distortion we wind up getting--
Senator King. Well, it is 39.5 at the top end for income
and it is 20 for capital gains. It was--and I just cannot
explain that to a working man, why what he is doing gets taxed
at almost twice the rate as the other guy. I have never--help
me out here.
Mr. Hall. Well, I think the sort of thing that I find
bothersome, one of the reasons we have such a low savings rate
is our tax policy encourages people to spend. We get a tax
break for housing. We get a tax break for a lot of things. And
that is almost certainly one of the reasons why the savings
rate is so low, is because our tax policy distorts people's
behavior with things like that.
Senator King. Well, I would argue that--
Mr. Hall. Our housing boom--go ahead.
Senator King. --encouraging people to buy houses is
encouraging investment, not spending. I would see that--
Mr. Hall. Well--
Senator King. That is the source of wealth for most
American families.
Mr. Hall. It is hard not to see that a lot of our troubles
are a housing bubble where, perhaps, people over-purchased
housing. There is too much investment in housing. That is
certainly something that differs in the United States to in
other countries.
Senator King. Dr. Chetty, this is a question, I think, for
the record, because I am running out of time, but you do a
scale of upward mobility by county around the country. I am
going to submit a question for the record of we have our--I
look at it--counties that are different levels, and I would
just like some explanation, background on what that really
means, county to county, and how we deal with that.
I think, finally, the question is, how do we as government
policy makers improve this issue of income inequality without
turning the government into Robin Hood? I do not think we have
a responsibility to take from the rich and give to the poor. I
think the question is, how do we improve--how do we build
policies that provide incentives and also the opportunities for
greater growth. I like your ideas about looking at student
loans and how we deal with that, because right now, we have
thousands and millions of kids graduating from college with
what amounts to a mortgage and no house and I would like to see
you supply us some--with help. We need proposals for solutions.
This is a problem. We need data and we need proposals for
solutions.
Thank you very much, gentlemen. Thank you, Madam Chair.
Chairman Murray. Thank you very much.
Senator Whitehouse.
Senator Whitehouse. Thank you, Madam Chair.
In any discussion of taxes, I cannot help but point,
particularly after we have heard more of the ardent commentary
of our Republican friends about the debt and the deficit, that
the tax loopholes that contribute to that debt and that
deficit, they appear to defend with a rare and special passion,
whether it is the carried interest exemption that allows
billionaires to pay lower tax rates than brick masons, whether
it is the offshore tax havens that allow American corporations
to pay essentially no taxes, use our roads, use our courts,
enjoy the benefit of a free society that everybody else pays
for, and then run their money offshore and avoid the tax man,
or letting the richest companies in the history of the planet
continue to enjoy oil subsidies.
Every time we try to address those, it is the very same
people who like to give these ardent statements on the debt,
then defend all of those loopholes, and it causes me to take
with a grain of salt how serious we are about the debt if we
are willing to--if we would prefer to maintain those tax
preferences than to deal with it. And, clearly, they are
political. It is very wealthy people and very wealthy
corporations and very wealthy interests that are behind all of
those.
So, to my friend from Maine, if he wants to explain to the
guy at Bath Iron Works why the tax code works that way, I would
ask how many people who work at Bath Iron Works are big
political donors, whereas the folks who are getting the big
capital benefits are the billionaires, and they are the ones
who are pouring money into elections and they are getting
things their way. And it is important for us, I think, to stand
up against that in order to have this run more fairly.
Mr. Stiglitz, I read in your paper on reforming taxation to
promote growth and equity the following. ``A tax on carbon
emissions has even more benefits. It encourages firms to make
carbon-reducing investments, to retrofit their firms to reflect
the true costs of the pollution that they generate. A tax on
pollution has a triple dividend because it leads to a better
environment which can itself lead to stronger economic
performance, and it raises revenue even as it reduces the bad
externalities spilling over on the rest of us. Moreover, it
incentivizes firms to retrofit, thus encouraging investment
that leads to higher output and employment.''
Could you comment a little further on that, and
particularly on the value of a revenue-neutral carbon fee.
Mr. Stiglitz. Yes. The point you quoted is exactly right.
This is an example of--
Senator Whitehouse. I should hope you think so, since I was
quoting you.
Mr. Stiglitz. Yes, I know, but--
[Laughter.]
Mr. Stiglitz. People often say that taxes have to depress
the economy, and what I wanted to emphasize there was that this
is a kind of tax that can actually stimulate the economy at the
same time that it is raising revenues and improving our
environment.
Senator Whitehouse. And you won a Nobel Prize.
Mr. Stiglitz. Yes. This is, you know, very commonly
accepted, and--
Senator Whitehouse. Including among economists--
Mr. Stiglitz. Among economists--
Senator Whitehouse. --who negotiated with Republican
Presidents--
Mr. Stiglitz. Most would say, yes, there is a distortion in
our economy because there is something that is imposing a cost
on our society and people are not paying for it. It is like a
subsidy, in a sense. They are not paying a real cost that they
are imposing on the American economy, the American society.
Senator Whitehouse. So, having price match cost actually
helps make markets work better, correct?
Mr. Stiglitz. That is right. So, this is an example of
trying to make markets work like markets, and the point is that
there is a cost to society that they are getting away with, and
if we impose that charge, we would get more revenue and create
more employment.
Senator Whitehouse. Well, thank you very much. I am afraid
in the same way that concern about the debt seems to vanish in
front of the tax benefits for special interests, concern about
properly operating markets is going to vanish in the face of
the subsidies to those special interests, so wish us luck in
getting that done.
[Laughter.]
Senator Whitehouse. Thank you.
Mr. Stiglitz. Thank you.
Chairman Murray. We have all decided that we get a
lightning round here, one additional question for each Senator
who is remaining, and Dr. Chetty, I wanted to ask you. There
has been a lot of discussion here in Congress about whether or
not the actual programs that are there to support families who
are struggling today are the problem or whether or not the
economic downturn and the changes that occurred to that are it,
and I wanted to ask you about one example that is very timely
and that is the unemployment insurance extension that we are
discussing. From your research, what can you tell us about the
effect of unemployment benefits on families and the economy?
Mr. Chetty. So, the concern that many people voice is that
when you extend unemployment benefits, as has been voiced here,
you potentially reduce the incentive for families to return to
work, and that is, theoretically, a concern that economists
have noted for a long time. It could be something that is
important.
The same exact issue arises in another context that we have
been discussing, the EITC. Senator Sessions pointed out that
when you have large phase-out tax rates, you potentially create
a disincentive for families to work. Now, while theory says
that that effect could be small, it could be large, we now have
good data that allows us to actually study what happens
empirically in practice, and the best data--there are now
numerous studies using millions of data points which indicate
that these disincentive effects, while they exist, are quite
small.
So, when you extend unemployment benefits by, say, ten
weeks, you extend the amount of time that people stay out of
work quite modestly. And even the small amount of longer time
out of work that occurs appears to be driven by things like
people trying to find a better job, a job that might work
better for their skill set, taking advantage of those longer
benefits to find the right match that is ultimately going to
help the economy grow rather than just idling their time and
living off the system, as some people perceive.
So, I think, theoretically, those issues are important and
economists talk about them, empirically, the data says those
effects are not nearly as big as you might have worried about.
Mr. Stiglitz. Could I just add one point to that, which is
that, right now, the problem is a lack of jobs. And having more
people applying for the same few jobs does not make the labor
market work better. So, if you have five applicants per job, or
three applicants per job, that is not going to affect the
actual level of employment in our economy.
So, right now, the issue is, you know, if we were at full
employment, these issues of whether people search for a job
would become more important. But right now, they are totally
irrelevant.
Chairman Murray. Or they are in a different place than
somebody is available to get to them, and when you have got a
mortgage on a house you have got to pay, it is hard to move,
and we had that discussion. I actually met a woman this
weekend--you have been watching the mudslides that occurred in
my State that has just been devastating, horrible, and was up
there this weekend visiting the town at one end of it that has
now been cut off from our main economic corridor, and a woman
said to me that she is three weeks away from losing her
unemployment. She now has no opportunity to get to the
employment center, which is down the road, and she is
desperate. She is not sitting at home saying, well, I just want
to sit on--you know, keep getting this check. She wants a job,
but she also wants to be able to put some food on the table for
her kids, so a point well taken.
Senator Sessions.
Senator Sessions. Well, thank you all for a very important
discussion, and I believe Congress has gone down the Keynesian
road as far as we are going to go. One of the problems is--
Senator Kaine. What is wrong with the Keynesian road?
Senator Sessions. Well, we have gone from--
Senator Kaine. I am joking. My name is Kaine, so--
Senator Sessions. Oh.
[Laughter.]
Senator Sessions. I am a little slow there, Senator
Keynesian--I mean, Kaine.
[Laughter.]
Senator Sessions. Thank you for correcting me, or helping
me. Going down that road of borrowing more has put us at a
point where we cannot borrow any more. I remember the former
Federal Reserve Chairman testified before--talked to a group of
Republicans and he said, ``Well, we could borrow more,'' and we
were at 35 percent of GDP. Debt was 35 percent of GDP. Now, it
is about 100 percent, gross debt, of GDP. And things changed.
And so we have done all these borrowing and spending. The
Agriculture Secretary told us, ``Oh, if we quadrupled Food
Stamps, oh, if we just spend more on Food Stamps, we would get
$1.75 in economic growth from it.'' So, why do we not just
quadruple that again? Why do we not provide people free shoes,
just borrow the money? We have been told now the interest rate
is going to be $880 billion in ten years by the Director of CBO
sitting right there. So, this day is over.
We spend $750 billion on welfare programs. We have no
vision, no coherence, no driving ability to move people from
poverty to productivity. We spend enough money on it. We are
just not doing a very good job on it. And we are going to spend
more money on education. That is going to fix our future. We
know that money does not prove--is not a direct correlation in
improving education.
So, I just would have to say to you, there are things we
can do. I do think--we have added five million jobs from
abroad, and that is about the same number that have been
created in the last number of years. So, I would just say we
are--you want me to hush and go and wrap this up.
Chairman Murray. No, I just want to--
Senator Sessions. This is a very good panel and we are
talking about something important, and I thank you, Madam
Chairman, for doing it, because it is not healthy when we are
seeing these things happen in our economy. And the National
Review had a piece and said we are a nation with an economy,
not an economy with a nation. So, we do have a responsibility
to our people. I think that is correct.
So, I think there is a conservative view, too, on how do we
help the American people prosper and get back on the road to
growth. We should consider all the comments we have had today
and keep working on it. But just taxing more, borrowing more,
spending more, regulating more, I believe, is the wrong
direction, and that is, in some degree, where we have a
difference of opinion. Thank you.
Chairman Murray. All right. Thank you.
Senator Kaine.
Senator Kaine. Thank you, Madam Chairwoman.
Something I am confused about, and as long as we brought
John Maynard Keynes into the conversation, many economists--
Keynes, Schumpeter, and others--have written about the capacity
of technology to destroy jobs. So, in Virginia, we mine as much
coal as we did 50 years ago, but with one-tenth the coal
miners. They did not propose that we not be innovative, because
they would assume that technology would also create jobs, and
hopefully the net creative over destructive would be positive.
Is there any research currently about whether that sort of
net result of technological advancements is still for the
American economy a positive in terms of creating more jobs than
destroying, or is the pace of technological change or
productivity advances at a place now where it is destroying
more work than it is creating? I am just curious about the
status of the research.
Mr. Stiglitz. Well, I guess it is really an open question.
A lot of people would use the metaphor of what happened back
with--you were mentioning Henry Ford. The car replaced
blacksmiths and buggy whips, but created more jobs with car
repairmen. But, we do not know whether the next round, which is
pretty fundamentally different--you know, we have robots
creating robots creating robots, and the question is, will the
job creation be there?
It will not be--well, I mean, the real issue is, it will
not be there unless there is some help, and I think from the
government, in making the structural transformation. The new
jobs will be in areas like the service sector, and people that
were in manufacturing will not necessarily have the skills for
the new sectors, and they do not have the capital to move into
those sectors.
The reason we made the structural transformation from an
agrarian economy to a manufacturing economy was through the
help of the Federal Government through things like the G.I.
Bill that really worked and created real opportunity for
Americans. It really transformed the country. It moved people
from the rural to the urban sector and created this huge
opportunity. For the first time, people could go to college.
So, that was a real example of a successful government
intervention that, through that whole period of the 1950s,
1960s, we created lots of jobs.
It was a period where we grew faster than any other period
and we grew together. Every part of our economy grew, but the
bottom grew more than the top. That is, I think, what we should
be aspiring for. And the success of that period was based on a
strong role for the government to make this structural
transformation, which markets do not do well on their own.
Mr. Chetty. So, just to echo that, you know, I think the
answer to that question depends fundamentally on whether
workers are reskilled when technology changes. So, clearly, if
you have changes in technology and the miners you described are
continuing to be in the same profession, if their jobs are
being done by machines, then they obviously are not going to be
employed at the same rates.
And so the question is whether the economy and the
investments we are making give workers the diverse set of
skills that they need to be able to transition to changing
jobs, and I would say some of that comes from things like job
training programs that might help workers adapt to the
structural shift, but some of it also comes from earlier
investments, echoing a theme we talked about earlier, where
when there are more college-educated workers or workers who
have had a strong background in school, they are going to be
able to adapt more naturally to changes in the demands of the
economy. And so I think the answer would be favorable if you
have that.
Mr. Hall. Well, once upon a time, I spent some time working
at the Council of Economic Advisors and helping with the
administration forecasts, and one of our big issues was
figuring out when the baby boomers were going to retire and
pull out of the labor force, because we are going to have to
significantly lower our forecast for economic growth, and that
is a big issue. And we had better hope we get a boost in
productivity, because the baby boomers are going to retire, and
especially if our labor force does not get back to growing, if
we are going to maintain our standard of living and our incomes
and growth, we need a boost in productivity. We need continued
gains in productivity.
Senator Kaine. Thank you.
Chairman Murray. Senator--
Senator Sessions. Can I ask a follow-up on this point?
Chairman Murray. We are going to be here for a long time,
but one quick follow-up and then short questions--
Senator Sessions. We keep hearing from business that we
have got a shortage of labor, but wages are down. You believe,
Dr. Hall, in a free market, do you not?
Mr. Hall. Absolutely--
Senator Sessions. If there is a shortage of labor, why are
wages down?
Mr. Hall. Well, first of all, I do not know that there is a
broad shortage of labor. I think there is a shortage of labor
in certain areas. I think there is a growing concern that there
is a skills mismatch going on that may hold us back. I am not
sure I am a believer quite in that yet because we just have not
gotten strong enough economic growth to push us to higher
hiring. And I think if we had had stronger economic growth and
still had this disengagement from the labor force, I would be
more worried about that.
Senator Sessions. Well, if we had stronger economic growth
and the wage market got tighter, maybe we would have some
economic growth for working Americans.
Mr. Hall. Well, absolutely. I mean, that would be--
Senator Sessions. The problem is, we seem to have this view
that, somehow, we have a constitutional right to have low wages
among some of our business friends, and I am not for that. I
think our job needs to be helping our people in America get
higher wages and better jobs.
Chairman Murray. Senator King.
Senator King. Professor Stiglitz, a question about the
Affordable Care Act. I had a couple in my office last week for
a coffee. They were touring Washington. At the end of our
conversation, the lady said, ``By the way, thank you for
supporting the Affordable Care Act.'' And I said, ``Well, that
is very nice. Why do you say that?'' And she said, ``Because I
have been in a job for the last 15 years that I really hate and
I have had to stay in it because it had health insurance. My
husband does not have it. And the Affordable Care Act has
allowed me to leave that job and start my own business, which
is something I have always wanted to do.''
I understand there is an economics accepted principle
called job lock, and I think one of the most significant
effects of the Affordable Care Act will be releasing job lock
and having people have the ability to start new businesses.
And, by the way, those are the job creators. Hedge fund
managers are not the job creators. It is people who start
businesses. Do you believe that this is--I think this is sort
of a hidden benefit that does not get talked about very much.
Is there anything to this idea of the ACA unlocking job lock?
Mr. Stiglitz. Yes, very much so. And, let me say, it also
increases productivity because the people can go from
employment where they are less productive to where they are
more productive. So, not only are they creating jobs, they can
be more productive.
And I want to highlight one other thing, that GDP, I have
emphasized, is not a good measure of well-being. So, she may
have been getting an income, but we were not appropriately
taking into account the effect that she was in a job that she
was unhappy. She now gets to be more creative in creating a new
business, create more jobs, and have a higher income. And the
increase in well-being is well in excess of the dollar income
that she gets.
So, we do not--one of the benefits of the Affordable Care
Act that is not fully appreciated and not reflected in GDP
statistics is that and the fact that it gives more security to
an awful lot of people. And again, our GDP statistics do not
capture the value of this insecurity that so many Americans
have felt.
Senator King. Thank you. Do either of you gentlemen want to
comment on that phenomenon?
Mr. Chetty. Again, just to say that there are empirical
studies which show that the job lock phenomenon is important,
and people, in particular, when they are in a job previously
that provided health insurance, were much less likely to
transition out of it for fear of losing health insurance. So, I
do think the ACA will have an impact in terms of increasing the
flow of workers across jobs and potentially lead to more
entrepreneurship, as well.
Senator King. Dr. Hall, do you accept the idea of job lock
and is the ACA going to help with that?
Mr. Hall. It may well. I do not know a lot about the ACA,
do not know a lot about the job lock, but just keep in mind
that you create all sorts of incentives with this. You know,
the one I pointed out was a different incentive and that is the
incentive to keep people out of the labor force when, in fact,
they probably should get back into the labor force, especially
if you want to see long-term improvement in inequality.
Senator King. But my visitor was not leaving the labor
force.
Mr. Hall. Right.
Senator King. She was changing places.
Mr. Hall. Right. Now, I understand.
Senator King. And there may be some people, a mom who says,
``I do not have to keep this job anymore and I am going to be
able to take care of my kids.'' I am not sure that is a bad
thing.
Mr. Hall. It may not be a bad thing, but it is also--like I
say, it is also a concern when you have all these things going
on, right. And part of the idea with any sort of policy is try
to design it as carefully as you can so you get less of these
sort of bad side effects and more of these good side effects.
Senator King. Right. Thank you. Thanks, gentlemen.
Chairman Murray. Last question, Senator Whitehouse.
Senator Whitehouse. Thank you.
I would note that the ancient Egyptians did a pretty good
job at getting everybody engaged in the labor force, but they
did not do it in ways that I think we would find very humane
right now.
[Laughter.]
Senator Whitehouse. Does the term disengagement from the
labor force in your testimony, Dr. Hall, include people who
were chucked out of their jobs as a result of the recession? It
sounds from the terminology that you use as if they all kind of
went for a walk in the woods and this was a voluntary
disengagement.
Mr. Hall. Right.
Senator Whitehouse. Did you mean to imply that, or am I
reading that wrong?
Mr. Hall. No, I will sort of define it for you. These are
people who are jobless and they are not currently looking for
work. So, they are not considered--
Senator Whitehouse. And they may very well be jobless
because they lost their job in the recession involuntarily.
Mr. Hall. Exactly.
Senator Whitehouse. Okay.
Mr. Hall. They may simply be discouraged, and if the labor
market improves, they will get back. Or, they may have retired.
Senator Whitehouse. And back to the question of the carbon
fee, you put that, Dr. Stiglitz, into the category you call
corrective taxes. We have some corrective taxes, like on liquor
and on cigarettes, where we tax it and people do less of it,
and that is to everybody's benefit, including the taxpayer,
because you are paying less for health care and car wrecks and
so forth.
But, we also tax work, income, earnings. Could you speak
generally about what value difference there is between a
corrective tax and a tax on productive activity, just as a
general proposition.
Mr. Stiglitz. Yes. P.S., and it goes back to the previous
question I did not fully answer about revenue-neutral taxation.
So, the point is, if you tax things that are, quote, ``bad,''
that means you have more revenue which you can then use to
reduce the taxes on things that are good. So, you can get--
another way of saying the same thing is that you get the
benefit of discouraging the pollution, discouraging the
externality, the bad activity, and because you can then lower
the taxes on work or savings, you get more of the good things,
which means more economic growth, more benefits.
So, that is why--and let me emphasize, there is a lot of
revenue we are talking about here. The social cost of these
environmental externalities--carbon--are very, very large. It
will impose a very large cost on our society and our economy in
the future years. So, what we are talking about is not a little
bottle tax, which is an important tax, but we are talking about
something, when we are talking about carbon, that is very large
for our economy.
Senator Whitehouse. So, hypothetically, if you were to
add--let us just pick round numbers--a trillion dollars in
revenue to the country as the result of a carbon fee and you
offset that with half-a-trillion reduction in the corporate tax
rate and half-a-trillion reduction in the personal income tax
rate, either through the EITC or rate reduction or otherwise,
you do not end up with a net-zero benefit to the economy. You
end up with a positive for the economy because of how you have
shifted the tax burden, correct?
Mr. Stiglitz. Doubly positive, because on the one hand, you
have less of the pollution, and secondly, because now you have
more work, more savings, more economic growth.
Senator Whitehouse. Thank you.
Chairman Murray. Thank you very much. That was one question
with five parts, but it was taken.
[Laughter.]
Chairman Murray. I want to thank all of our colleagues who
are participating today.
I especially want to thank our three witnesses who have
traveled here today and for your testimony.
And as a reminder to all of our colleagues, additional
questions are due by 6:00 p.m. today.
With that, I close this hearing. Thank you.
[Whereupon, at 11:50 a.m., the committee was adjourned.]
[GRAPHIC] [TIFF OMITTED]
SUPPORTING BROAD-BASED ECONOMIC GROWTH AND FISCAL RESPONSIBILITY
THROUGH A FAIRER TAX CODE
---------- -
TUESDAY, APRIL 8, 2014
United States Senate,
Committee on the Budget,
Washington, D.C.
The committee met, pursuant to notice, at 10:36 a.m., in
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray,
chairman of the committee, presiding.
Present: Senators Murray, Whitehouse, Sessions, and Crapo.
Staff Present: Evan T. Schatz, Majority Staff Director; and
Eric M. Ueland, Minority Staff Director.
OPENING STATEMENT OF CHAIRMAN MURRAY
Chairman Murray. Good morning. This hearing will come to
order.
I want to thank my Ranking Member, Senator Sessions, and
all of our colleagues who are joining us today.
We have a great group of witnesses here to speak with us:
John Buckley, who is the former Chief Tax Counsel on the Ways
and Means Committee and a former Chief of Staff of
the Joint Committee on Taxation; Dr. Jane Gravelle, a
Senior Specialist in Economic Policy at the Congressional
Research Service; and Senator Sessions has invited Diana
Furchtgott-Roth, a Senior Fellow at the Manhattan Institute for
Policy Research.
So, welcome to all of you and thank you so much for being
here and participating today. I appreciate the opportunity to
hear from all of you about how we can use our tax code to
expand opportunity and encourage broad-based growth and tackle
some of our budget challenges.
Our country has seen a lot of changes over the last several
decades, and one of the most striking is the widening gap
between those at the top and everybody else. In the last 30
years, the top one percent of the income distribution has seen
their earnings rise by more than 250 percent. But earnings for
those in the middle class and those struggling to make ends
meet has stayed stagnant or even declined. Costs for everything
from health care to college tuition have gone up, and
especially coming out of the financial crisis and the Great
Recession that began in 2007, the good, middle-class jobs that
helped so many families climb the economic ladder in the past
are fewer and farther between.
All of this adds up to a 21st century economy where even
though those at the very top continue to prosper, it has become
more and more difficult for many families to afford the middle-
class lifestyle they are working so hard for. I think we can
all agree that is not the kind of economy we want now or in the
future.
Changes to our tax code cannot solve this problem alone,
but there is no question tax reform can and should be a
powerful tool in the fight, especially because, right now,
inefficiency and unfairness in our tax code is actually making
things worse.
Today, our tax code is riddled with wasteful loopholes and
special interest carve-outs. In 2014 alone, tax expenditures,
or the countless special tax breaks in our code, will cost us
$1.4 trillion. That is more than we are expected to spend on
Medicare, Social Security, or our national defense this year.
And far too many of these tax breaks are skewed to benefit
those who need them the least.
There is a real need for reform when it comes to those
unfair tax breaks, and I am grateful, in particular, to Senator
Whitehouse, who is here today, for his focus on this issue,
because by letting them continue, we are spending a lot of
money through our tax code on wasteful and inefficient give-
aways to people and businesses who do not need help at a time
when investing in better schools and infrastructure repairs or
medical research would benefit a lot of families who really do.
On top of that, we are also missing an important opportunity to
help tackle our long-term budget challenges without burdening
seniors or the most vulnerable Americans.
Our economic, fiscal, and demographic situation is very
different than what it was in 1986, when the last major
overhaul of the tax code took place. While the near-term budget
outlook has improved significantly, we still need to tackle the
long-term debt that grew sharply as the result of two unpaid
wars, the massive 2001-2003 tax cuts that were skewed towards
the wealthiest, and the lingering effects of this recession.
And, as our population ages in the coming decades, more and
more seniors will rely on Medicare and Social Security benefits
they are owed.
When you add all that up, it is very clear, tax reform that
does not ask the wealthiest Americans and biggest corporations
to pay their fair share is simply fiscally irresponsible. And,
every bipartisan group that has examined our budget situation
has reached that same conclusion.
Now, I know many of my Republican colleagues prefer a
different approach. Chairman Camp's recent tax reform proposal
would put every dollar of savings back into lower rates,
primarily for corporations and those at the top of the income
scale, and protect the wealthiest Americans and biggest
corporations from paying their fair share towards reducing our
deficit and boosting our economy.
The House Republican budget that is being debated this week
would do all this, as well, but even goes a step further. Their
budget would push the top tax rate down to 25 percent, which
would mean that middle-class families would have to pick up the
tab for the new tax cuts for the wealthy. Giving tax breaks to
millionaires while doing nothing to help working families keep
more of their hard-earned income is not only wrong-headed in
terms of our budget, it is also unfair to families across the
country who are up against a decades-long trend of rising costs
and stagnant wages.
Now, I know everyone here is well aware of the differences
between the two parties when it comes to comprehensive tax
reform, and I do want to express my appreciation to Senator
Wyden, who in his new role as Finance Chairman will be tackling
these very tough issues.
As we look for opportunities to move forward on the larger
effort, I am hopeful we can also look for opportunities to
compromise in areas where there is some more agreement right
now. Chairman Ryan and I were able to reach a compromise on the
budget agreement to avoid another government shutdown and
create some economic certainty.
Now, I think it is time for the two parties to build on
that bipartisan foundation by coming together and finding ways
to make the tax code more fair for working families. We can do
this by getting rid of some of the wasteful loopholes I
mentioned earlier and putting the savings towards helping
working families keep more of their money and making job-
creating investments in areas like infrastructure and R&D that
both sides agree are important.
The 21st Century Worker Tax Cut Act that I recently
introduced is a great example. This bill would complement
critical reforms like raising the minimum wage by updating our
tax code to help today's workers and families keep more of what
they earn. It would give working families with children a 20
percent deduction on the second earner's income, and it would
expand the Earned Income Tax Credit, or EITC, for workers
without dependent children, like those who are just starting
out or those whose children have already left home. The
proposal builds on work incentives in the EITC that both
Republicans and Democrats agree have been effective, and it is
paid for by closing wasteful, unfair corporate tax loopholes
that Chairman Camp and Democrats have proposed eliminating.
Opinion leaders from across the political spectrum have
said it would provide much needed relief to workers and
families. One conservative commentator wrote in the National
Review that the 21st Century Worker Tax Cut Act is, quote, ``a
serious proposal that has the potential to better the lives of
a large number of workers.'' And, a New York Times editorial
columnist said it would be, quote, ``a huge benefit to low-
income childless families and two-earner families.'' So, I am
hopeful that here in Congress we will see similar support on
both sides of the aisle.
We will also be looking to close wasteful corporate tax
loopholes when it comes to addressing the looming shortfall in
the Highway Trust Fund. That fund supports transportation
projects that ease congestion and make much needed repairs to
our roads and bridges. But, in just a few months, at the height
of the construction season, the Highway Trust Fund is going to
reach critically low levels. That could lead to a construction
shut-down across the country this summer, which would halt
critical projects and put construction workers out of jobs.
Some States are already anticipating this crisis and planning
to stop construction projects in their tracks if Congress does
not act.
Fortunately, President Obama and Chairman Camp have both
proposed using corporate revenue to rescue the Highway Trust
Fund, so we should be able to find a bipartisan solution to
that challenge and I am hopeful that we can work together over
the coming weeks and months to give the Highway Trust Fund some
multi-year certainty and do it in a bipartisan way that also
closes wasteful tax loopholes and makes the tax code more fair.
In the 21st century economy, these kinds of changes to our tax
code, ones that help workers and families in a fiscally
responsible way, are opportunities we cannot afford to pass up.
We all know reforming our tax code will not be easy. The
difference between Republicans and Democrats when it comes to
making these changes are serious. But I also know, when both
sides are willing to come together and make some tough choices,
we can deliver. So, I am hopeful we will be able to move
forward on some of the proposals I have laid out today, and I
hope, going forward, we can build on them to achieve the kind
of comprehensive tax reform that will offer more workers and
families a fair shot and really help us build the foundation
for broad-based economic growth in the future.
With that, I want to thank our witnesses for joining us
again today and I will turn it over to my Ranking Member,
Senator Sessions, for his opening remarks.
OPENING STATEMENT OF SENATOR SESSIONS
Senator Sessions. Thank you, Chairman Murray, and thank you
for your hard work and for this hearing with good witnesses on
economic fairness.
American workers are, indeed, right to believe that
Washington actions are stacking the deck against them. As
Senator Murray noted, Washington and Wall Street are booming.
The greatest growth area in the United States is
Washington, D.C. The highest home values and incomes are in
this beltway area, sucking wealth out from middle America. So,
finding out what these issues are and how to fix the problem we
have is an important and valuable thing, and hopefully, we can
reach some bipartisan agreements on a number of areas that can
improve our situation.
Over the last five years, Washington has surged our debt
from $10 trillion to $17 trillion, promising all the time that
this borrowing and spending would create a better economy for
the very people that we are now lamenting who are hurting. Now,
that is just the bottom line. I do not think these policies are
working, will work, or will ever work. You cannot borrow your
way to prosperity.
Lobbyists, consultants, and politicians are doing quite
well, but median household incomes have declined by $2,268
since 2009. This is a stunning statistic. It is very real. I
have not heard it disputed. Both parties seem to agree with
that.
What policies have we been using that have created this? Is
there anything we could have done better? The Federal Reserve
has pursued an aggressive easy money policy that has been great
for the investor class, but at last week's hearing, where we
heard from Dr. Keith Hall, the former Commissioner of the
Bureau of Labor Statistics. He explained, quote, ``We have seen
an unprecedented worker disengagement from the labor force
since the end of this recession.'' I think that is an
undisputed fact.
Among workers without a high school diploma, nearly one in
four are unemployed, under-employed, or discouraged from
working. And African Americans and Hispanics, as a group, are
hurting more than any other groups in America.
Meanwhile, the U.S. logged a trade deficit of $42 billion
in February, the highest in six months. Overall, there are 1.7
million fewer manufacturing jobs today than there were in
December of 2007. Yes, robotics are a part of that, but we need
to have more growth and we are still not seeing the growth that
we need. Last year, growth came in at 1.9 percent GDP growth,
well below experts' projections and well below what we need to
create an economy that is healthy. Yet, Washington continues to
place new barriers to work.
It is fundamentally a vision, colleagues, of a
redistribution of wealth. Just tax more of people who have
wealth and pass out more to people who do not have it and this
will somehow fix our problems. I reject that. That will not fix
this economy. We need a tighter labor force. We need a growing
economy that is creating jobs. And it is hard for us all to
agree, but there are ways, I think, we can agree on this.
Now, CBO tells us that the President's health plan will
eliminate the equivalent of 2.5 million full-time jobs over the
next decade, eliminate those jobs. How can a proposal that is
supposed to help America is going to eliminate 2.5 million
jobs?
And the President has proposed more subsidies for adults
without children. But, this proposal, when interacting with
Obamacare, the Affordable Care Act subsidies, creates a
disincentive to work. For example, because EITC and the
Affordable Care Act have phase-out schedules as your income
rises, an adult without children whose income goes from $14,700
to $17,700 would lose 75 cents in higher taxes and reduced
government benefits for every dollar they earn. That creates a
disincentive to work.
The Federal Government spends more than $750 billion each
year on more than 80 means-tested income support programs. We
need to consolidate and reorganize these programs in a way that
affirms work, that does not punish it. Work is central to life.
It is central to character. It is central to self-esteem. It is
central to the ability of a nation to provide better things for
people. We need to reaffirm work. We need to insist that every
American work. It is good for them and good for the country.
We need a tax policy that allows our industries to compete.
We have the highest tax rates in the world. How can that be
good for business growth in America and job creation? Yet, when
it is talked about that we would reduce those rates to a more
competitive level, members are attacked. They say, you do not
care about poorer people. We want to attack the businesses
more. Real tax fairness should remove the competitive
disadvantage faced on American workers and businesses.
But, our friends in the majority believe that tax fairness
means more money for Washington. They propose to eliminate
popular deductions, not for the purpose of lowering rates, as a
Democratic witness told us a few months ago, or as Chairman
Baucus says, but for new government programs, new government
spending.
What we cannot do is borrow our way to prosperity. Our
excessive borrowing has already inflicted a painful toll. Right
now, it is hurting the economy now, this debt is. It is slowing
growth.
Last year, we paid our creditors $221 billion in interest
payments on the debt last year. That is five times the entire
Federal highway budget that Senator Murray mentioned that we
need to work on and see if we cannot fix. Five times that
amount of money went to interest on the debt last year alone.
But CBO now estimates that annual interest payments will grow
to $880 billion in ten years. That means one year's interest
payment ten years from now will be almost 12 times greater than
what the Federal Government spends on education.
Tax, spend, borrow, regulate is not only dangerous, but it
will not create jobs and higher wages. We must act to create
more jobs and rising incomes without adding to the debt. Here
are things that I think clearly will all improve the situation.
Let us produce more American energy. Let us eliminate all
wasteful regulations that do not produce benefits. Let us make
the tax code more competitive and more growth oriented. Let us
ensure fair trade, stand up for our trading partners and insist
on fair trade and end the cheating. Let us adopt an immigration
policy that serves the American workers' interest, that creates
rising wages, not falling wages. We need to turn the welfare
office into a job training center, where people come there for
help temporarily and they are helped and assisted into a way to
produce more and have a higher income. We need to streamline
the government to make it leaner and more competitive and
productive. We need to balance the Federal budget to restore
economic confidence.
All of these would create more jobs for American workers.
All of these steps would empower the individual, not the
bureaucracy. And all of these steps would grow the middle class
and not the government.
Thank you, Madam Chairman. I look forward to hearing from
our witnesses.
Chairman Murray. Well, thank you very much, and with that,
we will turn to our witnesses. Again, thank you all for being
here.
Mr. Buckley, we are going to begin with you.
STATEMENT OF JOHN L. BUCKLEY, FORMER CHIEF TAX COUNSEL, HOUSE
COMMITTEE ON WAYS AND MEANS, AND FORMER CHIEF OF STAFF, JOINT
COMMITTEE ON TAXATION
Mr. Buckley. Thank you, Madam Chairman and Ranking Member
Sessions, for the opportunity to participate in your hearing
today.
It is clear that tax reform will not be on the agenda this
year, but I believe that, ultimately, we will see a reform of
our tax system. It is inevitable. How that reform is
structured, however, will have a major impact both on our
economy and on long-term budget issues faced by this committee.
So, clearly, the committee is correct to start examining the
impact of tax reform.
For many people, tax reform is defined by reference to the
model of the 1986 Tax Reform Act: Lower rates, broadened base,
distributional neutrality, and revenue neutrality. I think the
Chair quite accurately points out that there are big
demographic and fiscal changes since 1986 that no longer make
that model the appropriate one for tax reform. Also, I think it
is very important to understand that although the 1986 Act was
an enormous accomplishment, and I take great pride from being
part of that, it failed in two major respects.
First, it did not result in a stable rate structure. Fairly
quickly after 1986, there were a series of substantial
increases in the top marginal rate, the first one signed by
President George Bush. In my opinion, it was the structure of
the 1986 Act that made those rate increases inevitable and that
offer a caution about tax reform going forward.
In no small part, the rate reductions in the 1986 Tax
Reform Act were financed by revenues from timing changes to our
tax law. Timing changes do not affect the ultimate size of a
deduction or income inclusion. They merely affect the year in
which that item is taken into account.
If you repeal a timing benefit, and most tax preferences
are timing benefits, you have a one-time temporary increase in
revenues during the budget window due to the transitional
effects of moving to the new system. If you finance a rate
reduction with revenue from a timing benefit, which is exactly
what the Camp tax reform plan does, you will end up with a bill
that appears to be revenue neutral during the budget window
because of those temporary transitional taxes, but will result
in large and growing deficits outside the budget window. That
is exactly what I believe happened in the 1986 Act.
Second, the economic benefits predicted from the 1986 Act
never materialized. In that respect, the 1986 Act was not
unique. Almost all of the economic predictions, which are
largely based on supply side economics, of the major revenue
acts enacted after 1981 were simply wrong. They never provided
the economic growth that was predicted when they were being
considered. Indeed, the 1993 tax increase was preceded by
predictions of extraordinary economic dislocations that simply
never happened.
I would argue, instead of following the 1986 model, I think
the goal for--there should be three goals for future tax
reform.
First, it should result in a stable revenue structure. I
think much of the debate over tax reform ignores the fact that
the fundamental purpose of our tax system is to raise revenue
to cover reasonably expected government expenditures. Tax
reform should initially focus on that goal, not an arbitrarily
selected top rate. Given the long-term fiscal challenges that
we face, I believe that means tax reform must result in
additional revenues.
Also, the Congress should not be bound by the ten-year
budget window in assessing the impact of tax reform. I assure
you, based on my experience, the ten-year budget window is
easily manipulated. I think the Camp tax reform plan is a
particularly artful manipulation of the ten-year budget window.
Proponents of substantial changes to our entitlement programs
point to concerns largely outside the budget window. Proponents
of tax reform should not be able to avoid the impact of their
proposals outside the ten-year budget window.
But, above all, tax reform should not worsen the long-term
budget projections. I see no benefit from repeating the 1986
reform example, and that is unsustainably low rates followed by
very politically painful decisions to reverse the impact of
those rates.
Second, I think tax reform should be designed with the goal
of increasing economic opportunities. I have to say that I
agreed with much of what Senator Sessions said about the lack
of job opportunities in this country. I believe it is the lack
of job opportunities that is the biggest challenge facing this
government, not the lack of willing and able workers. The
projections of economic growth from tax reform are largely
based on their expansion of the labor force, not their
expansion of work opportunities. Indeed, I think that you
should have a different focus in tax reform.
Finally, tax reform should not increase the growing
inequality in income and wealth in this country. A tax reform
that is based on temporary tax increases to finance rate
reductions could become quickly regressive outside the budget
window when those temporary tax increases end.
Thank you, Madam Chairman.
[GRAPHIC] [TIFF OMITTED]
Chairman Murray. Thank you very much.
Dr. Gravelle.
STATEMENT OF JANE G. GRAVELLE, PH.D., SENIOR SPECIALIST IN
ECONOMIC POLICY, CONGRESSIONAL RESEARCH SERVICE
Ms. Gravelle. Thank you very much for inviting me here
today.
The United States, due to the growth of programs to serve
an aging population, which we have known is coming for a long
time, faces an unsustainable debt. Now, tax reform might serve
as a vehicle to raise revenue to reduce this debt as well as
for lower rates or to pay for alternative, more desirable tax
benefits. A small change in tax revenue could close much or all
of the fiscal gap and prevent the debt from rising as a percent
of GDP.
Although raising taxes to reduce deficits might cause a
modest initial reduction in GDP in the short run, those effects
are expected to be offset by the benefits of reducing the
crowding out of private investment. That is, increasing taxes
to reduce the debt is expected to contribute to positive
economic growth.
Revenue-neutral tax reform is often argued to cause
economic growth through rate reduction, however, the same base-
broadening provisions that you use to finance these rates can
have effects on effective marginal tax rates. Just think of the
State and local tax deduction. If you reduce the deduction for
it, you have raised the marginal tax rate, and that happens
with a lot of provisions. So, the overall effects of this are
really very uncertain and probably negligible.
A study by two prominent economists found that the tax
reform of 1986, which lowered rates and broadened the base, had
little effect on the economy in the aggregate. Pursuing base
broadening, because revenues can be used to lower statutory
rates, with the objective of spurring economic growth is
unlikely to achieve its goals.
Although base broadening simply to permit rate reduction is
unlikely to achieve a growth objective, tax reform can
potentially improve fairness, efficiency, and simplicity. Tax
reform can also eliminate or limit existing benefits, but it
might also add or expand provisions. The Tax Reform Act of
1986, for example, expanded the Earned Income Tax Credit. And
the provision that Chairman Murray, that you have recently
proposed for the EIC and the second worker, there are a lot of
merits in this.
I actually wrote a paper about some of this in 2006, where,
basically, I showed with my co-author, who is my daughter, that
you would improve horizontal equity. The most important thing
to increase horizontal equity in the tax law is to increase the
EIC for couples, married couples without children and single
individuals. There is very little EIC for them.
Despite tax expenditures that are 80 percent of individual
tax revenues, potentially enough to decrease rates by 43
percent, a CRS study suggested the difficulties in broadening
the tax rate, because these tax expenditures, in most cases,
are viewed as serving an important purpose. I mean, among the
large tax expenditures are taxing Medicare to the recipients,
taxing capital gains at death, and taxing defined benefit
pension plans, all of which technically are very difficult to
do.
So, we kind of went through the top 20 tax expenditures and
found--we suggested that base broadening would--feasible base
broadening would be likely no more than six percent to nine
percent of revenues. The individual revenues in Chairman Camp's
proposal were of this magnitude, about six percent. Now, this
amount would not fund significant rate reduction, but if used
to raise revenue, would largely close the fiscal gap.
It is particularly difficult to find provisions that would
lower the top individual tax rate to 25 percent without
shifting the burden of the middle class. In the Tax Reform Act,
top rate cuts were financed, in part, by taxing capital gains
at ordinary rates and restrictions on tax shelters, options
that do not appear to be feasible now. Both of the fully
specified tax reform proposals that I mentioned in my testimony
both have a top rate of 35 percent.
Corporate tax expenditures are much smaller relative to
corporate tax revenue. Setting aside the treatment of foreign
source income, repealing every corporate tax expenditure would,
according to my estimates, prevent [sic] a reduction in the
corporate rate to 29.5 percent. If deferral of foreign source
income is eliminated, the rate could be reduced to 27 percent.
So, that is every tax expenditure that I am talking about.
While it might be more feasible to eliminate corporate tax
expenditures, there are also trade-offs. For example, financing
a rate cut with accelerated depreciation, which might be
desirable on other grounds, would nevertheless increase the
cost of capital. Circumstances are very different for corporate
rate reduction than they were in 1986. The 12 percentage point
reduction in the corporate rate at that time was financed
largely by the repeal of the investment credit. Accelerated
depreciation today would allow only a 2.2 percentage point
reduction.
One area where I believe revenue could be raised without
increasing the domestic cost of capital is increasing the tax
on foreign source income. Measures could also be taken against
artificial profit shifting, which is not an issue of the
treatment of investment but of tax avoidance. There are also
some other provisions, both individual and corporate, that
might be classified as loopholes--examples are carried
interest, inherited IRAs, there is a whole series of these--
that might be easier to address than a lot of tax expenditures.
A budgetary risk in tax reform is the use of provisions
that have transitory revenue gains to finance permanent tax
cuts, which would increase the deficit outside the budget
window. I describe in my testimony examples of these practices
in the Tax Reform Act of 1986, significant transitory
provisions and a number of revenue-raising provisions in
current proposals that produce less revenue loss outside the
budget window.
The Budget Committee has discussed including macroeconomic
estimates. I believe that economic science and research is not
at the stage that we could get reliable estimates for
macroeconomic effects. However, we are certainly able to get
reliable estimates for the steady state effects, and it would
be very easy for the JCT to estimate any of these tax proposals
as they would appear had they been in place for many years, and
that is something I think the Budget Committee might consider.
Thank you.
[The prepared statement of Ms. Gravelle follows:]
[GRAPHIC] [TIFF OMITTED]
Chairman Murray. Thank you.
Ms. Furchtgott-Roth.
STATEMENT OF DIANA FURCHTGOTT-ROTH, SENIOR FELLOW, MANHATTAN
INSTITUTE FOR POLICY RESEARCH
Ms. Furchtgott-Roth. Thank you very much, and I believe I
have some slides that you said were on a computer somewhere.
Ms. Gravelle. They are right behind you.
Ms. Furchtgott-Roth. So, thank you very much for inviting
me to testify. I would like, with your permission, to submit my
entire testimony for the record and then summarize it.
Chairman Murray. Without objection.
Ms. Furchtgott-Roth. Thank you. So, I would like to really
agree with my co-witness here, John Buckley, that the lack of
job opportunities is the major problem facing America. We have
a labor force participation rate that is around 1978 levels,
before the millions of women started moving into the workforce
in the 1980s. And the way to fix this problem is with--through
different types of tax reform, both at the bottom end, so
fixing entitlements so people leaving unemployment do not face
such high tax rates, and at the top end, because right now, for
top earners and small businesses, State and Federal taxes are
over 50 percent.
While taxes do matter--if they did not matter, America
could double them and buy everybody a Prius, and in study after
study, we find that taxes do have an effect. So, I do not want
to go through all these studies. I mention some of them in my
testimony. Professors Jonathan Gruber of MIT and Emmanuel Saez
found that people in the upper end of the income distribution
are highly responsive to tax rates. Edward Prescott got a Nobel
Prize for showing the effects of taxes on different countries,
including the United States. Professors William Gentry of
Williams College and Glenn Hubbard of Columbia found that high
taxes discourage entrepreneurship. Princeton University
Professor Harvey Rosen--the list just goes on..
I would like to just focus on a couple of slides from
Professors Christina and David Romer. As you know, Christina
Romer was the Chairman of President Obama's Council of Economic
Advisors and she concluded that a tax increase of one percent
of GDP reduces output over the next three years by nearly three
percent. And in Figure 1, you can see the estimated effect of
an exogenous tax increase of one percent of GDP on GDP, and you
can see that it is going down.
If you look at Figure 2, you can look at the effect of a
tax increase of one percent on the inflation rate, and the
Romers find that it makes inflation rise. The Romers took data
from the 1940s to the present and did a very thorough effect of
the increases of taxes on GDP.
And what is most startling and also related to the
testimony of my friend John Buckley over here is the effect of
a tax increase of one percent of GDP on the unemployment rate,
and it shows that there is a--that the unemployment rate
actually does decline under this.
But what they find is that with the increase in taxes, then
GDP actually does go down, and the reason is that, as all of
you know, when the government takes a dollar of your money,
then it spends it less efficiently than you do.
Well, one objection that we have heard today is that
reducing taxes leads to more inequality, and inequality
decreases economic growth. There has been an International
Monetary Fund study about this, and I think that a lot of this
is misstated. The IMF study used pre-tax, pre-transfer income
to measure inequality and many of these studies looking at
inequality do not take into account the taxes paid by the top
percent and the transfers that go to the bottom. So, for
example, the top five percent paid 57 percent of all Federal
individual income taxes in 2011, the latest year that data are
available, and the top half of earners paid 97 percent of these
taxes. So, the idea that inequality can be measured just
looking at these issues is very--just does not make sense at
all.
Well, mismeasurement of income is not the only flaw. Many
changes occurred between 1980 and 2012. For example, as we can
see in Table 1, women streamed into the workforce in the 1980s,
and by 2012, most families in the top fifth of the income
distribution had two earners. So--and in the middle of the
distribution, the average was 1.3 earners. So, one thing we
could do to increase income equality is to say that only one
person in a family can work. One of the things that we are
looking at when we observe more income inequality is more women
in the workforce.
We have also had, over the past 20 or 30 years, more people
living alone, and that has contributed to the perception of
income inequality. So, if you look at Table 2, you can see that
men and women living alone are more likely to be in the lowest
income quintiles, and with increasing life expectancy and more
divorces, we can see that there are more people living alone
than there used to be and this also contributes to the
perception of income inequality.
So, that is why it is important, when you look at income
distribution, to look at it on a per person basis so that you
can adjust for that, and also looking at consumption rather
than income, because when you look at taxes and transfers, the
taxes go from the top part of the income distribution and they
go to transfers to the bottom.
So, in Table 3, where I have done that, you can see that
the ratio of top to bottom income quintile spending is about
the same. It is about 2.5 in 1987 and about 2.5 in 2012. It has
not changed that much, and that is because even though looking
by certain measures, income inequality, it seems as though the
top--there is a lot more income inequality based on income
measures that do not include taxes and do not include
transfers. When you take out taxes and transfers, you have a
very different situation.
So, the answer is to do tax reform and not be concerned
about these measures of inequality, which are frequently
incorrect, and thank you very much.
[The prepared statement of Ms. Furchtgott-Roth follows:]
[GRAPHIC] [TIFF OMITTED]
Chairman Murray. Thank you to all of you.
Let me start with a question about House Ways and Means
Chairman Dave Camp's tax reform plan. That plan attempts to pay
for lower tax rates by closing loopholes and reducing tax
expenditures. Chairman Camp even imposes a new excise tax on
big banks and places a surtax on the income of wealthy
individuals. All told, his plan raises more than $4.2 trillion
in new revenue to pay for lower tax rates. And he tried to make
all these changes without increasing or decreasing revenues or
shifting tax burdens among taxpayers at different income
levels.
Mr. Buckley, you noted that despite all of his efforts,
Chairman Camp's plan would still lead to both bigger deficits
and tax cuts for the wealthy beyond the ten-year budget window,
and let me just say again, this is an approach to tax reform we
cannot afford, given our current budget window. But, can you
explain to us why Chairman Camp's plan would lead to bigger
deficits down the road.
Mr. Buckley. It is fairly simple. If you just look at the
revenue table of Chairman Camp's bill and look at what I call
permanent changes in the law--changes other than timing
changes--he has well over a trillion dollars in permanent tax
reductions. That is offset by a series of pure one-time revenue
increases--the tax on the unrepatriated profits of U.S.
multinationals, release of reserves from repeal of LIFO
accounting methods. Those are purely one-time revenue
increases. They are in the range of a couple hundred billion
dollars.
He also, you know, forces many into Roth IRAs and claims
that to be a revenue increase. It is not a revenue increase. It
is a tax benefit disguised as a revenue increase in the budget
window.
And then, finally, he has a whole series of pure timing
changes--repeal of accelerated depreciation, repeal of expense
treatment for R&D, you could go on, repeal of expense treatment
for advertising expenses. Those are all pure timing changes and
they will disappear to a very large extent--I have seen as much
as two-thirds disappear outside the budget window.
So, it is fairly simple math. He results in growing
deficits outside the ten-year window. Also, all of those one-
time and temporary tax increases are taken into account for
distributional purposes. During the ten-year window, these are
changes affecting businesses. The way the Joint
Committee on Taxation distributes tax burden, they will
flow almost all to upper-income taxpayers. That is what enables
his distributional table to look distributionally neutral in
the ten-year budget window.
Chairman Murray. But it is in the out-years that the
wealthy benefit.
Mr. Buckley. Those revenues disappear and the upper incomes
will get a substantial net tax cut, and you only have to look
at the Joint Committee distributional tables to find that
people making more than a million dollars get a significant tax
reduction in the last year of his ten-year budget window.
Chairman Murray. Okay. Dr. Gravelle, you recently wrote
that in 2008, U.S. companies reported profits in Bermuda, a tax
haven with no corporate income tax, that exceeded the size of
that country's GDP by almost 650 percent. Many of us are aware,
of course, of the infamous five-story building in the Cayman
Islands that houses something like 18,000 companies. But, no
doubt, really, our government is losing billions of dollars
every year to offshore tax abuse. Let us be clear. Those
schemes give big companies an unfair business advantage over
companies that only operate domestically, and I think that is
important to remember, as well.
I talked in my opening statement about the bill that I
introduced, the 21st Century Worker Tax Cut Act. My bill
actually borrows from Chairman Camp's to combat profit shifting
and tax haven abuse, uses those savings to invest in targeted
tax cuts for childless workers and two-earner families.
First of all, Dr. Gravelle, I wanted to get your
perspective on the magnitude of offshore profit shifting and
tax avoidance.
Ms. Gravelle. Actually, I think my 650 percent number has
grown. It is really more like over a thousand percent by now,
probably.
Chairman Murray. Really?
Ms. Gravelle. I need to update my paper. So, the estimates
that I look at would say that I think that the profit shifting,
sort of the best estimates, amount to probably about $70
billion in fiscal year 2015. That is profit shifting, not
revenue we could raise from it. But it is growing. It seems to
be growing all the time. But, you know, if you put out a 35
percent rate, you could get a substantial revenue gain from
that, and I think there are certainly ways to collect that
money effectively. A lot of countries tax currently income from
countries that have low taxes. That is very common. But we do
not do any of that.
Chairman Murray. Right. And, Mr. Buckley, would you agree
that providing targeted tax relief to struggling workers is a
better use of taxpayers' resources than allowing these tax
havens to continue unabated?
Mr. Buckley. I absolutely agree. I think, of the barriers
to employment faced by two-worker married couples are
significant when they have children, and so that anything that
is done to address those barriers, make it easier for them to
get quality day care, to afford the cost of that, is positive.
I am deeply troubled when you see tax reform plans like
Dave Camp's that repeal the Dependent Care Credit and that will
result in a net tax increase on many of the two-earner spouses
that you are concerned about. We should make it easier for them
to enter and remain in the workforce.
Chairman Murray. And we want people to work. I know my
counterpart here has talked about that before. But, it is a
disincentive to the second worker when they start working and
they have to pay for child care and clothes and transportation
and are not getting that tax credit, correct?
Mr. Buckley. That is correct.
Chairman Murray. Okay. My time is out. I will yield to
Senator Sessions, and thank you all very much.
Senator Sessions. Thank you.
Ms. Gravelle, you indicated you discussed new taxes, that
they would be used to pay down the debt, or reduce the annual
deficits, maybe more correctly. If taxes were to be increased,
is that what you would propose should be done with the money?
Ms. Gravelle. Well, I cannot recommend a policy. CRS never
makes recommendations.
[Laughter.]
Ms. Gravelle. Just basically, what I wanted to say in my
statement is--and, in fact, I would go on to say I have written
a paper on the long-run debt outlook where it seems to me, if
you put all the numbers together, it is very hard to deal with
that long-run debt without relying on some increase in taxes.
But, mainly, what I was saying--
Senator Sessions. But it does not improve the long-term
debt if you increase taxes to fund new spending. That is the
point.
Mr. Buckley, thank you for your comments. I would just say
that--well, CBO tells us that the marginal rate tax increases
do reduce economic growth. I think most people would agree. We
do have to have a certain amount of money to run this
government. There is just no doubt about it. But, I think that
it is clear that a marginal rate increase on the private sector
weakens the private sector and increases the Washington sector
and that is pretty clear.
I have got just a minute and I will let you respond. I see
you would like to.
Mr. Buckley. Well, I think you should look, carefully look
at the economic models that predict economic growth from tax
reform. They are what I call supply side models. Many of them
assume--if you could look at the Joint Committee analysis of
Dave Camp's bill, one of the models used that shows big
increases in growth assumes that the two major problems faced
by this country are already solved. They assume that the
Federal budget is sustainable, no long-term problems, and there
is no unemployment in this country. They are modeling the
effects--
Senator Sessions. Well, I doubt that they say there is no
unemployment--
Mr. Buckley. Well, that is what the model assumes.
Senator Sessions. Do you mean zero unemployment?
Mr. Buckley. I mean zero unemployment.
Senator Sessions. That would be unrealistic, I would agree.
Mr. Buckley. It is unrealistic, but that is where the
projections of economic growth come from.
Senator Sessions. Well, Ms. Furchtgott-Roth, you refer to
studies. There are a number of studies that have shown that in
Europe, IMF and some sophisticated analytical studies by
professionals who say that in reducing the deficits they were
facing, that the nation benefits more from reducing government
spending than it does from increasing taxes to reduce the
deficit. Is that your understanding of the state of the
economic analysis?
Ms. Furchtgott-Roth. I think it is important to reduce the
deficits by cutting spending. Increasing taxes to reduce the
deficit, especially in the system of government that we have
right now, seems to result in higher taxes and higher spending,
and I really agree that it is a great problem that companies
are putting profits abroad and one reason for this is that we
have a much higher tax rate than other countries around the
world and we need to lower our corporate tax rates to average
OECD levels and start taxing not on a worldwide but on a
territorial basis. OECD averages about 24 percent. So, it is no
surprise that since our rate, Federal and State, is 39 percent,
our companies are keeping profits offshore rather than bringing
them back where they would be taxed.
Also, I am surprised that we have not had any discussions
of cuts in spending. We are just assuming that spending cannot
be cut, and there are a lot more efficient ways of dealing with
the spending that we have. For example, we talked about the
Highway Trust Fund. If that were devolved to the States, for
example, instead of sending all the gas tax to Washington, then
sending it back to the States, if we let the States keep their
gas tax revenues and spend it themselves on what highway
projects they wanted without having to have the required 15
percent for mass transit, which is not much good in places like
Nebraska, where they do not use mass transit, States could make
much more efficient uses of these revenues and they would not
be hamstrung by project labor agreements and other kinds of
Federal rules on this highway construction and that could go a
lot further.
There are many ways we could be cutting spending, such as
the $12 to $15 billion we spend every year making electricity
more expensive, and I think we really need some discussion of
that, not just assume we need to raise taxes to reduce the
deficit. We also need to be looking at entitlements out in the
long run, how we can trim those down, because those are the
major source of government spending.
Senator Sessions. Well, I think that is exactly right. It
is the equivalent of a tax to pass an environmental regulation
or a global warming regulation that raises the price of
everybody's energy for people alike. It is the equivalent of a
tax, in my opinion. It is equivalent to the government taxing
those same people and then paying for the CO2 reduction ideas.
Ms. Furchtgott-Roth. Right. And what is really--
Senator Sessions. Economic sense, it is not much
difference, is it?
Ms. Furchtgott-Roth. Yes--
Senator Sessions. I would just say this--
Ms. Furchtgott-Roth. --and what is really interesting is
that when extended unemployment benefits ended in December,
between December and March, the labor force participation rate
went up by four-tenths of a percentage point. That is the
fastest increase since 2010. And that was because, in essence,
the effective tax rate for working at lower income levels had
disappeared when people were not losing that extra unemployment
benefit by going out to work.
Senator Sessions. Could I ask you this, Ms. Furchtgott-
Roth. University of Chicago Professor Casey Mulligan has said
that the penalty on working, that, in effect, for low-income
workers, can be much higher than those for upper-income earners
because of the phase-out of different benefits they are
receiving from the government.
Ms. Furchtgott-Roth. Right. He had speculated about 40 to
60 percent, and that is why we really need to work on trimming
back these entitlements and making the phase-outs different.
That is why it is particularly interesting that when extended
unemployment benefits ended in December, we saw this movement
of people into the workforce, and also, the percent of long-
term unemployed went down from 37 percent--the long-term
unemployed, that is 26 weeks or longer--went from 37 percent of
the unemployed to 35.8, just last month.
Senator Sessions. Thank you, Madam Chair. I would just say
that the argument over taxes and economic growth is complex,
but in 1981, the Reagan plan took the marginal tax rate from 70
percent to 50 percent, and I think that was a positive step for
the economy. The economy did recover. And then in 1986, it was
taken to 28 percent. Perhaps that was lower than the country
could sustain, Mr. Buckley, I do not know. But, when it went
back up--it went up, what, to 39--and you still ended up with
far less marginal tax rate imposition on the private economy
than you had in 1980. And, I think all of that did help create
growth and prosperity.
All of us are guilty. Something changes in policy and we
run out and say the next month, whatever good or bad happened
was a result of that event. And it may just be a smaller event
in the long-term shape of things that helped shape it.
So, anyway, these are important issues. Thank you for your
leadership, and this is a valuable discussion.
Chairman Murray. Thank you.
Senator Whitehouse.
Senator Whitehouse. Thank you, Chairman.
Let me get a sense--I think the Chairman used one of the
numbers that I want to use already, but I would like to hear it
from the witnesses. The revenue that comes into the Federal
Government has two ways of being spent. One is it can be spent
through the budget and through appropriations, and you could
describe that as going out the front door, and everybody gets a
look at it when it is on the porch because the appropriations
process looks on a regular basis at all of that.
And the other is by tweaking the tax code to give people
advantages and deductions and so forth. You can send revenues
that would otherwise be collected for spending in the
traditional sense, that would otherwise go out the front door,
you can send them out the back door, and that can also be very
beneficial to special interests, and, indeed, there are huge
lobbying professions that are designed to make sure that
industries maximize their benefit of that expenditure out the
back door.
In terms of the scale of how much money is lost through tax
avoidance, tax deductions, tax specialized rates, things like
that, compared to what gets actually spent, how would you
compare the two, generally? And on the corporate side and on
the individual side separately, if you would.
Mr. Buckley. Senator, I think you have to divide what are
called tax expenditures into different pockets here.
Senator Whitehouse. Let me put it this way. Are they called
tax expenditures for a reason?
Mr. Buckley. They are called tax expenditures for a reason.
Senator Whitehouse. And what is that reason?
Mr. Buckley. That they are spending through the tax system.
Senator Whitehouse. Okay.
Mr. Buckley. But, many of the tax expenditures are items
like the Dependent Care Credit, per child credit, charitable
deductions, home mortgage interest deductions, State and local
tax deductions--
Senator Whitehouse. Yes.
Mr. Buckley. Those type of tax expenditures on the
individual side are somewhere between 80 and 90 percent of
total tax expenditures. So, there clearly is a lot of special
interest things here.
Senator Whitehouse. Particularly on the corporate side.
Mr. Buckley. Particularly on the corporate side--on the
business side--
Senator Whitehouse. Yes.
Mr. Buckley. Not just corporations, but businesses. But, if
you look at the overall numbers that are being tossed around,
the bulk of the tax expenditures are things that you really
could not accomplish through a spending program. They are
called tax expenditures, but you cannot replicate the
charitable deduction through a spending program. I do not think
the Congress would want to replicate--
Senator Whitehouse. My point is, the scale of it, because I
think most people think, when they think of Federal spending,
that what we see through the appropriations process is a very,
very big number--
Mr. Buckley. Right.
Senator Whitehouse. and whatever happens with the tax code
is sort of a lesser thing. And, in fact, on the corporate side,
it is 70 to 80 percent of all revenues that actually goes--
Ms. Gravelle. No, it is smaller than that.
Mr. Buckley. No.
Senator Whitehouse. Smaller than that?
Mr. Buckley. Yes, very much.
Ms. Gravelle. It is smaller. It is about--I think it is--it
seems to me it was about 40 percent--35 percent, 40 percent.
The biggest tax expenditure, I think, is comprised partly of
what I think is a loophole, and that is the revenue loss on the
deferral of foreign source income.
Mr. Buckley. Correct.
Ms. Gravelle. Some of that might be real activity, but I
think a large part of it is these profits that have been
shifted through various schemes to, you know, to the Cayman
Islands or to Bermuda or--
Senator Whitehouse. And some of that, we do not see at all
because the income is hidden, so you never know that--
Ms. Gravelle. We are capable of collecting that if we want
to.
Senator Whitehouse. If we want to, yes.
Ms. Gravelle. But, it is the biggest tax expenditure and it
is worth--I do it in percentage points of the rate--it is worth
about three percentage points. The one that is talked about all
the time, the next biggest one, is worth about 2.2 percentage
points. So, those are the two biggest tax expenditures, and
accelerated depreciation only accidentally became a tax
expenditure because we set the rates where they should be in
present value terms in 1986, but we set them with the wrong
expectation of inflation. That is what happened there.
Ms. Furchtgott-Roth. But, that is on the corporate side. If
you look at the individual side, the mortgage interest
deduction, the deduction for health care expenses on the
employer side, the deduction for State and local taxes, I mean,
all these really are the major tax expenditures and they are
very difficult to get rid of for political purposes.
Senator Whitehouse. Ms. Furchtgott-Roth, while I have got
you here, I think the last time we saw each other was in the
Environment and Public Works Committee, and we do not often
have witnesses who show up in both the Budget Committee and the
Environment and Public Works Committee, and so I have looked at
some of the areas where you have testified, and you have
testified on climate change in the Environment and Public Works
Committee.
You have testified on the impact of Obamacare on America's
health insurance in the House Energy and Commerce Subcommittee.
You have testified on sequestration in the House Education
and Workforce Subcommittee.
You have testified on energy in the House Energy and
Commerce Subcommittee.
You have testified on Bureau of Labor Statistics employment
data on the House Oversight and Government Reform Committee.
You have testified on the individual mandate in the
Affordable Care Act in the House Ways and Means Subcommittee.
You have testified on national ocean policy in the House
Natural Resources Subcommittee.
You have testified on a balanced budget amendment in the
Senate Judiciary Subcommittee, which actually makes three of my
committees that you have testified on.
You have testified on something called Obama's hidden
marriage penalty in the House Oversight and Government Reform
Subcommittee.
You have testified on the future of union transparency on
the House Education and Workforce Subcommittee.
You have testified in the Joint Economic Committee on the
gender pay gap for women.
You have testified in the House Natural Resources
Subcommittee on American Samoa fisheries subsidies.
You have testified in my Senate Judiciary Subcommittee on
medical bankruptcy reform.
You have testified on the nomination of John Roberts to be
an Associate Justice of the Supreme Court.
You have testified in the confirmation hearings in Senate
Banking, Housing, and Urban Affairs.
You have testified on estate and capital gains tax levies
on farmers.
And, you have testified on being compensated for overtime
by taking time off rather than receiving additional pay.
Ms. Furchtgott-Roth. Oh dear. You are showing everybody how
old I am.
Senator Whitehouse. And, fair to say that in every single
one of those testimonies, you were the Republican witness?
Ms. Furchtgott-Roth. Absolutely. I worked also for three
Republican White Houses and I have written five books, the
latest being Regulating to Disaster: How Green Jobs Policies
are Damaging America's Economy.
Senator Whitehouse. Is there any area where you will not
testify?
Ms. Furchtgott-Roth. Yes. Yes. I do not testify on anything
legal. I only testify on economics because I am an economist. I
am the former Chief Economist of the U.S. Department of Labor,
and labor issues overlap many of these things that you
mentioned. For example, in my testimony on behalf of John
Roberts, I was testifying on the theory of comparable worth,
not on his qualifications to be a Justice. But, yes, I will
testify on--
Senator Whitehouse. We will see you in the Judiciary
Committee again and we can see whether we are not talking about
legal issues.
Ms. Furchtgott-Roth. Only if it is an economic issue. For
example, I do not testify on things like banking or telecom
because I do not have expertise in those areas and they do not
really overlap with labor economics.
Senator Whitehouse. Very well.
Thank you, Chairman.
Chairman Murray. Thank you. I want to thank all three of
our witnesses for participating today, all of our colleagues
that are here.
As a reminder to my colleagues, additional statements or
questions for the witnesses are due by 6:00 p.m. today, to be
submitted to the Office of Chief Clerk in Room 624.
With that, thank you again for all of you participating.
With that, I call the hearing to a close.
[Whereupon, at 11:38 a.m., the committee was adjourned.]
INVESTING IN WHAT WORKS: EXPLORING SOCIAL IMPACT BONDS
----------
THURSDAY, MAY 1, 2014
United States Senate,
Committee on the Budget and the Government Performance Task
Force,
Washington, D.C.
The committee met, pursuant to notice, at 10:01 a.m., in
Room SD-608, Dirksen Senate Office Building, Hon. Mark Warner,
chairman of the Task Force, presiding.
Present: Senators Warner, Whitehouse, and Ayotte.
Also Present: Senator King.
OPENING STATEMENT OF CHAIRMAN WARNER
Chairman Warner. Good morning, everyone, and welcome to
today's hearing of the Budget Committee's Government
Performance Task Force on a very interesting subject,
``Investing in What Works: Exploring Social Impact Bonds.''
I mentioned to the panel this morning, we are going to go
ahead and get started. I know Senator Ayotte is going to join
us in a few minutes. Senator Whitehouse is on the committee, as
well--actually, whose idea for the hearing it was--is in a
Judiciary Committee markup and will be here. So, I particularly
mention to our guest from the U.K., please do not be offended
if people float in and out. We often have very short attention
spans, but when we are here, we are going to be very focused on
what you say.
I want to, before we get to our subject, just do a quick
review for staff and others who have followed this Task Force.
At our last Task Force hearing, we discussed the need to expand
financial transparency, and I am happy to report that since
that last hearing, we have actually made some real progress.
This month, both the Senate and the House passed our bipartisan
Digital Accountability and Transparency Act, or DATA Act, and I
would like to thank all the members of the Task Force for their
support of the DATA Act, and I do not think he is going to be
with us this morning, but particularly Senator Portman, another
member of the committee who was my lead cosponsor on this bill.
We are soon going to get, actually, a Presidential signing
ceremony.
Recognizing that these are sometimes a bit obscure topics
that we deal with here, but we all talk about how we can try to
bring better accountability to the government, the DATA Act
will actually improve transparency and accountability by
requiring that agencies post all Federal spending data on a
single easily accessible website. This bill will also require
agencies to develop financial data standards so that spending
data is reported to the public in a consistent and accurate
way.
I am not sure, Mr. Fisher, whether in the U.K. it is the
same, but we have, for example, in the Department of Defense,
200 different financial accounting systems. It is ludicrous,
trying to push the bureaucracy to get a common standard, common
data.
Darrell Issa from the House, who was a lead sponsor, said
if--and, again, apologies to our guest from the U.K.--but if
you were in baseball and every baseball team had a different
way of measuring what a hit was or what an error was or what a
person's averages were, you would be very hard pressed to
determine who were the good players and who were not.
This DATA bill, which has been called the most significant
piece of government transparency work since the Freedom of
Information Act, I think is going to really give us a tool.
What we also do in this bill is reduce reporting burdens
for the recipients of Federal funds, because we have clearly
learned--and Senator Ayotte and I are working together on
legislation in this area--we ask agencies to report time and
again in different forms. If we can cut back on that, we can
save resources. Actually, Senator Ayotte and I have legislation
to try to eliminate some of the duplicative reporting
requirements.
Probably not all members of the public would realize that
we do an annual Dog and Cat Fur Violations Report, which I know
the public is hanging on each day waiting for that Cat and Dog
Fur Report that comes out. If there was ever a case of a
meaningless report--
Senator Ayotte. Yes, it is riveting. They are waiting.
[Laughter.]
Chairman Warner. And it is costing and costing. So, we are
actually trying to eliminate some of that. This is what,
really, this Task Force was set up for back in 2009, to say,
how can we drive down, in tight fiscal times, better
performance.
And we have passed the Government Performance and Results
Modernization Act, again, an obscure piece of legislation that
most people do not know, but it actually requires agencies for
the first time to identify not only their best performing
programs, but their least performing programs, which is always
hard to get anyone in government to acknowledge that certain
things may not be working.
We have also looked at Federal customer service reporting,
and again, as I mentioned, with Senator Ayotte, we are looking
at getting rid of some of the duplicative reports. A lot of
time and money is spent on reports that are not very useful.
Today, we are going to go into a different area that is
really very, very brand new. It was suggested, as I mentioned,
by Senator Whitehouse. We are here to learn more about social
impact bonds, a new approach to financing government services
designed to ensure government only pays for what works.
Frankly, the Federal Government does a poor job of
understanding what works. Federal agencies often talk a good
game about measuring results and delivering value for the
taxpayers, but the truth is that evaluating what works and what
does not really work is really something the Federal Government
does not do very well. Maybe we can learn from others about
this. It is done better elsewhere. But part of that was because
there is lack of common data standards. Part of that is because
there is really not a lot of transparency. But this idea of
social impact bonds is something that may be a new tool. This
is especially true when linking resources to outcomes,
something that a lot of us talk about, but, again, we do not
have very good standards.
The Federal Government has a practice of what is called
base budgeting, where discussion and analysis of resource
allocation is framed by the prior year's funding level rather
than the outcomes that those resources achieved. We simply
start with that baseline and build from there rather than
looking back and saying, did we actually get value for our
dollar in terms of what was spent in the preceding year?
Now, we all know that we are going to continue to be faced
with tight budget times. In these times, we need to make sure
that we are allocating limited resources to the programs that
actually deliver results. That is why the recent development of
social impact bonds is of importance.
Social impact bonds are not really bonds, but they are
probably better described as a new type of performance-based
contracts. Governments use social impact bonds to finance
social service projects with private and philanthropic capital
and only repay this investment after an independent evaluation
confirms the project has achieved the goals. The key here is
that government does not pay if the project fails to deliver.
Initially pioneered in the U.K., social impact bonds--and I
think this was in 2010, Mr. Fisher, when it started--social
impact bonds have expanded to several States in the United
States, including Utah and New York, targeting such issues as
juvenile recidivism and early childhood education.
The appeal of this approach is growing, in large measure
because it achieves several important policy goals. It ensures
accountability, again, making sure that we actually pay for
what works. It supports evidence-based investments. The tool
promotes use of high-quality program evaluation to inform
investment decisions and add to the information based upon what
works. It incentivizes public-private partnerships. Social
impact bonds create a mechanism to leverage private and
philanthropic capital to fund programs that lack sufficient
funding. And, finally, it results in savings. This has the
potential to yield long-term savings from reductions in social
problems that rely heavily on government services.
Now, this is a new idea and I think we are going to have
probably a spirited discussion on the panel, where some are
advocates, some question this tool, and I think coming from, at
least me, coming at this relatively new, I am excited by the
concept, but I am also concerned about if we were to embark on
this on a broader basis, what we should be careful about. So, I
am again looking forward to the discussions that will happen.
So, let me very quickly introduce the panel and then call
on my friend, Senator Ayotte, for her opening comments, and we
will get right to the testimony.
First, we welcome Mr. Jeffrey Liebman, the Malcolm Wiener
Professor of Public Policy at the Harvard Law--Harvard Kennedy
School. Obviously, it would not be at the Harvard Law School.
They are not very good at performing results, having been a
graduate there.
[Laughter.]
Chairman Warner. The Director of the Kennedy School's
Social Impact Bond Technical Assistance Lab. That is a fancy
title. The SIB Lab provides technical assistance to State and
local governments exploring the use of SIBs. Mr. Liebman
previously served at the Office of Management and Budget, first
as Executive Associate Director and Chief Economist and
subsequently as Acting Deputy Director.
And now, we have got the first of two Mark Fishers. This
may be the first time we have had a panel where we had two
witnesses with the exact same name. Mark Fisher Number one is
Social Justice Director with the United Kingdom Department for
Work and Pensions. In his role, Mr. Fisher heads the
Department's Innovation Fund, which has entered into ten social
impact bonds to date that examine different types of social
investment and delivery models supporting disadvantaged youth
and those at risk of disadvantage. We particularly thank Mr.
Fisher from coming all the way from the U.K.
Next, Mark Fisher number two, who is a member of the House
of Delegates from Maryland, where he serves on the Ways and
Means Committee and also from Calvert County, a neighbor of
ours in Virginia. Again, welcome, Mark. Also, he has got a
great background in telecom.
And our final witness is Kyle McKay, an analyst with the
Texas Legislative Budget Board who previously, again, worked
for Maryland's Department of Legislative Services.
We are very excited to have you all here, gentlemen, and
look forward to a spirited discussion in your statements and
then in our questions.
With that, I would like to call on my partner and
colleague, Senator Ayotte, for her opening statement.
OPENING STATEMENT OF SENATOR AYOTTE
Senator Ayotte. I want to thank Chairman Warner for holding
this important hearing. I want to thank all the witnesses for
being here.
And I certainly want to echo some of the comments of
Senator Warner at the top. I was very glad to be a cosponsor of
the DATA Act. I am glad that has passed. I think that is a very
important transparency measure that will help us as we try to
root out waste, duplication, fraud in the government.
And I am also very proud to cosponsor our Report
Duplication Act because it is astounding, the amount of reports
that often are requested by Congress, but sit on shelves and no
one is reading, and people put a lot of work into them. So, our
goal is to--the data we need, we want and we are going to get,
but we want to eliminate the reports that people are wasting
their time on that no one is reading. So, I really appreciated
cosponsoring that with you and your leadership on that.
And, finally, there are a couple other pieces around here
that I think are important, as well. I am the cosponsor of a
bill with Senator Manchin that--you know, GAO does a lot of
fantastic work identifying duplicative programs, performance
issues within our government, and often--too often--these
reports sit on the shelf. And so our act is pretty
straightforward. It would actually require the executive branch
within 90 days of the receipt of the annual report card to
submit to the Congress what recommendations the executive
branch has for eliminating duplicative programs, consolidating
for performance measures, and then actually require us, the
House and the Senate, to vote on it within a very short time
frame so that we can start acting upon some of these things.
So, I think that we share the goal in this committee of
making sure that we can find ways for the government to work
better for taxpayers, and so I appreciate all of you being here
today and appreciate the Chairman's focus on this issue.
And for me, this committee hearing today really is a
learning opportunity. I do not know a lot about social impact
bonds, so my focus is going to be, as the Ranking Member of
this Task Force, pretty simple. I want to know if and why
social impact bonds are feasible and advisable for the Federal
Government, what evidence we have that they work in practice
and not just in theory, and how or if they could help the
government weed out waste, fraud, and abuse, and have actual
accountability for the dollars that we would spend to address
problems.
In addition, I certainly would like to know whether these
bonds would further enhance transparency and accountability for
taxpayers. Government can always use more innovation, and so
whenever we can get the private sector engaged to helping us
address important problems, I think that is a very positive
step for us and we need to be open to new, inventive
approaches. But, I think we owe it to the taxpayers to
understand how effective these approaches are to make evidence-
based decisions and to understand if we bring a third party
into a complex contract arrangement, how will this work to save
money for the government.
So, I look forward to hearing from all of you today. I
think this is an important hearing to really bring this issue
to the forefront in the Congress and I look forward to hearing
each of your perspectives on this issue, so thank you.
Chairman Warner. Thank you, Senator.
This hearing was born because of Senator Whitehouse's
interest, and we do want to get to the panel, but, Sheldon, do
you want to make a comment?
OPENING STATEMENT OF SENATOR WHITEHOUSE
Senator Whitehouse. Sure. I would like to join my
colleagues in welcoming all of you to this discussion. I want
to thank Chairman Warner for his leadership.
I think Senator Ayotte asked the right questions. I would
add one, not just if and why social impact bonds make sense,
but also when. And I think that there is at least the prospect
of a real opportunity here when new theories of ways to save
money can meet the standard of a private investor but cannot
meet the standard of our dear friends at CBO or OMB, and it
provides a mechanism for taking a trial and giving it a shot
with private capital both willing to make the bet and setting
down the measures of accountability to test whether the results
have really been achieved. I think it has the capacity to be a
very significant breakthrough technology, if you will.
I think once you get past that first stage and the case has
proven itself, the likelihood that private investors need to
make money off of regular government operations begins to
diminish. But, I really do think that that leading edge of
innovation is where the action is and this could be a very
useful tool in that regard.
So, again, my thanks to all the witnesses for being here.
My thanks to Chairman Warner for his leadership. I would point
out, the way I always do in this room, that we are spending 50
percent more on health care than all the other industrialized
countries in the world and we are not getting better results
and we are not insuring more people, so there is clearly room
for some very, very big innovation gains in that sector and I
hope we can talk a little bit about that. Thank you.
Chairman Warner. Gentlemen, we are very interested in this
idea and look forward to your testimony. Dr. Liebman, why do
you not start us off.
STATEMENT OF JEFFREY B. LIEBMAN, MALCOLM WIENER PROFESSOR OF
PUBLIC POLICY, AND DIRECTOR, SOCIAL IMPACT BOND TECHNICAL
ASSISTANCE LAB, JOHN F. KENNEDY SCHOOL OF GOVERNMENT, HARVARD
UNIVERSITY
Mr. Liebman. Thank you. Chairman Warner, Ranking Member
Ayotte, Senator Whitehouse, thank you for inviting me to
testify this morning about Pay for Success contracts and social
impact bonds.
Despite spending hundreds of billions of dollars each year,
our country is not making rapid enough progress in addressing
social problems, from recidivism to school readiness, and
obesity to workforce development. And for the vast majority of
the spending, we have little to no evidence about which
programs actually improve social outcomes. Instead, governments
continue to fund the same services year after year, paying
based on the number of people served regardless of whether the
programs make a difference in the lives of the people they aim
to help. We can and must do better to produce more value with
each taxpayer dollar.
Starting with the GPRA Modernization Act of 2010, the
Government Performance Task Force has been at the front lines
of the effort to strengthen performance management and improve
how our government works. I believe that Pay for Success
contracts could be a critical next step in this Task Force's
efforts.
Under the most common PFS model, the government contracts
to obtain social services from a local service provider. The
government pays entirely or almost entirely based upon the
provider achieving performance targets, such as a ten percent
increase in employment or a 50 percent reduction in emergency
room visits. Performance is rigorously measured by comparing
the outcomes of individuals referred to the service provider
relative to the outcomes of a comparison group that is not
offered the services. If the program fails to achieve minimum
performance targets, the government and taxpayers do not pay.
Above the minimum, payments occur on a sliding scale, with
greater payment for better performance.
Under this model, there is often a several-year lag between
when services are delivered and when performance can be
measured and performance related payments made. Private
investors bridge this gap, providing capital to fund the up-
front operating expenses of the service provider. The private
investors get repaid only if the provider achieves the required
level of performance. This financing arrangement is known as a
social impact bond.
Over the past two years, we have observed the Pay for
Success model improve government performance in three ways.
First, it improves decision making by bringing market
discipline to government decisions about which programs to
expand, as investors will only put their dollars behind
programs with a strong evidence base.
Second, it shifts government resources to pay for
preventative services rather than pay for the remedial costs
associated with bad outcomes.
And, third, it fosters multi-year collaborations to tackle
challenging social problems, something that is very difficult
to accomplish with conventional annual government budgeting and
standard government management techniques.
Dozens of State and local governments around the country
are exploring this model. My Harvard Kennedy School SIB Lab is
providing pro bono technical assistance to ten State and local
governments that are developing PFS projects. These include the
States of Colorado, Connecticut, Illinois, Massachusetts,
Michigan, New York, Ohio, and South Carolina, as well as the
Cities of Chicago and Denver. These governments are developing
PFS contracts to address a wide range of policy issues, from
early childhood education to homelessness, and from prison
recidivism to diabetes prevention. And there are four U.S. Pay
for Success contracts that are already delivering services,
including projects in Utah, New York City, Massachusetts, and
New York State.
If the Pay for Success model is going to achieve its full
potential, the Federal Government will need to play a larger
role than it has played to date. First, in collaborating with
States in projects that produce Federal budgetary savings. Many
of the most promising PFS projects being developed by State
governments will produce Federal budgetary savings along with
the State savings. This is particularly true of interventions
that reduce future Medicaid costs. For most of these projects,
the total Federal and State benefits exceed the project costs,
but the State savings alone do not. These projects are viable
only if the Federal Government partners with the State
government and enables performance payments to be based on the
combined government benefits.
Second, the Federal Government has an important role to
play in areas where nearly all the benefits accrue to the
Federal Government, because there is little impetus for State
and local governments to get involved in these sorts of
projects. Take, for example, an initiative that would enable
individuals with health impairments to remain in the workforce,
thereby reducing Federal spending on SSI and Disability
Insurance. Unless the Federal Government initiatives Pay for
Success projects in policy areas like this, they are just not
going to happen.
I want to emphasize that the President's proposal for a Pay
for Success Incentive Fund at the Treasury Department is quite
promising, as is the draft legislation that was released this
week by Republican Indiana Congressman Todd Young, because both
envision a range of Federal strategies matched to the
particular needs of different types of PFS projects.
Pay for Success is based on the simple premise that
governments should pay for demonstrated results rather than for
unverifiable promises. I look forward to working with members
of this Task Force to further explore how the Federal
Government can best encourage the use of this promising
approach.
Thank you.
[The prepared statement of Mr. Liebman follows:]
[GRAPHIC] [TIFF OMITTED]
Chairman Warner. Thank you, Dr. Liebman.
Mr. Fisher.
STATEMENT OF MARK FISHER, CBE, SOCIAL JUSTICE DIRECTOR,
DEPARTMENT FOR WORK AND PENSIONS, UNITED KINGDOM
Mr. Fisher. Thank you, Senator. I should say, it is a
pleasure to be here. I am Mark Fisher. I am Director for Social
Justice at the Department for Work and Pensions in the U.K.
My particular role, which stems from Mr. Ian Duncan Smith's
tenure as Secretary of State, is the prevention of
worklessness. How do you stop people drifting onto welfare in
the first place? How do you prevent those with the most long-
term conditions simply staying in life on welfare? And to us,
social investment, social impact bonds, have been a powerful
part of the solution to that for a number of reasons.
Firstly, they actually are a way of getting investment
upstream, you know, into the things that stop long-term costs
happening later in people's lives. Secondly, they bring about
innovation. And, thirdly, they bring about a powerful
partnership between the states, investors, and small voluntary
and community sector charities, people who do the work on the
ground, all of which are really important to us if you are
going to prevent welfare dependency. So, right from the start,
we were very keen to see if we could increase social investment
and try out some of these social impact bonds.
Now, the U.K. is trying a number of social impact bonds,
the famous one in Peterborough Prison, which was the first,
which was about finding a way of preventing ex-prisoners
reoffending. We have social impact bonds to increase levels of
adoption, to increase numbers of adopted children. You end up
saving taxpayers down the line. We are trying to help prevent
kids going into care. Again, care is very expensive. If you can
put an intervention in early that stops a child going to care,
you are going to save the taxpayer money.
And the particular one I want to talk about is the
Innovation Fund. We launched in my team ten social impact bonds
which are designed to intervene with disadvantaged kids, kids
who are falling out of school, becoming detached from school,
who are likely to have a low education attainment. Can you do
something about those children to increase their educational
attainment, to reengage them in work or in an apprenticeship or
training such that they simply do not drift into welfare when
they get to 18 but actually end up in employment? If you do
that successfully, you will save the taxpayer money.
So, we built ten social impact bonds to test that
principle. We produced some more results yesterday. We have
something like 10,000 of these children being helped through
our ten social impact bonds and we are going to evaluate this
thoroughly to see if it works.
They rely on a risk share between the taxpayer and the
provider. The taxpayer is taking a bit of risk if we have not
got the calculations right. The provider is taking a bit of
risk if they do not actually deliver results.
A lot of it depends on this rate card that we produced,
which was in my testimony, which sets out the precise sums of
money that we pay for results. For example, if a child's
attendance improves in school, we think that will end up in a
long-term saving to the taxpayers. We pay 1,400 pounds for
that. Sustained employment and entry into employment, several
more thousand pounds, we pay. And those are all based on
calculations of what the long-term saving to the taxpayer
actually is.
That requires a lot of data. You referred to data. Data is
key. Data sharing is key. We have had to match data between the
education system and the welfare system to actually do these
calculations in the first place. But, obviously, we are now
going to evaluate it and see if it works.
We are seeing a growth in the social investment market in
the U.K. Only yesterday, the Deputy Prime Minister, Mr. Nick
Clegg, announced an expansion of our scheme and a further
scheme for young homeless people on the basis, again, that
these are not only good for--good in themselves, but actually
do end up saving taxpayers money down the line from this sort
of preventive activity.
And the final thing I would say is I think the fundamental
lessons from us about these schemes are they do bring about
innovation. They do help social problems. But they can be
inherently quite complicated.
And I think the lessons from us, if we are going to see
expansion, is, that one, you have to find a social problem. You
have to find a social problem which captivates commissioners as
well as investors. In our experience, there is no shortage of
investors wanting to invest in these schemes. The shortage is
the number of commissioners who are willing to actually
organize themselves to run contracts with the investors and put
their own money at risk in terms of results payments.
Second, you have to make them simple. There are a number of
complicated ways of doing social investment. I you want to get
traction with these schemes, you have to keep them simple. Our
rate card is not perfect. We are going to have to evaluate it
and change it over time, but at least it is relatively simple
and the market can understand it.
I think if you do expand these things, you will see that
emphasis on prevention, which is really helpful. I think it is
one of those things that it is a really good thing just to
start and get going and see how it works and evaluate it over
time, and I think this thing will get traction simply the more
you try it and the more you do it, and certainly the practice
in U.K. does seem to be working.
Thank you.
[The prepared statement of Mr. Fisher follows:]
[GRAPHIC] [TIFF OMITTED]
Chairman Warner. Thank you, Mr. Fisher. I was just saying
to Senator Ayotte that we share a common language, but usage of
words would be the difference. I am not sure if we had some
successful project here we would ever call it a scheme, but--
[Laughter.]
Chairman Warner. That may be the right lead-in for Delegate
Fisher, who may be more critical of some of these, but Delegate
Fisher, thank you for being here.
STATEMENT OF HON. MARK FISHER, DELEGATE, MARYLAND HOUSE OF
DELEGATES
Delegate Fisher. I actually like that word, Mr. Chairman.
[Laughter.]
Delegate Fisher. Yes, I am Mark Fisher number two. I feel
like I am on Austin Powers, you know. I am number two. I am a
member of the Maryland House of Delegates and I serve on the
House Ways and Means Committee. I reside in Prince Frederick,
Maryland, and I am pleased to provide testimony today
concerning social impact bonds.
In the 2013 regular session of the Maryland General
Assembly, Delegate Sandy Rosenberg of Baltimore City introduced
House Bill 517. Delegate Rosenberg is a professor at the
University of Baltimore School of Law and served on the House
Ways and Means Committee. His bill, heard in that committee,
introduced the idea of social impact bonds. As stated in the
bill's synopsis, H.B. 517 would enable the State of Maryland to
issue an RFP for social impact bonds. The goal of the
legislation was to improve pre-K to 12 public education in
Maryland.
Many non-Marylanders might ask a simple question: Why would
a Delegate introduce legislation for SIBs when his State has a
top-rated public education system? The answer to this question
is not so transparent. You see, amongst all of the celebrating
of Maryland's public education achievements, what may be true
of a State is not the case in Baltimore City.
Baltimore City has some of the worst outcomes in public
education in the United States, yet the city has the second-
highest per pupil spending in the U.S., second only to New
York, according to the Bureau of the Census. Baltimore spends
almost $15,500 per pupil, or about double the cost of a private
or parochial education in the city. It is understandable as to
why the SIB alternative, given these facts, to the status quo
was offered.
In their analysis of H.B. 517, the Maryland Department of
Legislative Services analyzed numerous factors. They researched
a program for prisoner recidivism in Great Britain and they
worked with the Maryland Department of Public Safety and
Correctional Services.
In January of 2013, the Department of Legislative Services
advised against SIBs for the following reasons. SIBs cause an
increase in budgetary pressure compared to direct program
financing due to the necessity of funding contingent
liabilities and the added expense features unique to SIBs. SIBs
do not produce cost savings when outcomes are achieved, even
under highly optimistic assumptions. SIBs could effectively
exclude new providers and program types that do not have a well
established record of success with investors seeking to
minimize risk. And, SIBs potentially distort evidence used in
policy decisions.
As a member of the Maryland House Ways and Means Committee
for four years, I have had an opportunity to listen to many
proposals seeking to improve outcomes in public education.
While I understand that SIBs could leverage public dollars, my
concern is that alternative models already exist.
In the case of public education, why not take a pragmatic
approach. In those jurisdictions where outcomes are acceptable,
public dollars keep flowing. But in those jurisdictions where
outcomes repeatedly are substandard, such as in Baltimore City,
why not provide tuition vouchers and a school choice program.
Since Maryland spends twice the amount on public education in
Baltimore per pupil than private education, why not try a
voucher system. The cost savings from less spending per pupil
would more than offset the expenditures of tracking student
progress, something the State already does.
In conclusion, SIBs are well intended, but they
unnecessarily bloat bureaucracies. Moreover, they have the
potential of leading to crony capitalism. And, as the Maryland
Department of Legislative Services concluded, they do not save
money.
Thank you, Mr. Chairman, for the opportunity to provide
this testimony, and I would be happy to answer any questions.
[The prepared statement of Delegate Fisher follows:]
[GRAPHIC] [TIFF OMITTED]
Chairman Warner. Thank you, Delegate Fisher.
Mr. McKay.
STATEMENT OF KYLE McKAY, ANALYST, TEXAS LEGISLATIVE BUDGET
BOARD
Mr. McKay. Chairman Warner, Ranking Member Ayotte, and
members of the Task Force, my name is Kyle McKay. I am
currently an Analyst with the Texas Legislative Budget Board
and was previously an Analyst with the Maryland Department of
Legislative Services, though the views here today are my own.
Thank you for the invitation to appear before you today to
discuss social impact bonds.
For governments facing revenue constraints, social impact
bonds may appear to be the silver bullet for social services.
However, the benefits may be based largely on wishful thinking,
yet the risks and cost to governments from engaging in this
type of model are real, which is why an in-depth study that I
led at the Maryland Department of Legislative Services resulted
in a recommendation that the State not pursue social impact
bonds.
Based on my research in Maryland, I think it is important
to closely examine some of the common claims made about social
impact bonds, the first of which is that social impact bonds
will provide new capital for programs. Forgive me for stating
the obvious here, but if a program funded by a social impact
bond works, the government will have to pay for the program.
Thus, governments should budget for this potential payment by
appropriating funds in advance.
Though it may be technically possible to appropriate funds
after outcomes have been demonstrated, in spite of fiscal best
practices and balanced budget rules in States and local
governments, investors will likely seek a secured source of
income for repayment. This is why the governments of
Massachusetts, New York City, and the U.K., among others, are
pre-funding their potential outcome payments with government
funds.
Because the government may have to pay back investors with
interest and a bonus or a return on investment and the
mechanics of this model require a large number of consultants
and intermediaries, the government must budget for the
potential payment using an amount that is greater than the
investors provide to the program.
In Massachusetts, for example, the State is liable for up
to $27 million in payments for their social impact bond pilot
program, yet the investors are providing only $12 million in
funding. The social impact bond will, therefore, add pressure
to a cash-strapped budget.
The second claim is that governments pay only for success.
The investors must face a real risk, as a program with a very
high likelihood of success would result in a risk premium to
investors bearing no risk. In addition to the challenge of
selecting a program with something approximate to a 50 percent
chance of success, the government must also have a high degree
of confidence in the commitment of the private investors to
realize a loss if the program fails. However, as the consulting
group RAND found in the Peterborough pilot, the complexity of
the model means that, in some instances, that, quote, ``the
actual transfer of risk is not clear.''
Attempting to manage social services through an all or
nothing payment to a host of intermediaries will inevitably
produce a contract that is complex and, therefore, subject to
unforseen weaknesses, so I am not sure this is an escapable
problem.
And the third claim is that the programs will save
governments money. Proponents argue that social impact bonds
will result in decreased expenditures and, thus, cost savings
to the State. There is a basic mathematical problem with this
claim, though. Pilot programs do not operate at a scale large
enough to produce significant cost savings to the government.
In Maryland, we used well established cost estimation
techniques with our State agencies to model a high impact pilot
program. The program came nowhere close to paying for itself,
which is consistent with RAND's finding that Peterborough is
too small to produce savings.
Though the benefits may not be as obtainable as advocates
claim, the appeal of innovation may still attract many. But it
is important to consider a number of significant risks to
governments engaging in this model before making a decision to
experiment. These risks have been shown to be persistent and
problematic across a large number of policy areas following
decades of attempts to link payments to outcomes. Whether it is
teaching to the test in education or creaming in health care,
we have seen over and over again that heightened levels of
pressure on outcome indicators can backfire. Not only can the
pressure reduce the validity of the indicator, it can produce
unintended consequences that overshadow the benefits of, quote,
``paying for success.''
In all of these historical experiences, the percentage of
payment at risk represented less than 50 percent of the income
to the actors. Simply adding an investor will not erase these
problems. Instead, there is a risk that the introduction of an
investor will just exacerbate the problems typically
experienced as the amount of funding at risk increases and the
investors assume a primary role for establishing what
constitutes evidence.
Now, these risks are substantial, but the one that should
be the most concerning is the opportunity cost. Building a
highly sophisticated contracting and financing mechanism to
focus on one small program may impede the capacity of agencies
to engage in broader policy evaluation and change.
In short, it is my personal opinion that social impact
bonds are expensive and risky. They may also distract
governments from a more comprehensive, sustainable approach to
improving public policy. Across a variety of policy areas, we
have learned that measuring outcomes and using monetary
payments to incentivize behavior change is difficult and often
produces mixed results. Simply throwing investors into the fray
will not resolve the ongoing limitations and problems. Instead,
it may very well exacerbate the challenges.
Thank you.
[The prepared statement of Mr. McKay follows:]
[GRAPHIC] [TIFF OMITTED]
Chairman Warner. Well, thank you, gentlemen.
I have to tell you, I am a little surprised how the
responses are lining up, if there is kind of a left to right or
conservative to liberal on this. I would have actually thought
that we might have had the reverse kind of opinions, because I
think about many of the advocates, and, for example, in our
State government we outsourced private collections and other
things which kind of fell more on the traditional--would be
viewed as a more conservative approach that was maybe not a
social impact bond, but the same concept of a pay for
performance. I would have thought there would have been maybe
people more on the kind of view of the Democrats as government
advocates, that this has the possibility of being much more
disruptive, and consequently might have been feared more from
the kind of establishment. And, so, it is curious how people
are lining up.
I understand, Mr. McKay, your view that you have got to get
the contracting right and you have got to have the expertise,
and I would argue on some level, that would argue that--you
know, we have used in Virginia, for example, a great use of
public-private initiatives in the transportation field. Some of
those projects work. Some of those projects, we get skinned
because we do not have the expertise to go toe to toe with Wall
Street. So, having some concentrated--if you are going to go
down this field, you are going to have to have some level of
concentrated expertise.
I would also think that one of the things that government
does not do well, and one of the purposes of this panel has
been how do we get more transparency? How do we push agencies
to identify what is working and what is not working? And the
notion of private capital coming in there, putting their, in
effect, money where their mouth is in terms of trying to
deliver would seem to me inherently a more market-driven
approach.
So, I am going to start with Dr. Liebman, I guess. One,
since this is also happening in Utah, it does not sound like it
is following--it is just in more liberal States, number one.
Number two, what are the general size and character of the
people who are putting up the private capital? Are they
generally advocates for a particular cause? What is their rate
of return expected? Why do we not start with some of those.
Mr. Liebman. Thank you, Mr. Chairman. I think you are right
that there is not a consistent alignment between the left-right
partisanship and people's interest in this tool. At the Kennedy
School SIB Lab, we are working with Republican Governors in
South Carolina, Ohio, and Michigan, and with Democratic
Governors in Colorado and Illinois and Connecticut. I think if
you know the story of the U.K., the initiative originally was
the Labor Government, but just as it was leaving office, the
Conservative Government said, we want to take credit for this,
essentially, and has been expanding it greatly. So, I do not
think there is any particular--and I think that is probably--
your committee already knows this, that that interest in making
government more efficient and in trying innovation is not a
particularly partisan issue.
The particular projects that are being done, in some
States, they knew from the beginning what issue they wanted to
tackle. South Carolina knew they wanted to do early childhood
education. In other cases, they knew they wanted to innovate
and they started a process where they both did a public request
for information to get ideas for projects from the public, and
then, also, internally, the government met with all the people
in the human service areas and said, where is it that we are
missing opportunities to invest in prevention and save money.
And what typically happens in those processes is you end up
with 35 ideas, and about half of them basically run into
trouble for one of the good critiques that Mr. McKay put up.
For one reason or another, they are not a good fit for this
model, and you are down to about 18. And then what happens is
you say, you know, we are really only going to be putting in
the effort on something like this, just as Mr. McKay said,
because there is an opportunity cost, if it is a top priority
of the Governor or the mayor, and that whittles it down to
three or four. And then you really do the hard numbers on those
and make a choice about which ones to do. And part of that
discussion has to do with, do you think you can raise enough
private capital in that policy area--
Chairman Warner. And who usually makes up--are the private
capital usually--I do not want to use a term that would sound
pejorative, but social do-gooder capital? Is it kind of--
Mr. Liebman. It is about--in the U.S. project now, I would
say it is about half and half. So, both in New York State and
in Massachusetts, there was big commercial involvement. In the
New York State one, Bank of America, Merrill Lynch basically
did the total investment and then they did not keep it on their
own books, they actually sold it to their high net worth
individuals. And the particular high net worth individuals who
got involved, I would say, are a mix of people who--
Chairman Warner. And what was the rate of return they were
looking for, if there were--
Mr. Liebman. The rate of returns are in the high single
digits or low double-digits--
Chairman Warner. Let me just make one last comment, because
I want to make sure everybody gets their shot here.
Mr. Liebman. Yes.
Chairman Warner. I would think--I could understand Mr.
McKay's concern when it is such a large purpose as overall
student achievement. But, it would seem to me that if you had a
narrow focus on some of these--recidivism, or actually
workforce training programs where you have way too many--and
there are areas where, if we narrowed the focus, I just think
this has some value. I know Senator Whitehouse, I am sure, is
going to get into discrete areas in health care, which is his
passion.
Senator Ayotte.
Senator Ayotte. Thank you, Chairman.
So, we heard a pretty divergent set of views from the panel
here on the efficacy of the social impact bonds and performance
bonds, so can you help me understand. The example that was
given in Massachusetts, the $12 million is really the
investment given, and then a $27 million cost to the
government. Why is that, and how would you contrast--I am not
sure what they were doing in Massachusetts in terms of what the
performance measures were or what they were trying to
accomplish, but how does that compare to--in terms of rate of
return and how much the taxpayers are paying versus what is
invested, compared to some other projects you would deem more
successful on this side?
So, I want to hear the sort of side first on how do you get
in this situation, because that does not seem like a good value
to me, as you describe it, and why do you think that that ends
up being the way it was in Massachusetts, whatever they were
trying to accomplish. And then, also, you are being an advocate
over here. I would love to hear some examples of where you felt
that there was a value to it, that there was a cost savings,
that there was a contrast to what they are presenting over
here, I mean, because, ultimately, if it is going to cost us
more to do this, then I do not see a value in doing it. So that
is an issue I am trying to get at.
Mr. McKay. Yes. So, the government does not know in advance
whether or not it has to make an outcome payment, and in an
operating budget, it is not a good idea to create a speculative
debt instrument or a contingent liability without budgeting for
the potential of making that payment.
So, in Massachusetts, I put a reference to the
appropriations bill in my written testimony where it basically
shows that, each year, the government has to appropriate in
advance of each year that the program operates, before they
know whether or not the outcomes have been demonstrated, and
because they may have to make a payment that includes a return
on investment to the investors and the service providers, the
government has to budget more money than the investors are
providing. So, that is why the government is liable for up to
$27 million worth of payments but they are only getting $12
million from investors.
Senator Ayotte. So, what is your counter to that, because,
obviously--
Mr. McKay. I do not know--
Senator Ayotte. --you are probably familiar with the
project, because you--
Mr. Liebman. Absolutely. We were involved in the
Massachusetts project. I do not think Mr. McKay is giving you
the right perspective on that project. Basically, what is
happening in the Massachusetts project is about 90 percent of
the funds are going directly to deliver services and there is
maybe ten percent that is going to things that you might call
extra costs because we are using this model, but those are
things that would have value.
So, for example, the fact that it is being rigorously
evaluated costs some money, but I would say spending two or
three percent of the amount you are spending on a project to
find out whether it works or not so that if it does not work,
you can stop spending money on it, that is a bargain.
And, similarly, the intermediaries that are helping to
manage the project and bringing private sector expertise into
the project, and, frankly, more human capital into the project
than the government has on its own side, typically, they are
adding two or three percent to this project, but they are also
delivering value and--or, at least we are going to find out. If
the project works and we suddenly are getting much better
results than we have had before, then we will know this model
is working. If it does not give us good results, the taxpayers
do not pay and we should not be doing any more.
Senator Ayotte. Can I ask you a question? So, when a
project is undertaken, you have to have some expertise on the
government end to be able to manage this kind of project,
because I know that Mr. Fisher has talked about the complexity
of the projects as a challenge on the government end. So, as we
look at sort of resource efficacy, when you are undertaking
this type of project, are you actually saving resources on the
government end? So, in other words, you are getting an influx
of resources on the private sector end, but limit resources and
what we can spend our hours on on the government end also. Are
you then saving the work done on the government end? Or are we
putting in the same amount of work on the government end and
then also investing in the private end?
I do not know if I am asking this question properly, but
thinking about all the things we could spend our time on, if we
are spending the same amount of government time and also
investing the private time and then we are paying more, that is
what I am trying to get at, is are we actually leveraging--what
does it take in terms of resources to manage this kind of thing
on the government end?
Mr. Fisher. Okay. Should I answer that? I would also like
to just say something about the resourcing issue. I mean, we--
our Innovation Fund, which are these ten social impact bonds
for kids' disadvantaged education, we are putting 30 million
pounds in to pay the returns. Investors have put ten million
pounds up front. But, the 30 million is not a net cost to the
taxpayer. If this works, the saving to the taxpayer in the
longer run exceeds 30 million pounds, even on a discounted
basis. So, there is a net saving to the taxpayer for doing
this. The risk is that we have not got those calculations quite
right. There is a quite large margin of error in that.
On the resources we put in, the resources, basically, are
resources actually of my own team. We ran this--I have got
about three people running this scheme on an ongoing basis and
there was a commercial team of about ten who actually did the
contracting at the point in time when we actually had to let
the contract. So, these were not hugely resource intensive as
far as the public sector was concerned. I think they can get
resource intensive. Here we are talking about one single
scheme, you know, just one single scheme, which goes to the
importance of doing them at reasonable scale.
So, if you do them at reasonable scale, A, it helps the
commissioners, in this case, the Department of Work and
Pensions, and it also helps the investors, because one of the
biggest bits of feedback we had from investors were they did
not like putting a cost-benefit on their side for one small
scheme in one place. They like to see scale. So, I think scale
is important, if that is helpful.
Senator Ayotte. Thank you. Thank you.
Chairman Warner. Senator Whitehouse.
Senator Whitehouse. Although there is some disagreement on
the panel on a number of issues, there seems to be agreement on
two points that I would like to confirm. One is that it is
possible for a State, a government, to get in over its head if
it has not chosen the program wisely and then the investors
know more about the project than the government does and they
start to get spun because the investigators have a different
motivation. That is a risk. Everybody concedes that?
[Witnesses nod.]
Senator Whitehouse. Yes, everybody concedes that. Okay.
The second is that there appears to be a common
understanding that there is, or may be, a value during what you
might call an innovation period for bringing in private capital
to do something. But once the model has proven itself, assuming
the model has proven itself, then you should move that capital
on to other innovations and not leave it in that area because
it is less efficient to run a program with private capital that
has to be paid than simply to do it through regular government
services. Is that also agreed by everyone?
[Witnesses nod.]
Senator Whitehouse. Yes, with one hesitation from Mr.
Fisher one, Mr. Fisher the first. Go ahead.
Mr. Fisher. Should I just say something about that? I think
the fundamental principle is possibly right in the sense that,
for example, if our ten social impact bonds work, then--
Senator Whitehouse. Why would you go back to have more
investors do it--
Mr. Fisher. Government does have choices about what it then
does. It might simply decide, aha, we have--we are simply
under-investing in children's education at that time in their
lives and there are then other ways of addressing that issue.
On the other hand, the benefit of the social impact bond is
you have schools and voluntary community sector bodies doing
the work on the ground as opposed to state employees, which it
may well be a positive. And, also, you do have the discipline
of the investor working with a charity and there is a benefit
to that, too. So, this is one of the issues that we--
Senator Whitehouse. I guess my theory is that the
innovation that is sponsored by the social impact bond, if it
proves itself, will then naturally migrate into policy, and
once it has migrated into policy, it no longer needs a social
impact bond to support it. It just becomes the way the system
works. And investing in the trial to try to make that move is
what makes sense. Do I have agreement on that?
Mr. McKay. Yes. I would add one thing, which is that the
Center for Law and Social Policy, they just released a report
where they looked at most of the social impact bonds that have
been implemented to date and what they found is that, quote,
``investors appear to be sticking to models that have already
been extensively evaluated,'' which is sort of consistent with
what you would expect if investors are trying to minimize their
risk.
Senator Whitehouse. But, that does not necessarily dispute
my proposition, because this is Congress. We have lots of
things that have been consistently evaluated and most people of
good sense and good motivation believe them to be true. And
yet, for a variety of reasons, we cannot get them done in
Congress. There is politics involved. There are scoring issues
with CBO involved.
There are hazards--just because something has been
evaluated, I think it is, frankly, good if something has been
well evaluated, private capital comes behind it, they move that
evaluated practice into government in a way that probably makes
them money and shows that this is a savings technique, and
then, boom, we have proven the proposition and it is way easier
to pass that reform because, frankly, you might even find from
CBO you have got some savings that they will now document based
on that government experience. So, I take your point, but I do
not think it rebuts the, at least the window of utility that I
see this potentially having.
Dr. Liebman.
Mr. Liebman. Senator, I think your premise is 95 percent
right. The one thing I would add is, often, when we evaluate
something, we do a single snapshot that tells us something
worked in one location 15 years ago. And an important feature
of the social impact bond projects is it gives you ongoing,
real-time assessment of how things are performing.
Senator Whitehouse. Yes.
Mr. Liebman. And if the conversion from the social impact
bond back to traditional government funding loses that ongoing
monitoring and learning, things could be changing so that the
program is no longer as effective because circumstances are
different or how it is being implemented and we might not know.
Senator Whitehouse. Got it.
Mr. Liebman. And so--
Senator Whitehouse. You can flub the transition--
Mr. Liebman. Exactly. So, government has to learn not
only--
Senator Whitehouse. --or we might never have gotten to that
transition--
Mr. Liebman. Exactly.
Senator Whitehouse. --if you did not have the social impact
bond in the first place.
Mr. Liebman. You have got it.
Senator Whitehouse. Okay. You seem to have agreement there.
I would ask you guys, if you do not mind, this is a
question for the record, but it is an option one. If you have
other things to do, do not feel obliged. But if you do, I would
be interested in having you reflect a little bit on our health
care system. We run the most disgracefully wasteful health care
system in the world, probably by a factor of 50 percent, maybe
more. Norway and Switzerland are the two most expensive health
care systems in the world per capita. We beat them both by 50
percent. And we do that leaving a lot of people uninsured. We
do that leaving hundreds of thousands of people dead from
hospital-acquired infections and other medical errors. If you
want to find a place where there is room for improvement, take
a look at the American health care system.
So, if you have any ideas about what might be good points
of entry, because what we find is it is very hard to get
anything scorable until it is up and running, and then by then,
they tend to have kind of built it into the baseline, and so
the government support for innovation is challenging at the
legislative level. So, that is my QFR, and thank you, Chairman.
My OQFR, optional question for the record.
Chairman Warner. Senator King, who has also been a leader,
as a former Governor, in trying new things.
Senator King. Thank you. I am--
Senator Whitehouse. Is his State as well managed as
Virginia?
Senator King. I am trying to think this through, and I have
a radical idea. Instead of contracting out and social impact
bonds and everything else, why does not government try to get
it right? I mean, this whole scheme--I take your term--is a
gigantic admission that government cannot do stuff, and I think
that is a valid criticism. But, to me, the answer is not to go
through--the only thing government does worse than execute
programs is execute contracts. That is--and I know that as a
Governor. This whole idea of contracting out is the worst of
both worlds. It costs as much or more and you lose
accountability and control.
I just--I do not get this at all. I think this is an
admission that government cannot do what it is supposed to do,
and I think it is an admission that we, as political leaders,
generally pay more attention to passing the bill than executing
it. In my view, execution is as important as vision, and this
is an admission that we do not do that, and I think we ought to
start doing it. And instead of the contract holding the
contractor accountable, how about the President or the Governor
holding the Superintendent of Schools accountable?
This just strikes me as--it is a fancy way of contracting
out, and as I say, I do not believe government contracts very
well. And defining the outcomes are going to be very difficult
and they are going to be--and it just--I am just--why does the
President not pay for results, you know. I mean, Mr. Liebman,
what do you--I just do not get this.
Mr. Liebman. Yes. I think--
Senator King. I come to this unburdened by knowledge, by
the way, which is--
Mr. Liebman. No, I think you are onto something here, which
is that if government--a lot of the things being accomplished
by this model could in theory be accomplished if government
operated the way we wish it operated. But, in fact, it does
not. We have been trying for years and years to get it to do a
lot of the things like measure outcomes and allocate resources
to things that work and it is not. And what people are finding
in these State governments is that this is a leadership tool
that is allowing Governors and State Budget Directors to shake
things up and actually get people to do the things that, you
are probably right, they should be doing anyway, but we cannot
get them to do anyway. And so let me give you--
Senator King. But, you are inserting a whole level of cost,
of consultants and analysts, and the government is always going
to be outfoxed on the contracts, in my experience.
Mr. Liebman. I do not think that is what we--I mean, my
role is to give pro bono assistance on the government side so
they do not get outfoxed, so maybe I do not have the completely
neutral view on this--
Senator King. Pro bono is good.
Mr. Liebman. Yes, exactly. But, here is an example. In one
of our States, we put a bunch of options in front of a State
Budget Director for a social impact bond, and one of the
options was that there was an intervention, which was a health
care intervention, where they thought that if you put
caseworkers in senior centers, making sure that people took
their medicines and made it to their doctors' appointments, you
could save on Medicaid costs down the road.
And we put this on the table as a potential social impact
bond project and the State Budget Director said, ``Can I not
just put this in the budget?'' And we said, ``Yes.'' And he
said, ``Done.'' And that is great. If social impact bonds cause
that to happen and we do not do social impact bonds, that is
just as good. I mean, what we need to do is shake things up and
have those kind of conversations such that this kind of
innovation happens.
Senator King. Yes. Okay. Any other thoughts?
Mr. Fisher. If I may, I think your premise is entirely
right. I mean, just another example. I think when we evaluate
the social impact bonds for disadvantaged school children, we
will find that we may well prove the fact that the taxpayer is
simply under-investing in this particular part of the system,
and if schools and the taxpayer invested more in disadvantaged
children, that might also achieve the benefit. We might find
other practical things, too.
But, the point is, at the moment, that is not happening at
the moment for various reasons. Too many children in our
country are turning 18 and going straight into welfare. That is
happening because that part of the school system is not working
well enough to address that issue. So, this does give a boost
to a particular problem at a particular point when something
can be done about it.
But, I do want to agree, in the longer run, it may not be
the right answer to that particular social problem. But, in a
short transitional way, it can be a really helpful boost, and
it may well be, also--the evaluation might prove this is also a
more efficient way of spending this particular money for
results than, you know, just giving the money to schools. I
mean, there are a number of ways which will come forward in the
evaluation. So, the jury is slightly out, I think.
Senator King. Well, I understand what you are saying, but
it just seems to me that a good administration would say, okay,
we have this problem and we need to do some pilots in different
cities and see what works and then go from there. In other
words, the same result could be achieved without the
complexity. I mean, the only way this works in terms of the
taxpayers is if the funders take a substantial risk of not
getting paid. But if they take that risk, their risk premium is
going to be so high that it cannot--it really cannot work out
for the taxpayers very well.
I am a great believer--for example, in terms of the Federal
Government funding education, I do not think the Federal
Government has a big role in funding education. I think what
the Federal Government ought to be doing is funding pilot and
experimental programs and then disseminating the results across
the country and finding out what works. If somebody really
found a great way to teach social studies in Boise, Idaho, the
Federal Government can have an important role in acting as a
clearinghouse so every other school district in the country
does not have to reinvent that program.
But this, the idea--I mean, I just, like I say, I think we
are essentially throwing up our hands and saying, government
cannot do it right, so we are going to try something else. It
may be more expensive, but what the heck. I just--
Chairman Warner. Everybody is going to get another bite at
the apple very quickly, but let me just quickly try to respond.
Again, everybody is surprising me here this morning in terms of
where I thought they were coming from, because I spent a lot of
time in the private sector. We created, for example, in greater
Washington something called the Venture Philanthropy Partners
to try innovative models on delivery of services for at risk
youth in greater Washington, a very cool project.
We had a series of initiatives. What we did not have was
common evaluation across those. What we did not have was the
ability to say, since we did not have the common evaluation,
how do you take to scale? And I guess that in enormously
constrained budget times, my fear is that--you cannot take a
dollar away from any school right now, because, oh my gosh,
that is going to cause a huge decrease in services, or we
cannot try any innovation at all, and this may be a tool to
leverage innovation--and I think Mr. McKay and Delegate Fisher
put forward some good points--if the project is too big--we are
going to solve all of K-12's problems--I would have some qualms
about that. Mr. McKay's questions about the ability to contract
and evaluate, but we do not do a very good job on that, as
well.
If there is some private capital in there, there is
discipline, I think, that private capital brings on evaluation
that maybe we do not have on the public capital side, and this
may be a way to leverage, more experimentation, and if it is
done within this kind of--some upside model, and I agree with
Sheldon that if it proves out, then it ought to become
governmental policy. But it would seem to me this would be a
way to leverage more ideas and perhaps have the common
evaluation standards that we lack.
The votes start in about ten minutes, so this is going to
turn into less questions--
Senator Whitehouse. Mr. Chairman, the one point that I
would add on what you said is that one of the things I do not
think we do very well in government anywhere is the prototyping
function, and it is even harder to do a prototyping function
when it costs money and you are trying to go into an existing
budget and compete for funds that are already being used. So,
you can facilitate the prototyping function if you can find
other capital to kick it off.
I would also expect that private capital would bring a
business perspective to their provision of funds that could be
actually a helpful defense against prototypes, so-called, that
are, in fact, driven by ideology, or loyalty to an interest
group, or some of the other things that kind of infect
politics. So, you might actually find value in it as a screener
of really bad ideas that nobody would put money behind, but in
our political world could get momentum because an interest
group or a lobby group or an ideology selects them. So--
Chairman Warner. One of the things--
Senator Whitehouse. --anyway, I think this has been a great
hearing--
Chairman Warner. Well, let me let Senator Ayotte get the
last word, and if any of the panelists want to, too. I do not
know how we get enough kind of venture capital ideas into
government. This would seem to be a way.
Senator King. How about by the leaders of government doing
it? I mean--
Chairman Warner. But you also know, as a Governor, there is
always that resistance. Trying something new in today's
constrained environment, since there is no new capital, means
you have got to take something away from an existing
initiative. And, when we think about evaluation, I remember--
the last point I will make and then turn to Kelly--is that when
I was Governor, we tried something that said, at some national
level, we spend billions and billions of dollars on education,
yet our evaluation budget in education on a nationwide basis is
less than one percent of the dollars we spend on education.
From any business background, that is a stupid basis going
forward.
Kelly.
Senator Ayotte. Kelly is fine. You know, I really have to
agree with the comments of Senator King, because as I sit here
and I think about this, we have--what we do very little of in
government is actually measure the effectiveness of the
programs. And rather than eliminating a program that has never
achieved a result, we just keep adding the layers on instead of
saying, you know, make the call. It has not gotten a result. We
have not gotten achieved what we needed to from it, so we need
to do something different.
So, I think that we need performance measures on the
government programs, and also, you know, I think that phrase
that Ronald Reagan once said, there is nothing closer to
eternal life than a government program, I mean, we have got to
get beyond that, because I see why the private sector
innovation in terms of looking at new ways to do things and
more measurement-focused ways of what comes from these
proposals is so critical. It is just that, I agree, this is
what we need to work on as leaders, to do things differently.
Thanks.
Chairman Warner. Does not private capital bring some of
that discipline? Everybody, we have only got a couple more
minutes, but if everybody, and we will start with Mr. McKay and
go in reverse order this time, if each of you want to make kind
of a closing out--
Senator Whitehouse. Final sentence.
Chairman Warner. --final minute comment apiece, or minute
and a half--
Mr. McKay. Sure--
Chairman Warner. And thank you all.
Mr. McKay. I guess the thing I would add is that you need
to be really careful that the investors are bringing a
discipline that is valuable to the government, because if the
investors are telling the government what it should already
know to implement programs that have already been proven, then
you are going to privatize the savings of that program to the
investors. And so if you are going to go down this path, you
really have to make sure that there is a substantial risk that
the investors bear in piloting a program that has not already
been proven to work. But what we have seen so far, according to
several analysts, is that most of the programs are focusing on
things that already work, or we know already work, because
investors do not want to take that large of a risk in a pilot
program. Thank you.
Chairman Warner. That would mean that you are really
defeating--the investor is not willing to be the tip of the
spear on experimentation. I think your premise is right.
Delegate Fisher.
Delegate Fisher. Yes. Thank you, Mr. Chairman. Senator King
said something, I think, that I have seen in Maryland that
really kind of underscores the problem, and that is, is that
coming from the private sector and serving just my first four
years in Annapolis, it is remarkable how poor government
negotiates contracts, and that expertise is needed now more
than ever. You know, in Maryland, it is not a secret about our
health care exchange. I mean, we are going to scrap our
quarter-of-a-billion dollar health care exchange and adopt
Connecticut's.
But, notwithstanding that, I have always admired Virginia's
P3 idea on highways and even put in legislation to try to
outsource Maryland's Welcome Centers and Maryland's rest stops.
But, the problem in Annapolis is that is completely against the
institution to try to outsource those. There is no contractual
knowledge in the bureaucracy to know how to do those kinds of
contracts, and as a result, when we have done that in Maryland,
when we have engaged in these kinds of outsource projects, they
have, unfortunately, not done so well, and that is my primary
reason. So, thank you.
Chairman Warner. Are you mentioning Virginia, the
nationally best managed State in the country? Is that the one
you are--
[Laughter.]
Delegate Fisher. Well, it--
Chairman Warner. Started by a certain Governor.
Delegate Fisher. Yes, Senator, and Maryland losing $5.5
billion of taxable income, so I actually agree with you.
[Laughter.]
Chairman Warner. The only thing is, we have not always got
it right, and it is one of the challenges. When we think about
P3, though, and one of the reasons, again, off topic a little
bit, but I think there needs to be a--since we have an office
in the Treasury Department that advises American pension funds
how to invest in Europe, because we do not have the expertise
in America to go toe to toe with Wall Street.
Mr. Fisher, you have come a long way, and then Dr. Liebman.
Mr. Fisher. All I would add is that our schemes are being
fully evaluated. We are spending over a million pounds on
evaluation of the ten social impact bonds we are running. That
evaluation will, I think, help answer some of the questions
about, you know, is this better value than alternative ways of
spending the same amount of money? Have we got the calculations
right? And, obviously, we will share those observations with
colleagues here as they emerge, because I think this is a
debate that will run and run, actually, and I think some
schemes are going to be more effective than other schemes.
The only thing I would finally say is, to me, the key is,
if we are going to make a success of this, we have to keep
these things relatively simple. I think there are quite a few
social impact bonds out there which, in my humble opinion, are
simply too complicated. I think if these are getting any
traction at all, keeping the models basically simple is going
to be quite important.
Mr. Liebman. I think the bottom line here is we have about
a dozen Governors from both parties that are finding this tool
useful for breaking through the political, financial, and
bureaucratic obstacles to doing the kinds of reforms, the
venture capital and prototyping activities that you described.
And they are coming up with projects that are going to produce
Federal savings, particularly through Medicaid, and unless the
Federal Government partners with those innovators, the projects
are not going to happen. And so whether or not you think this
is the perfect tool or the only tool to change government, we
have this opportunity right now. We are on the ground and
people are trying to innovate and they need some Federal help.
And so I hope your Task Force will think hard about whether you
can partner with these States that are trying these things on
the projects that have these Federal payoffs.
Chairman Warner. Can you get us data on the status of those
12?
Mr. Liebman. Yes, absolutely.
Chairman Warner. And then, colleagues, last word, anybody?
Senator King. I want Mr. Fisher to realize that we are not
the same as the House of Lords.
[Laughter.]
Senator King. Welcome. We are delighted that you came, and
thank you very much, all of you. This is a very interesting
discussion, and I think provocative and very helpful. Thank
you.
Senator Whitehouse. I agree. This has been a very useful
discussion. I thank the Chairman and the Ranking Member for
holding it.
Senator Ayotte. Thank you. I appreciate it, and I look
forward to further discussions from this. So, I think we all
share the same goal. We want government to actually achieve
things in a measurable way and the most cost effective way, so
thank you.
Chairman Warner. I believe this is the first time this
subject has been raised at the Federal level, so you are
getting first impressions, and again, I think it has been very
curious. On the traditional ideological front, I would have
expected almost the reverse, so I think that is provocative, as
well, which I am--so, if you have got more information, if you
have got more data, help us.
I do think Dr. Liebman's point that if there is real value
savings, but because of the State-Federal match on Medicaid,
States are not doing it because there is not that ability to
kind of garner savings on both sides of the ledger, that is a
bad business proposition. Now, you have got to prove that there
is a savings, but that might be an area, and Sheldon left
already, but I know he is passionate about.
I think all of us--I do not want to be presumptive here--we
are open to ideas. This group, by virtue of being on this
committee, are willing to be a little more disruptive. I think
we all realize there is a lot we can do better, and we are
going to be in constrained times. And with $17 trillion in debt
going up $4 billion a night, you know, if we do not find a
better way, we are really up the creek. That is a technical
political term.
[Laughter.]
Chairman Warner. With that, the hearing is adjourned.
[Whereupon, at 11:18 a.m., the committee was adjourned.]
[GRAPHIC] [TIFF OMITTED]
EXPANDING ECONOMIC OPPORTUNITY FOR WOMEN AND FAMILIES
---------- -
TUESDAY, MAY 13, 2014
United States Senate,
Committee on the Budget,
Washington, D.C.
The Committee met, pursuant to notice, at 10:31 a.m., in
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray,
Chairman of the Committee, presiding.
Present: Senators Murray, Wyden, Baldwin, Kaine, King, and
Sessions.
Staff Present: Evan T. Schatz, Majority Staff Director; and
Eric Ueland, Minority Staff Director.
OPENING STATEMENT OF CHAIRMAN MURRAY
Chairman Murray. Good morning. This hearing will come to
order. I want to thank my Ranking Member, Senator Sessions, and
all of our colleagues who have joined us. And thank you to our
witnesses. We have AnnMarie Duchon, the associate director of
accommodation services at the University of Massachusetts,
Amherst; Dr. Heather Boushey, the executive director and chief
economist at the Washington Center for Equitable Growth; and
Sabrina Schaeffer, executive director of the Independent
Women's Forum.
We are glad you are able to join us today to discuss ways
we can help working women succeed in today's economy and the
reasons why their success is so important to family, economic
security, and to the economy as a whole.
Over the last four decades, the economy has seen a lot of
change. American businesses and workers have had to compete on
an increasingly global scale. Far too many of the middle-class
jobs workers could support a family on have moved overseas, and
the gap has widened between those at the very top of the income
scale and everyone else.
All of this has put an increasing burden on working
families, but in the face of these challenges, one of the most
significant shifts we have seen in the last few decades has
actually eased some of the burden, and that is the increasing
participation of women in the workforce.
As working families have felt more and more strained,
women's economic contributions have made a huge difference,
both to family budgets and to our broader economy. Federal
Reserve Chair Janet Yellen, who attended our hearing last week,
has called the increasing participation of women in the
workforce ``a major factor in sustaining growing family
incomes.'' And Dr. Boushey found in a recent study that between
1979 and 2012, the U.S. economy grew by almost 11 percent as a
result of women joining the labor force. And, of course, that
kind of economic growth has important outlooks and implications
for our budget as well.
As we think about ways to support growth in the 21st
century, it is absolutely clear our country's economic success
and that of middle-class families goes hand in hand with
women's economic success. This means we have a lot more work to
do because, despite all the progress that has been made, all
the glass ceilings that have been broken, women still face
barriers that are holding them, their families, and the economy
back.
Even though the majority of women are now full-time workers
and two-thirds of mothers are either earning all or a big part
of what their families depend on to make ends meet, women
overall still earn 70 cents to the dollar for doing the same
work as men. Over just 1 year, that adds up to $11,600 in lost
wages per household. I believe AnnMarie will be speaking about
what kind of difference it means to her family's budget.
And because women are still more likely to be the primary
caregiver in a family, the lack of paid leave at most jobs
means they experience higher turnover and lost earnings and are
more likely to be passed over for promotions that would help
them advance.
In addition, our outdated Tax Code works against married
women who choose to go back to work as a second earner. Because
their earnings are counted on top of their spouse's, they can
actually be taxed at a higher rate. This can deter some mothers
from choosing to re-enter the workforce, especially when you
consider the high costs and lack of access to high-quality
child care and other costs associated with work.
These kinds of challenges are especially pronounced for
women, and particularly mothers, who are struggling to make
ends meet.
Two-thirds of minimum wage earners are women, and their
jobs are disproportionately unlikely to offer any flexibility
when, for example, a child gets sick and needs to be picked up
early from school. And their earnings are quickly swallowed by
costs associated with work like child care and transportation.
It is also important to note that our outdated policies
disproportionately affect women when it comes to their
retirement security. Because women on average earn less than
men, accumulate less in savings, and receive smaller pensions,
nearly three in ten women over 65 depend only on Social
Security for income in their later years. I think all of my
colleagues and I are alarmed that the average Social Security
benefit for women over 65 is just $13,100 per year. That is
hardly enough to feel financially secure.
The impact of these barriers is increasingly clear. Over
the last decade, the share of women in the labor force has
actually stalled, even as other countries have continued to see
more women choosing to go to work. Experts believe that a major
reason for this is that, unlike many other countries, we simply
have not updated our policies to reflect our 21st century
workforce and help today's two-earner families succeed.
At a time when we need to be doing everything we can to
grow the economy and strengthen our middle class, that is
unacceptable. Women need to have an equal shot at success.
First and foremost, that means we need to end unfair practices
that set women back financially. We took a good step forward
with the Affordable Care Act, which now prevents insurance
companies from charging women more than men for coverage.
But we need to do more to make sure women are getting equal
pay for equal work. My colleague Chairwoman Mikulski has led
the way on the Paycheck Fairness Act, which would provide women
with more tools to fight pay discrimination. Giving the
millions of women earning the minimum wage a raise would also
go a long way toward that effort. And we also need to update
our Tax Code so that mothers returning to the workforce do not
face a marriage penalty.
In addition to expanding the earned income tax credit for
childless workers, the 21st century worker tax cut that I
introduced would provide a 20-percent deduction on the second
earner's income for working families with young children to
help them keep more of what they earn.
As we get rid of discriminatory practices, we should also
recognize the challenges that working parents face and put in
place a set of policies that help them at work and at home. A
big part of this is investing in expanded access to affordable,
high-quality child care. Parents deserve to know that their
children are safe and thriving when they are at work.
So I hope our witnesses today will share some thoughts
about steps Congress could take through our Tax Code and by
building on successful programs like Head Start to give them
some peace of mind.
Finally, we need to build on and strengthen Social Security
with policies that make it easier for women and their families
to build a secure retirement.
There is, of course, much more we need to do in addition,
but any of these changes would make a huge difference for
working women and their families. Acting to expand economic
opportunity for women is the right thing to do. It is part of
our ongoing work to uphold our country's most fundamental
values. But as our country's recent history shows, it is also
an economic necessity, both for those families and for our
broader economy. I hope that in the coming weeks and months we
will be able to work together on some of these ideas which
would do so much to strengthen our country right now and into
the future.
So, again, I thank all of our witnesses for joining us
today. We look forward to your testimony. But first I will turn
it over to my Ranking Member, Senator Sessions.
OPENING STATEMENT OF SENATOR SESSIONS
Senator Sessions. Thank you, Madam Chairman. We appreciate
the witnesses that will be before us today. This is an
important issue, and we look forward to your testimony.
There is no question that the state of our economy remains
poor and that millions of American families are barely scraping
by. And despite some progress, women do still face challenges,
unique challenges, and discrimination. We must have in America
a fair and equal workplace for all our citizens.
The workforce participation rate for women is now at its
lowest level in 23 years. We had a surge of women coming into
the workforce in the 1970s and 1980s. That is being altered
today. For every one job added last month, nearly three people
left the workforce entirely. Real wages for women have been
stagnant since 2009.
I think, Madam Chair, there is a marriage penalty on a
spouse who decides to go to work. We need to look at that.
Median household income in America has dropped a stunning
$2,268 since 2009 after adjusting for inflation. And Chairman
Yellen told us last week lamenting twice in her remarks that we
are facing a slack labor market.
So these statistics paint an alarming portrait of economic
hardships facing Americans. Working moms are struggling
valiantly every day to support their kids, pay bills, and raise
a family, often by themselves, and to set aside a little money
for the future. That is very difficult. They are heroes in the
American economy. There is no doubt about that.
Every day this administration, however, every day it
continues to advance policies that make it more difficult for
Americans to find a job, to earn a living, to see their wages
go up is a detriment to all, including women.
Women especially are rightly concerned about the economic
futures facing our young people. The statistics there are grim.
Nearly one in two recent college graduates is underemployed.
The unemployment rate for Americans age 20 to 24 is 10.6
percent. Teenage unemployment has been at or above 20 percent
since 2009. Hispanic youth unemployment is 21.7 percent.
African American youth unemployment is 36.8 percent.
We have borrowed $8 trillion, running our debt past $17
trillion total, and yet incomes are down, wages are down, and
workplace participation is down.
Over the past year, we have held a number of informative
hearings in the Budget Committee, all leading to one
conclusion, it seems to me: American workers are suffering
under President Obama's economy. Every major policy action,
virtually every major policy action tends to weaken job
creation and wage progress, lowering wages.
Here is the economic agenda that we are facing today: an
anti-energy policy that drives up prices of energy and sends
good-paying jobs overseas; excessive Government regulation that
always destroys jobs and weakens productivity; a burdensome Tax
Code that undermines the ability of American workers and
industry to compete on the world stage; a Government health
care expansion that is shrinking the workforce and forcing
people, too many, into part-time jobs; a weak trade policy that
fails to defend the American worker effectively on the world
stage and insists that our trading partners comply with their
agreements; and an immigration plan that would import twice as
much new guest workers at a time when record numbers of
Americans are not working at all, pushing down wages and
increasing unemployment; and a massive maze-like welfare state
that helps Government bureaucrats but traps families in
poverty; out-of-control deficit spending and debt undermine
economic confidence and erode stability.
So these policies, I suggest, are hurting Americans, not
helping us, all ages, women particularly, and in all walks of
life. We must stop this. Everyone agrees American workers are
suffering. We need a new economic strategy that grows the
middle class, and not the Government, and puts the needs of
women and all workers first.
Madam Chair, thank you for the hearing, and I look forward
to hearing from the witnesses.
Chairman Murray. Thank you very much.
With that, we will turn it over to our witnesses. Dr.
Boushey, we will begin with you.
STATEMENT OF HEATHER BOUSHEY, PH.D., EXECUTIVE DIRECTOR AND
CHIEF ECONOMIST, WASHINGTON CENTER FOR EQUITABLE GROWTH, AND
SENIOR FELLOW, CENTER FOR AMERICAN PROGRESS
Ms. Boushey. Thank you. Thank you, Chairman Murray, Ranking
Member Sessions, and the rest of the Committee for inviting me
here today to testify.
My name is Heather Boushey. I am executive director and
chief economist of the Washington Center for Equitable Growth.
The center is a new project devoted to understanding what grows
our economy, with a particular emphasis on understanding
whether and how rising levels of economic inequality affect
economic growth and stability.
It is an honor to be invited here today to discuss how
working women are critical for economic growth and the role of
Federal policy in advancing their economic progress. My
testimony highlights the many aspects of our economy where
gender inequality and economic inequality go hand in hand, and
also where economic inequality among women threatens family
well-being and economic growth. Government policies can address
these gaps in order to help women succeed so our economy can
succeed.
There are three conclusions I want to highlight from my
testimony.
First, women, their families, and the economy have greatly
benefitted from women's entry into the labor force.
Second, barriers to women's work manifest themselves
differently across the income distribution.
Third, there are a variety of ways that Federal policy can
encourage women's labor force participation, among them tax
credits, family leave, early childhood education programs, all
of which can increase women's contribution to family income and
grow our economy.
Today most women work and they work full time. About two-
thirds of mothers are family breadwinners, bringing home either
all of their family's earnings or at least as much as their
partners or co-breadwinners.
Women's increased work is important for family incomes and
for economic growth. My colleagues and I found that between
1979 and 2012, our Nation's gross domestic product increased by
almost 11 percent due to women's greater hours of work. This
translates into about $1.7 trillion in output in today's
dollars, roughly equivalent to our combined Federal spending on
Social Security, Medicare, and Medicaid in 2012.
Over the past few decades, women have made enormous
economic gains. Between 1960 and 2000, women's labor force
participation steadily grew, and the gender pay gap steadily
shrank. But progress on both has stalled for more than a
decade. The United States has fallen from being the 6th highest
country in terms of female labor participation among developed
economies to the 17th in 2010. And while some women have made
gains in the workforce, too many have been left behind. Between
2000 and 2007, higher-wage women saw their real wages increase
by four times the amount of women with poorly paid jobs.
One reason for these kinds of disparities is that while
some women have made progress entering into professional or
male-dominated occupations, many women continue to toil in
female-dominated jobs that still pay low wages. But also within
occupations, there are disparities, in no small part due to
differences in flexibility in terms of hour and location.
Policies to address conflicts between work and family are
too often available only to women at the top of the wage
distribution, and too often women have to quit their jobs in
order to provide care, which harms their future earnings
potential and limits their retirement benefits.
Policies such as paid sick days, paid family leave, and
scheduling flexibility would fill an important inequality gap
for workers, especially women and especially caregivers.
It is important to recognize that employers have not on
their own stepped in to provide these important benefits. Last
year, only 61 percent of workers had employer-provided paid
sick days, and only 12 percent of workers had access to
employer-provided paid leave which could be used to recover
from a serious illness or care for a family member. These are
issues that are especially important for low-wage workers who
disproportionately lack these benefits.
Federal budget policies can encourage women's work and
increase family income. The Murray-Ryan budget agreement has
helped to promote women's economic progress in the workforce,
but there will be more to do after that deal expires.
In my written testimony, I focus on six policies that have
been tailored to achieve the results we need for our families
and our economy. Here this morning I want to just highlight
three.
First, the earned income tax credit, child tax credit, and
child independent care tax credit are very important to the
financial security for all American families, especially low-
income families. But we must expand them and, importantly, make
the child independent care tax credit refundable.
Second, the 21st Century Worker Tax Cut Act would let two-
earner families keep more of what they earn and increase the
earned income tax credit for childless low-wage workers.
Importantly, it will encourage mothers' workforce participation
and help them to better financially support their families and
give low-wage workers a better shot at entering the middle
class. It is estimated that this tax cut would benefit 7.3
million working families and 13 million childless workers.
Finally, the Family and Medical Leave Insurance Act of 2013
will create an insurance program for nearly every U.S. workers
when they need leave to care for a child, a seriously ill
family member, or to recover from a serious illness. It draws
on what we have learned from three States that have family
leave insurance: California, New Jersey, and Rhode Island. From
their experiences we know what an effectively run program looks
like. Paid leave makes it easier for women to work, improves
their lifetime earnings, and can help close the wage gap
between workers who provide care and those who do not, while
having benefits in terms of productivity and business outcomes.
To conclude, Federal policy can do more to help all women
realize their full economic potential. But policies must
acknowledge that barriers to women's work manifest themselves
differently across the income distribution, because when all
women succeed, America succeeds.
[The prepared statement of Ms. Boushey follows:]
[GRAPHIC] [TIFF OMITTED]
Chairman Murray. Thank you very much.
We will turn to Ms. Duchon.
STATEMENT OF ANNMARIE DUCHON, ASSOCIATE DIRECTOR OF
ACCOMMODATION SERVICES, UNIVERSITY OF MASSACHUSETTS, AMHERST
Ms. Duchon. Thank you, Chairwoman Murray, Ranking Member
Sessions, and all the Senators and staff here today. My name is
AnnMarie Duchon, and I am a member of MomsRising. I am honored
to be here today to tell you my story and to give voice to the
women who cannot be here today to share their experiences.
My work environment is not the sort of place where you
would think we would have a problem with unfair pay practices.
I work at a progressive public university that prides itself on
its commitment to diversity. I am the associate director of an
innovative disability services office, and I love my job. I am
continuously learning and growing, and I get to work
collaboratively with colleagues that I greatly respect. Every
day I oversee programs that we have designed to assist people
with disabilities gain full access to the university
environment. However, even in an environment like this, wage
discrimination based on gender still existed.
I am telling my story not because I hate my job or because
I have any ill will toward my employer or toward the male
colleague who made a higher salary than I did. In fact, we are
very good friends. But this story is not about him; it is about
me. And it is a story that is all too common for women, and
moms in particular, who face gender wage discrimination. It is
unfair, it is bad for our economy, and, to borrow a phrase, it
is time to put an end to the ``Mad Men'' era policies.
I began working for the disability services office at the
University of Massachusetts, Amherst in 2004. I was originally
hired as a member of a team of consumer managers. From the
moment I was hired, I made less than a male coworker doing the
same job. This was the case even though our resumes were nearly
identical. We both have master's degrees and comparable
professional experience. In fact, we even graduated from the
same University on the very same day.
When I became aware of this wage disparity, I asked my
employer if I could be paid more. She said no. I was told that
because my male coworker had accepted a pay cut to take this
job, he should be paid more. But here is a fact: I, too, had
taken a pay cut to accept this position, and my family depends
just as much on my wages as my coworker's family depends on
his. This is the sort of ridiculous stereotyping--the
assumption that because my male coworker needed the higher
salary and I did not--that is still prevalent in too many
workplaces today and is used to justify wage discrimination. My
raise was denied, and I was being paid less because I am a
woman.
After 5 years, my male coworker and I were promoted at the
very same time. Since 2009, we both have held the position of
associate director. And although I do love my work, it really
hurt to know that my contributions were worth less than his
were. Initially, I was hopeful at the time of the promotion
that my employer would finally acknowledge my work and equalize
my pay. But instead, I was disappointed to learn that the wage
gap increased by approximately $1,400.
Recently, my husband's teaching job was threatened due to
budget cuts. This situation made me really think about what
those lost wages were costing my family. When I added those
lost wages up and calculated that my family had lost over
$12,000 in income, it was heartbreaking. My husband and I are
both first-generation college students. We have crushing
student loan debt. On paper, we look like we are doing just
fine. But in reality, money is tight. We pay as much on our
student loan payments each month as we do for our mortgage. Our
daughter Gracie is in full-time daycare because neither of us
can afford not to work. $12,000 in lost wages accounts for a
year's worth of child care or 10 months' worth of our mortgage
or 10 months of student loan payments--all our expenses that we
struggle to pay for.
So I tried again. I approached my employer again this time
with a visual chart that showed the stark salary difference
between my coworker and me. And I repeated my case that I
should be paid fairly. This time, my employer agreed to raise
my salary to equal my male coworker's. And 5 months later, I
received a paycheck that finally reflected equal pay.
I was eventually able to get paid fairly, but it took more
than 7 years of difficult conversations and cost me thousands
in lost wages--all of this in an environment where I could have
open conversations about my salary without fearing
repercussions.
I was thrilled last month when President Obama took
Executive action to ensure that Federal contractors are barred
from retaliating against employees who discuss their salary
information. But we still need Congress to pass the Paycheck
Fairness Act, which would allow all workers to talk about their
salaries to their coworkers without the fear of being fired.
Millions of women trying to raise families while working
minimum wage jobs have not seen an increase in years. Congress
has the opportunity to right these wrongs. It is time to
increase minimum wage, time to do something about the student
loan crisis, and it is long past time to pass the Paycheck
Fairness Act.
I hope that by the time my daughter Gracie is able to
understand what wage discrimination is all about, it will have
long since been resolved. According to recent research, at the
rate we are going, if we do not take action, the wage gap will
not close on its own until my 5-year-old girl is 48. Forty-
eight. Instead, I hope that the idea of Mommy being paid less
than a man while working at the same job will be a relic
concept for her, kind of like life before the iPhone.
I am honored to be here today, and I thank you again for
the opportunity to testify.
[The prepared statement of Ms. Duchon follows:]
[GRAPHIC] [TIFF OMITTED]
Chairman Murray. Thank you very much.
Ms. Schaeffer?
STATEMENT OF SABRINA L. SCHAEFFER, EXECUTIVE DIRECTOR,
INDEPENDENT WOMEN'S FORUM
Ms. Schaeffer. Chairman Murray, Ranking Member Sessions,
and members of the Committee, thank you for inviting me here
today to discuss what I view as a serious shortcoming to the
proposed Paycheck Fairness Act.
My name is Sabrina Schaeffer, and I am the executive
director of the Independent Women's Forum. We are a nonprofit
organization, and our mission is to increase the number of
women who value and understand free markets and personal
liberty. And we respond to those who portray society, and
especially the workplace, as inherently unfair to women because
we know it is simply not true.
I come to this issue not just as the head of IWF but also
as a working mother. I have three young children ages 6, 5, and
2, and I understand the very real need for plentiful jobs, fair
wages, and workplace flexibility. And I am aware of the
different factors women weigh when making decisions about what
types of jobs to pursue and how to balance work and family
responsibilities.
It is those decisions and tradeoffs that should be at the
heart of the discussion about workplace fairness. But
proponents of the Paycheck Fairness Act usually begin their
argument by citing the faulty 77-cent wage gap statistic--that
women only make 77 cents for every dollar a man earns. But to
have an honest conversation about the workplace and about
women's earnings, we need to stop blindly repeating this
number.
We all know that this statistic is grossly overstated, as
every serious study has demonstrated, including those done by
liberal groups like the American Association of
University Women and the 2009 CONSAD Research commissioned
by the Department of Labor under this administration.
The Department of Labor statistic compares the earnings of
average full-time working man to average full-time working
woman, which shows that women actually earn about 81 percent of
what men earn. But this is not the equivalent of comparing
coworkers performing the same job. It is a comparison of
averages, and it is like comparing apples to oranges.
This number does not take into consideration any of the
many important factors--from college major, work history,
industry, specialty, hours spent working each day, to name a
few--which have a significant impact on how much someone earns,
because when those factors are taken into account, the pay gap
shrinks to as little as 4 cents.
Discrimination may explain some of this remaining gap, and
there are bad employers out there, although there could be
other causes, such as women being more reluctant than men to
negotiate starting salaries and to ask for raises. And knowing
this is important so I can help close that small remaining wage
gap by being more proactive on my own behalf and by teaching my
daughters to be comfortable talking about money.
Even the White House conceded on Equal Pay Day this year
that the wage gap statistic is misleading. Betsey Stevenson, a
member of the White House Council of Economic Advisers, said
she ``completely misspoke'' when suggesting that gap was
evidence of discrimination.
Still, President Obama, Democrats here in Congress, and
progressive women's groups continue to use this statistic to
try to convince women that they are routinely suffering massive
wage discrimination to justify growing Government in the name
of protecting women.
And that is how they sell the Paycheck Fairness Act. They
suggest that it would advance the cause of pay equity and help
women earn more. But the bill's sponsors rarely mention what
the legislation would actually do and whom it would really
benefit. And that is probably because the legislation's focus
is not on increasing economic opportunity for women, which we
all want, but it is on facilitating more lawsuits against
employers.
Consider what would happen if this law were to pass.
Employees would be forced to opt out of, rather than into,
class action lawsuits, making it easier for lawyers to get a
class certified and increasing the potential for a jackpot
award.
Currently, victims of workplace discrimination can receive
back pay for the earnings they were denied, as well as punitive
damages of up to $300,000. The Paycheck Fairness Act would
allow unlimited punitive damage awards, including for
unintentional discrimination. This dramatically increases the
motivation for both lawyers and employees to sue in hopes of
windfall payouts.
Most importantly, the proposed law would severely limit how
employers could justify compensation decisions. Currently,
businesses can justify differences in pay on factors like
experience and job responsibilities. But under the Paycheck
Fairness Act, employers would only be justified in paying men
and women differently if they can prove to the Government that
it is a ``business necessity.'' Such ambiguity would be an open
invitation to trial lawyers. Employers would be targets of
potential lawsuits for essentially any compensation decision--
whether it is giving a bonus for superior performance or
offering an employee more flexible hours in exchange for
reduced compensation.
Ultimately, employers would have the incentive to create
rigid, one-size-fits-all compensation packages which would hurt
both men and women.
The Paycheck Fairness Act is not necessary because equal
pay is already the law. The Equal Pay Act and the Civil Rights
Act protect employees from gender-based wage discrimination.
The Lily Ledbetter Fair Pay Act extends the amount of time a
worker has to bring a suit against her employer.
So what is the alternative? Well, women make up nearly 50
percent of the workforce today and are incredibly valuable to
businesses. The workplace is changing quickly and for the
better. Providing fair pay, sensible leave policies, and more
generous benefit packages are increasingly being used to
attract and retain women.
And where businesses lag behind, there is a robust industry
devoted to not just helping women sue, like the Paycheck
Fairness Act does, but to overcoming remaining hurdles in the
workplace. 85 Broads, Negotiating Women, She Negotiates--these
all help women maximize their success at work.
The goal of public policy ought to be to give women and men
equal opportunities to pursue their vision of happiness. But we
should not be fixated on creating equal outcomes. Some people
will choose to take lower-paying jobs they find personally
fulfilling; others will be willing to work 80-hour weeks to
maximize their pay. That is why job creation and growth--not
more lawsuits--is the real key to expanding economic
opportunity for women and their families.
Thank you.
[The prepared statement of Ms. Schaeffer follows:]
[GRAPHIC] [TIFF OMITTED]
Chairman Murray. Thank you. Many of you know I care a lot
about making sure that children have access to high-quality
early childhood education, including child care. And I often
talk about the long-term benefits that these programs have for
the children who experience them. But it is really important to
remember that child care is a vital work support for mothers as
well. We know that mothers who have access to reliable child
care have less absenteeism and tardiness from work and they are
more productive.
However, we also know that child care is still
prohibitively expensive for many families. For example, in
every State in the U.S., center-based care for an infant
exceeds 25 percent of median income for single parents.
So, Dr. Boushey, I wanted to ask you, can you speak to the
economic impacts of these challenges that families face in
accessing child care?
Ms. Boushey. Certainly. Thank you. I believe, you know, in
some ways AnnMarie here to my left actually very eloquently
described her own challenges that I think are important to sort
of recognize, that child care is so costly for families. I
believe you said it was $12,000 a year. When you look across
the country, you see that the average cost for a 4-year-old in
center-based care ranges from less than about $4,000 to more
than $15,000 or even $20,000 a year. And with most working
women earning less than $30,000 a year, that is an enormous
cost for families to have to bear.
But let us also put this into a bit of a broader context.
Most families that need child care for very young children are
young families. Half of women have their first child by the age
of 25. When people enter the labor force, that is when their
wages are lowest. It is also when they have their biggest
student loan debt if they went to college, regardless of
whether or not they graduated if they started college. And I
will note that women are more likely than men to take out
student debt, and when they do, they take on larger amounts of
loans.
So all of this compounds for workers at the start of their
careers, making it very difficult to afford child care and
pushing a lot of families into this very false dichotomy
between her working and not working, and the impact on the
family budget.
Let me be very clear. Those years that women lose in the
labor force, if it is not by choice--or even if it is by
choice--have a lifetime impact on their earnings, on their
retirement security, on their ability to grow and develop their
careers. This is not just a choice that families make when that
child is 2 or 3 and that mom is young and that family is young.
This is a decision that affects the rest of her career, their
family economic security, and feeds right into how we think
about whether or not Social Security is providing that family
with enough benefits. Those are years that she has lost paying
into. So that is on the work side.
I also want to stress that, as an economist, one of the
things that we now is that early childhood education is one of
the most important things we need to do to be developing our
Nation's human capital. And the fact that we are leaving this
unattended to in such a large way and so different than other
developed countries is shooting ourselves in the foot for the
next generation of workers.
Chairman Murray. Well, thank you very much.
Ms. Duchon, I assume that your experience reflects what you
just heard.
Ms. Duchon. Absolutely. I just want to add, one of the ways
that we have tried to keep costs down is we have my mom watch
my daughter once a week. It sort of keeps our cost down by
about $2,400 a year. But she does not live close, so she drives
almost 4 hours a day to do that.
Chairman Murray. So child care access impacts on lots of
people there.
Dr. Boushey, I also wanted to ask you about retirement
security. About half of our workers in the private sector have
access to an employer-based retirement plan. That is a figure
that drops to about 30 percent for workers and businesses with
fewer than 100 employees. And, surprisingly, in such a wealthy
Nation, about 45 percent of all workers report that they have
no retirement assets at all. So that is pretty bad news for
everyone, but in particular, it leads to worse retirement
conditions for women. Among people 65 and older, women have
less retirement income, face a greater risk of poverty than
men, and one in three women depend on Social Security as their
sole source of income.
So I think it is no exaggeration to say that we face a
retirement crisis, particularly for women, and, Dr. Boushey, I
wanted to ask you, there are a lot of policy steps that could
be proposed. Give me your top two to address this.
Ms. Boushey. Well, I would start by looking at women's
labor supply, so I would focus on policies that help women move
up the job ladder and stay in the labor market--policies such
as addressing child care, policies such as the family and
medical leave insurance legislation that has been put on the
table, policies that make it possible for women to earn a fair
day's pay. So that basket, if you care about retirement
security, you have to care about what is happening when people
are in the labor market.
But then, of course, we also need to attend to making sure
that Social Security is a vibrant and strong program. There are
a lot of new proposals out there that people are talking about
to make sure that people that have their savings in 401(k)s are
getting a good deal. That is one of the challenges. We have
moved from a pension system which got a pretty good deal for
workers and their families to these 401(k)s where often there
are exorbitantly high fees and where people are sort of left on
their own to make decisions about investments that are
challenging even for a Ph.D. economist to know what kinds of
investments you should be focusing on.
So the USA Retirement Funds Act and the SAFE Retirement
Plan that the Center for American Progress has put together,
both focus on how is it that we can make 401(k)s a better
financial tool for families. So I would focus there as well.
Chairman Murray. Thank you very much, and I am out of time.
Senator Sessions?
Senator Sessions. Thank you. Senator Wyden is a member of
this Committee and chairs the Finance Committee. He and I have
been talking about retirement savings and the need for that and
the importance of it, Ms. Boushey, so I think it is something
to look at. And I am concerned about fees. Fees can erode
significantly a person's savings over time, and I do not think
a lot of people understand that. The Federal thrift program is
probably one of the best because it has such low fees, and I
would like to see more of that.
Senator Wyden believes that we can start saving younger and
that would help everybody learn more about savings. And he and
I are talking about some of the things that we could do there.
Ms. Schaeffer, you have been frank about some of your
concerns about the way we have approached this issue. I think
some of the points you make are valid and should be heard. As
we establish public policy, it is awfully difficult to do so. I
am confident there are women being taken advantage of today,
and there are men being taken advantage of sometimes, too, not
really knowing, like Ms. Duchon, to stand up and defend
themselves.
But tell us what you think are some of the things that
would be most helpful to allow women to fulfill their highest
values to make the choices they would like to make for
themselves or their families. And are there any policies that
the Government could carry out that would help that?
Ms. Schaeffer. Thank you. And I agree that discrimination
occurs. I agree that there are bad employers out there. But I
do not think that the Paycheck Fairness Act will solve that
problem.
I think the very best thing for women, for men, and their
families is strong economic growth and job creation. This gives
all workers flexibility, right? If you are in a bad job, you
have the opportunity to look for a new job. So I think it is
much better for us to focus our resources and our attention on
growing our economy so that people have more choices. Because
as I tried to identify, everybody is going to want to lay out
their life plan in a different way, and we cannot have sort of
these top-down Government-run solutions because it simply will
not work.
I think better than many of these Government-run ideas is
to allow a market in education so that women can more easily
get educated themselves and have more choices for their
children at an earlier age. We currently do not have that. Most
supporters of the Paycheck Fairness Act have stood up and
blocked most educational freedom bills in their States.
I think we need to stop picking winners and losers in the
energy industry so that women can afford quality goods that are
at lower prices, so that they can afford to fill up their car
and get to work every day.
We need to streamline our Tax Code so that women and men
are taking home more of their take-home pay.
We need to make sure that women and men own and control
their health care dollars, so I would call for repealing
Obamacare.
These are all real solutions that would require reining in
what I view as the progressive State and allowing individual
families and individuals to have more control over the choices
in their lives.
Senator Sessions. Ms. Boushey, as you look at women and the
choices they make, which are good for America if they choose to
invest a lot of their time and effort in raising children in
the next generation, that can put them behind financially. Do
you have any thoughts about how we can deal with that in a
realistic way?
Ms. Boushey. Well, I think a couple of things. Certainly it
is important--right, we have to start from the premise that
family is, of course, very important, and raising the next
generation is a critically important job both for families but
also for our economy more generally.
The United States stands alone in not supporting families
as they actually live and work today. The reality is that most
parents are in the labor force, most children are being raised
by a family that does not have a stay-at-home caregiver, and
that poses challenges for children. But, of course, at the
other end, it means that most families do not have someone at
home who can help when an elder may need a little bit of help.
Somebody has got to take time off work. And we have not thought
enough deeply about how to update our labor standards and our
social insurance programs and our child-care systems to really
help families.
So I would focus on making sure that families actually have
a choice, that child care is high quality and accessible to
everybody, not just the very wealthy. And one of the things we
forget about child care is you cannot scrimp on it. You cannot,
you know, get cheaper-cost child care and think that that is
just going to be okay for your kids, right? The kind of care is
the kind of care that you need. You need a qualified teacher.
It has got to be of sufficient quality. And we do not go far
enough to make sure that every child in America and every
family in America has access to that kind of quality at a cost
that families can afford, again, when they are young and they
do not have a lot of money. This is something that we need to
step in and really help them with so they can make those
choices honestly.
Senator Sessions. Thank you.
Chairman Murray. Senator Kaine.
Senator Kaine. Thank you, Madam Chairwoman, and thank you
to the witnesses. A lot of topics of interest. Let me just ask
about one that I am really focused on, which is sort of
nontraditional career fields and career and technical
education. Senator Baldwin and I, Senator Portman and others
are doing some work in this area, and we are having a
fascinating debate now in the Armed Services Committee about
the opening up of all these combat MOSs that have heretofore
been gender exclusive for men, opening them up to women and
providing women opportunities to meet the same standards that
men meet in those areas.
Traditionally, women have been underrepresented in some of
what we call ``nontraditional fields''--construction,
engineering, manufacturing areas. The Perkins Career and
Technical Education Act requires States to set targets for
representation of women in these nontraditional career fields.
But I would like just each of you to talk about kind of
workforce training as advancing employment opportunities for
women, and particularly, you know, what we could do in the
career and technical education or workforce training area that
would help women be more equitably represented across the whole
spectrum of professions and jobs. I just would like each of
your thoughts on that.
Ms. Boushey. I will go first and be brief. I think that is
an enormously issue. It is one that we have been working on for
quite a long time, trying to get women into a wider array of
occupations. And I would just sort of add one other point to
that, and I am happy to also follow up in writing on some
specifics on what we can do in that area. But one of the things
that we are learning from the literature is that it is not just
about getting women into different occupations. It is that
inequality is actually occurring within occupations.
Claudia Goldin, who is a professor at Harvard, has written
an enormously important new study that just came out
documenting how it is actually the working conditions in terms
of hours and flexibility that make all the difference for
inequality within occupations. So I do think we need to make
sure that we are opening up all sorts of professions to women.
Just one more stat, and then I will stop. There is a
Stanford professor and some folks from the University of
Chicago that had this amazing study that came out a year and a
half ago that found that between 1960 and 2008, a fifth, a full
fifth of U.S. economic growth was because of the opening up of
professions to women and minorities. This is enormously
important, and I can follow up in writing with some specifics.
[The information follows:]
[GRAPHIC] [TIFF OMITTED]
Senator Kaine. Thank you.
Ms. Duchon. Well, as the mom of a young girl, I would like
to say that knowing that those opportunities are available from
the start and having young people grow up in good-quality
educational environments where they see women taking on those
roles and they can imagine that for themselves, just the sheer
modeling of that both from a parental perspective as well as an
education perspective I think is truly important.
Senator Kaine. Ms. Schaeffer?
Ms. Schaeffer. Thank you for that question, because I
actually think this is a very interesting one. I tend to be
careful that we do not characterize sort of our schools as
somehow providing one thing for the male students today that is
different from the girls. I have two girls and a son, and I
know that they are all being treated the same way.
That being said, I know that for many, many years now, we
have been pouring money into the STEM field and trying to
encourage more women to go into it. And recently I took a look
at MIT and what the female students and the male students were
majoring in. And I thought, of any school out there, MIT, we
have some of the brightest science and math minds. And it was
very interesting to see the way men and women are sort of
falling. Men were still overrepresented in areas like petroleum
engineering and computer science, while women were
overrepresented in the social sciences and biology and
architecture.
So I think that there is a point at which we have to accept
that men and women are different, they are going to make
different choices, and that might be okay. And we have to maybe
also ask ourselves, is there a reason that we are not looking
at sort of the underrepresentation of men, for instance, in
nursing or in English or in psychology? Should we be concerned
on that side of things?
And one last thing is just that we have a lot of women now
who are in these leadership positions, and I agree it is not as
high as with men, but we have women who have come up the ranks,
like a Virginia Rometty at IBM. We know that 75 percent of
veterinary students are now women. These are numbers that we
should not ignore because I think it is sometimes painted as
sort of black or white, women go into the humanities, men go
into the sciences, that is the problem. So I think it is a
little bit--a little grayer.
Senator Kaine. Thank you, Madam Chairwoman.
Chairman Murray. Thank you.
We do have a vote called, and I am going to give Senator
King and Senator Baldwin 5 minutes each, and we should be able
to wrap up before we get over there. Senator King?
Senator King. Thank you. Before getting into some
questions, Ms. Boushey, could you supply that Goldin study to
us? That sounds very interesting, the one that you mentioned. I
would appreciate that.
Senator King. As I have traveled abroad, and did so
particularly as Governor, going on trade missions, it was one
of my conclusions that one of the parts of the secret sauce of
America's success is the openness of our business community to
women. You go to other countries, you go to business meetings,
chamber of commerce meetings, zero women. And you realize that
these societies are missing a huge part of the talent. That is
what America is all about, is giving this opportunity.
The challenge, it seems to me--there are two challenges.
One is how do we harness this enormous power that half of our
population brings to the table, at the same time accommodating
the special needs, particularly around motherhood.
Now, part of it is the tradition that it is moms who are
responsible and not dads. I mean, that is something we ought to
be thinking about and talking about. You know, why is it
assumed that the woman has to deal with the child care and the
sick child and all of those kinds of things?
I guess the question is: What are the factors, the
flexibility policies that are most important for us to adopt?
And the secondary question is: Does this have to be by Federal
law or will this take place in the marketplace as companies
say, hey, we want this talent, we have, therefore--a company I
visited in Maine a few weeks ago has an in-house daycare
center. Why? Because they want to have good people working
there, and that is one of the things that they have had to do.
So two questions. What are the important policies? And,
two, do they have to be mandated by Federal law or can the
marketplace take care of it? And if so, how long will that
take? Ms. Boushey, do you want to take a crack at that?
Ms. Boushey. Yes, thank you. That is an excellent question.
I have a bunch of answers for you.
So, first, you know, thinking in terms of workplace
flexibility, there are a lot of things that we could do. San
Francisco and Vermont have both just implemented new policies
that give workers the right to request a flexible schedule. It
is a soft-touch law, meaning that it is not a mandate, but it
says that a worker can go to their boss and say, ``Hey, I need
this kind of flexibility,'' and the employer is obligated to
respond to that request and give a good reason why they want to
deny it.
We have seen this to be enormously successful in the United
Kingdom and in New Zealand and other countries, and it is
something that might be able to be effective here, and I am
very excited that these two places are doing this so that
people like me can study it. So I encourage you to look at
that, and that is something that is happening at the State and
local level.
Second, there is an experimentation in States right now
with family leave insurance. California, New Jersey, and Rhode
Island--
Senator King. You mentioned that. Who pays--when you say
``insurance,'' it implies somebody is paying a premium.
Ms. Boushey. Yes. So this is employee paid for, so it is a
new small tax on employees.
Senator King. Like unemployment insurance.
Ms. Boushey. Like unemployment insurance, or in those--
there are five States that have longstanding temporary
disability insurance programs that provide up to a year in some
places, benefits when you get sick, and those three States have
added family leave onto that benefit. And it is paid for
entirely by employees.
The FAMILY Act, the family and medical leave insurance bill
that Senator Gillibrand has introduced, would create a Federal
system for that. The big challenge of doing that one at the
State level is beyond these five States that have these
longstanding systems, the startup costs are very high. And so
the Federal Government could play a role there in helping with
startup costs.
Senator King. I want to get Ms. Schaeffer into this
discussion. You had trenchant comments about the Paycheck
Fairness Act. Are there other policies that could be adopted,
flexibility policies, daycare flexibility, hours, those kinds
of things that you think are important, and your thoughts on
whether these should be Federal law, marketplace? And the
problem with--I suspect you are going to say marketplace, but
then we get to Ms. Duchon's comment that it will take 43 years
to get there.
Ms. Schaeffer. Well, you know, I am not sure if it will
take 43 years, and the reason is because I think women are
beginning to outpace men. We know that women are now earning 57
percent of bachelor's degrees, 59 percent of master's degrees,
the majority of Ph.D.s. They are overrepresented in law schools
as well as medical schools. So the demand is--the workplace is
really changing. The demand for flexibility, not for just women
but for men as well, is changing. And, you know, as one of my
colleagues says, I think that toothpaste is out of the tube,
right? People have sort of gotten a taste of what flexibility
means and what it looks like, and they like it. And employers
want to respond to that, so I will give you two examples.
One is very small, and that is the Independent Women's
Forum. We are a very small organization. We used to have very
fancy office space. We are now a virtual office. And one of the
reasons for that is that we have a lot of moms, and it simply
did not make sense for them to waste an hour getting into the
office and parking and getting settled at a desk and wasting
another hour at the end of the day when we realized that we had
a team of very hard workers who could do their job from home.
Now, it works for us. It might not work for the next think
tank, but it does work for us.
Another example, though, is Walmart, a much larger example.
They started in their legal department with a flexible work
arrangement. What they found is that people really liked it.
They were more productive workers, and to the extent that they
could integrate that into other departments, they were trying.
Obviously, you always have to have somebody at the checkout
line, but that does not mean that other parts--there are other
ways in which you could have job sharing and flexible work
arrangements.
So I think that the marketplace is going to respond to both
women's and men's needs for flexibility.
Senator King. Thank you very much. We are running close--
Chairman Murray. Yes, I want to make sure that Senator
Baldwin has a chance.
Senator King. I will follow up with some questions.
Chairman Murray. And we do not want to miss the vote, so,
Senator Baldwin?
Senator Baldwin. Thank you. I really appreciate your
holding this hearing.
There are a number of non-compensation barriers to economic
opportunity for women that have come up. One that I do not
believe has come up but yet is a major barrier to economic
empowerment of women is the unacceptable reality of workplace
discrimination, including harassment and sexual harassment
specifically. And I think it really continues to limit the
opportunity to succeed at the workplace.
According to the Equal Employment Opportunity Commission,
annually there are average claims of about 10,000 cases of
sexual harassment, yet according to numerous studies, this is
supposed to be drastically underreported, so in reality there
is a belief that it occurs in much higher levels.
Last summer the U.S. Supreme Court in my opinion worsened
an already difficult situation by stripping away some crucial
protections for people who are harassed in the workplace in a
case called Vance v. Ball State University. What happened in
Vance is the Court made it harder to hold employers accountable
when harassment is being perpetrated by a supervisor who does
not have specifically hiring and firing authority. So if you
have a supervisor who is directing all of your daily
activities, choosing what hours you have to report, whether or
not you get overtime or can get absences, you know, all sorts
of conditions of your work, but that person expressly does not
have hiring and firing authority, there is no employer
accountability. And I fear what that is going to do in terms of
people's recourses and weakening of Federal workplace
protections.
So with that quick introduction, Dr. Boushey, I would like
to ask you how does workplace harassment limit the economic
opportunities of women and their families. I know that is a
very broad question, but how will this case, the weakening of
these workplace protections make it more difficult for women to
succeed economically?
Ms. Boushey. Well, we live in a country where employees,
you know, most of the rights that they get they get from the
Federal Government. Very few workers--7 percent of private
sector workers these days--are represented by a union, so that
means that these laws are incredibly important in protecting
workers. And I think AnnMarie's story for me is so compelling
in some ways because she was able to talk to her colleagues and
her employer about what was going on. But for so many people,
they cannot do that, and they fear being laid off or they fear
being fired. Most people--you know, so many Americans work in
States--you know, right-to-work States, and you do not have a
lot of recourse.
So I actually think this is fundamentally and profoundly
important, and I think there are a variety of ways of getting
at it. I think now you have talked about some legislation, the
Fair Employment Protection Act, which I think would be very
important. There are also some new policies going on at the
State level and something that just happened a couple of days
ago. Massachusetts became the fourth State to pass a Domestic
Workers' Bill of Rights, which gives domestic workers, in-home
workers, rights that they do not have under the Fair Labor
Standards Act, and one of them, of course, importantly, are
issues around harassment, where I think that this could
actually play--this could actually be one of the more important
areas where we could see this happening.
So I think that understanding the importance of jobs in
people's lives and that if you do not have choices and you are
stuck, well, then, you are going to put up with it, and that is
just not right or fair.
Chairman Murray. Thank you very much. I really want to
thank our colleagues for participating today, and I especially
want to thank our three witnesses for your time today.
As a reminder to our Committee members, additional
statements and questions are due in by 6:00 p.m. today. We will
submit these to you for your response. And, again, thank you so
much.
With that, we will call this hearing to a close. Thank you.
[Whereupon, at 11:28 a.m., the Committee was adjourned.]
[GRAPHIC] [TIFF OMITTED]
THE IMPACT OF STUDENT LOAN DEBT ON BORROWERS AND THE ECONOMY
---------- -
WEDNESDAY, JUNE 4, 2014
United States Senate,
Committee on the Budget,
Washington, D.C.
The Committee met, pursuant to notice, at 10:01 a.m., in
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray,
Chairman of the Committee, presiding.
Present: Senators Murray, Wyden, Nelson, Stabenow,
Whitehouse, Warner, Merkley, Baldwin, Kaine, King, Johnson, and
Ayotte.
Staff Present: Evan T. Schatz, Majority Staff Director; and
Eric Ueland, Minority Staff Director.
OPENING STATEMENT OF CHAIRMAN MURRAY
Chairman Murray. This hearing will now come to order. I
want to thank Senator Johnson, who is filling in today for my
Ranking Member, Senator Sessions. Welcome to you and to all of
our colleagues who are joining us today, as well as a room
full. Welcome to all of you on a really important topic today.
We are going to be talking about a challenge that 40
million people around our country face today. And for many
Americans who want to further their education and build their
skills, taking out student loans has become a college
prerequisite. But that debt can have lasting consequences for
borrowers and weaken their chances of getting ahead.
Ensuring more Americans get a fair shot is something many
of us here in the Senate are very focused on. And a bill that
is coming to the floor very soon, which will allow borrowers to
refinance their school loans, is an important part of that Fair
Shot Agenda.
I will be discussing that legislation a bit more later. But
first I want to thank our witnesses who are here with us today
who will help shed some light on the challenges that mounting
student debt can pose for borrowers and for our economy.
Today we are going to be hearing from Rohit Chopra. He is
the student loan ombudsman for the Consumer Financial
Protection Bureau.
And I am very pleased to welcome Brittany Jones today. She
is a recent graduate and the former president of the Student
Virginia Education Association.
We are also going to be hearing from Richard Vedder. He is
a Distinguished Professor Emeritus of Economics at Ohio
University.
A college degree is a worthwhile investment, and for many
it can be a ticket to the middle class. We know that on
average, college graduates earn more, and they tend to have
lower unemployment rates than their less educated peers.
A highly educated workforce is also good for our country.
It strengthens our middle class. It strengthens the workforce
we will need to compete in the 21st century global economy.
More and more, jobs of the future will require
postsecondary credentials or degrees. And, in fact, in the
coming years, as many as two-thirds of all jobs will require at
least some college education, according to the Center on
Education and Workforce.
But to afford college, many people have to turn to student
loans to help finance their education. In just a few moments,
you are going to hear from Brittany Jones. She is going to be
talking about how taking out student loans made it possible for
her to get a college degree. And, Brittany, I look forward to
hearing more about your experience, as you have now worked to
start a teaching career and at the same time paying down that
student loan that got you through college.
Of course, Brittany is not alone. Dealing with overbearing
student debt has become a reality for a growing number of
Americans. The statistics are staggering. Today the average
college graduate will have to pay back around $30,000 in
student loans. And a record number of young households owe
student debt.
Back in 1989, 16 percent of young households had student
debt. By 2010, that figure had more than doubled, according to
the Pew Research Center. More young people than ever before are
dealing with more student debt than ever before, and that can
have lasting consequences.
Americans who took out school loans can find it difficult
to save and accumulate wealth. A recent study found that
college graduates without student debt had accumulated seven
times more wealth than those who are paying back school loans.
Crushing student debt is not just hurting borrowers. There
is mounting evidence that student debt is also holding back our
economy. Historically, young Americans have been a source of
economic activity as they set up their households and start
their own careers. But today many are finding it difficult to
save even for a downpayment on a home. And the high monthly
bills to pay back student loans can disqualify many people from
even getting a mortgage.
When first-time homebuyers are not able to get a mortgage,
it can adversely affect the housing industry as a whole. That
is why groups like the National Association of Realtors and the
Homebuilders Association have expressed concern about the
overbearing financial weight of student loans.
Student debt can stifle entrepreneurship. Young people who
dream of starting up their own businesses are not able to take
the risks and the business loans that are usually needed when
they launch a startup.
Paying off student loans can prevent young people from
saving for retirement or making the kinds of purchases that
help further our economic recovery.
Mr. Chopra, I know these economic consequences are what
you, and others at the Consumer Financial Protection Bureau,
have called the ``domino effect,'' and I am looking forward to
hearing more details in your testimony about those negative
economic impacts.
To address these challenges, as a starting point, we need
to ensure that student loan servicers--those are the companies
who handle billing and track borrowers' payments--are treating
those borrowers fairly and responsibly.
Unfortunately, there have been alarming reports of student
loan servicers mistreating borrowers. Some people have
discovered their student loan servicer has not properly
processed payments. There have also been complaints that
private student lenders have put borrowers into default if a
cosigner dies, despite the borrower being current on their loan
payments.
And I was very troubled to hear recent reports that Sallie
Mae was overcharging military members on their student loans.
Sallie Mae now has agreed to pay nearly $100 million in fines
after charging military members higher interest rates. And I
have asked Secretary Arne Duncan to investigate to make sure
other student loan servicing companies are not doing the same.
But we can do more to help borrowers. The Bank on Student
Emergency Loan Refinancing Act is a bill from Senator Elizabeth
Warren that I have cosponsored, along with several of our
Democratic colleagues. That bill will allow borrowers to
refinance their Federal student debt. The Congressional
Research Service estimates that this bill would let borrowers
save $4,000 on average.
Passing that legislation would put more money in borrowers'
pockets so they can make ends meet, make downpayments homes, or
start new businesses and help grow our economy.
Right now, people can refinance their home loans or their
business loans when interest rates drop. This bill will let
borrowers with Federal student debt do the same. And this
should be a bipartisan issue.
Just last year, for example, Republicans and Democrats came
together to pass the Bipartisan Student Loan Certainty Act.
That bill allowed new borrowers to take advantage of lower
interest rates established by the free market. This refinancing
legislation would use those same free market principles to help
those with existing student loans.
At a time when higher education is more important than ever
to our Nation's long-term competitiveness, a college degree
should not drown borrowers in debt.
Now, and in the future, we need to make sure that people
who choose to further their education and build their skills
are better able to afford college and manage their student
debt. It is an economic imperative.
To strengthen our middle class, to strengthen our
workforce, and to help spark economic growth, Congress needs to
address these challenges.
So I am very delighted to have this hearing today, and
before I turn it over to our panel of witnesses, we would like
to hear from Senator Johnson.
OPENING STATEMENT OF SENATOR JOHNSON
Senator Johnson. Thank you, Madam Chair. I appreciate you
holding this hearing. This is, I think, an extremely important
issue. I think it is a tragedy that we have enticed our
children to incur now about $1.2 trillion in student loan debt
collectively.
I had a finance professor in college who, before he would
ever talk about cost of capital and all the complex issues with
corporate finance, would spend a day just talking about
personal finance. He said, ``The reason they call a debt
instrument a bond is because when you go into debt, you put
yourself into bondage. And you want to really avoid that.'' So
I certainly took that to heart.
I, of course, had the advantage of growing up and going to
college in the 1970s when college was a whole lot cheaper. I
worked full-time, and rather than leaving college with close to
$30,000 in debt, I actually left college with $7,000 in the
bank. So I wish that were more possible.
I would like to start with a chart that I have prepared,
and I have actually been using this in my PowerPoint
presentations as I travel around the State of Wisconsin. Just
laying out some facts and a little food for thought here.
What this chart shows is that in 1963 the total cost of a
4-year undergraduate degree in a public college was about $929
per year. That is room, board, and tuition. Now, by 1988, the
actual cost had risen to $4,678, which was 27 percent higher
than had it just grown at the rate of inflation. But you can
see as of 2012 the cost of college outstripped the rate of
inflation by almost two and a half times. So rather than
costing about $7,000, which is what it would have been if it
just would have grown by the rate of inflation, one year of
college now is about--in 2012, it was $17,474, two and a half
times the rate of inflation.
I guess the question I am asking is, ``Why?'' What is so
different about what colleges and universities spend their
money on that their costs would outstrip the rate of inflation
by 2.5 percent? And, by the way, two of the components, room
and board, you know, food and shelter, in the rest of the
economy--not necessarily on college campuses. In the rest of
the economy, those have actually grown at a lower rate than
inflation because we have become so much more productive in
those sectors of our economy. Obviously ``productivity'' is not
exactly a word we use in education, which is a real shame.
So, again, just kind of asking the question of, you know,
why. All of our good intentions--and let us face it, what we
spent in college, around college in terms of student aid, which
is about $2 trillion since 1963, was all well intentioned, but
it had a very serious negative unintended consequence. In other
words, in trying to make college more accessible, did we
actually make it less accessible because we have made it so
much more unaffordable?
Oh, by the way, just, you know, to add a little more detail
to that chart, of the $2 trillion we have spent over that time
frame, about $200 billion was spent between 1963 and 1988; $1.8
trillion was spent as college costs really skyrocketed and
soared. Again, cause and effect, I will leave that for the
reader to judge. And I think Mr. Vedder is going to talk a
little bit about that as well.
Madam Chair, you were correct. It is a shame that in 2011,
which is the latest figures I have from the College Board,
average student loan debt after 4 years of college is $25,000.
Of those, 57 percent of the students that actually incurred
debt in a private institution it is about $29,900, and 65
percent of private college students incurred debt.
Another interesting statistic is how long it is taking our
students to graduate. About half graduate pretty much in the 4-
year time period. In other words, they graduate within 52
months, about 4.3 years. But the other half raises the average
time to graduate to 6.3 years. Again, just asking the question:
Why is that, particularly when you have so many kids leaving
high school with college credits in the bag? Have we made
college funds available so readily that people can dither in
college? It is just a question I am asking.
Now, I know part of this hearing is to talk about, you
know, other types of pieces of legislation to supposedly solve
the problem. One thing I think is important for us to talk
about, though, is how those proposals might be scored.
Currently the CBO is constrained by having to score the cost of
these college aid programs under the Federal Credit Reform Act,
and under that scoring, for the 10-year period 2015-24, because
it does not account really for varying economic conditions or
loan defaults, it is actually showing that the student loan
program saves the American taxpayer, in other words, reduces
the deficit by $135 billion over 10 years.
But if you use a fair-value basis, if you actually account
for tougher economic times, varying economic times, and
defaults, it would actually cost the Federal Government $88
billion over that 10-year time frame.
So I think it is important, if we are looking at pieces of
legislation, that we actually take a look at the fair-value
cost and the effect it has on the deficit.
And then I think finally the only thing I want to talk
about is another potentially unintended consequence of some of
these programs designed to forgive loans. In 2007, Congress
passed into law the College Cost Reduction and Access Act of
2007. It established a new public service loan forgiveness
program that discharges any remaining debt after 10 years of
full-time employment in the public service. The borrower must
have made 120 payments a part of the direct loan program in
order to obtain this benefit. In other words, they have to keep
their--you know, they cannot be in default over the 10-year
period while they are working for the public sector.
Now, Politico wrote a column on this and said that law
schools looked at the new laws and saw an opportunity. Income-
based monthly statements are lower than standard payments so
the schools could cover graduates' payments entirely for the
first 10 years. The money for law school repayment assistance
programs usually comes out of tuition mostly paid with Federal
student loans. Do you understand what I am saying there? So the
law school is gaming the system. They are saying, ``Oooh, so
all we have to do is we will make the loan payments for our
graduate students for 10 years, and at that point the American
taxpayer will pay for our law degrees?''
At Berkeley, for example, it is part of the fee that all
professional degree students pay. At Georgetown, 350 borrowers
are taking advantage of this program. At Berkeley, there are
263.
By the way, the average student debt of a law graduate of
Georgetown is $150,000. At Berkeley, it is $115,000.
And the Wall Street Journal wrote about this, too. It is
not just Berkeley and Georgetown. Columbia University and
University of Chicago are also doing that. And until recently,
Georgetown had on its law school website basically talking
about how the school's aid combined with the Federal plan
``means public interest borrowers might not pay a single penny
on their loans ever!'' A school spokesman has said the
statement was removed this year.
So, again, I understand that this $3.5 trillion a year
entity called the Federal Government and the student loan
program and all these aid packages are all well-intentioned
programs. But I think we have to honestly take a look at the
reality of the situation and look at the very severe and
serious negative unintended consequences of our good
intentions, part of that being that we have collectively
enticed our children to incur $1.2 trillion in student loan
debt that now we are trying to figure how to solve that problem
that the Government has caused.
Thank you, Madam Chair.
Chairman Murray. Thank you.
We are going to turn to our witnesses. Again, Ms. Jones,
thank you for coming and sharing your personal experiences. We
are going to start with you.
STATEMENT OF BRITTANY JONES, FORMER PRESIDENT, STUDENT VIRGINIA
EDUCATION ASSOCIATION
Ms. Jones. Good morning, Chairwoman Murray, Senator
Johnson, and members of the Committee. My name is Brittany
Jones, and I thank you for inviting me here today.
My story starts as a second grade student at Birdneck
Elementary School, when the decision was made. I, Brittany
Jones, self-proclaimed mathematician and resident drama queen,
declared to the world that I would become a second grade
teacher. With little deviation, I pursued this plan throughout
my studies, then as a teacher intern in Henrico County Public
Schools, followed by receiving my bachelor's degree from
Virginia Commonwealth University in early and elementary
education.
It was during high school when our counselors first began
the conversations about attending college. They talked in
detail about scholarships and grants and financial aid awards.
Naturally, I assumed everyone could attend college. It was not
until I was accepted and learned the amount of financial aid I
would be offered that I feared I could not attend. After
conversations with my financial aid counselor and various chats
with my parents regarding the necessity of a college degree, I
made the decision to enroll with the assistance of student
loans and pursue my dream of becoming a teacher. Unfortunately,
the cost of attendance constantly increased while the grant
funds decreased.
Upon graduation in 2011, the joy of completing the first
portion of my program was overshadowed by the truth that I had
borrowed well over $70,000 in student loans from various
sources--Federal subsidized, unsubsidized, Perkins, and
personal loans. And still, I needed to complete another year of
school, which was required to get my teaching certification. I,
like many of the students I encountered as the Student Virginia
Education Association President, was facing the difficult
decision of whether to continue my education and follow my
dream of being a teacher or seek immediate employment.
I recall one student who, having borrowed the maximum
amount of student loans allowed for one school year, was unable
to fill the gap in his cost of attendance. He later withdrew
from the university and never returned. Another student, who,
ironically, served as our chapter treasurer, also left school
for financial reasons. A full-time student in the master's
program, she also had a job in sales and was offered the
position of store manager. Faced with the decision of incurring
more student loan debt, she decided becoming a teacher was no
longer the career path she would follow. For me personally,
when confronted with the decision to borrow another 20 grand,
$20,000, to complete my program, I decided it was best to
postpone attendance.
Immediately after commencement ceremonies, I drove to an
interview for a preschool teaching job, got it, and began
teaching the following Tuesday. I was excited to have a
position, despite the low wage of $10 an hour, because unlike
many of my colleagues, I was working in my desired field. I was
the lead teacher in my own classroom. I was elated--until the
loan statements started to come.
Because I owed approximately $60,000 in Federal loans at
the time and I was working full-time, I had to start paying
them back. This proved problematic. They figured I would be
able to afford paying $600 a month. I was making $10 an hour
and paying over $900 in rent and insurance and other expenses a
month Fortunately, my parents were able to help with some of
the payments to keep the loan in good standing.
This continued for a few more months until I lost my job.
In 2012, I received notice that I had defaulted on the
remainder of my Federal loans, totaling approximately $58,000.
A nice gentleman from the loan company called and requested the
date by which I could send the $58,000 check or money order.
After a laugh or two, he then said he would be happy to help
set up a payment plan. He put in the calculations and
determined I would be able to pay $653 a month. At this time I
was working as a pre-kindergarten teacher making $13 an hour
and paying $783 in rent, with more payments for utilities and
insurance bills. Again, simple math: the numbers did not add
up. I worked as many as three jobs at once just to make my
monthly payments.
Now, 2 years later, I was finally cleared to apply for
financial aid and return to school to pursue my master's. As
you can imagine, the ordeal I went through with my student
loans made this decision a weary one. So the search for
alternative programs began. I did not want to collect any more
student debt. My goal is to become a classroom teacher, not a
teacher with more loan debt than she makes in a year.
This search led me to find the Denver Teacher Residency
program. Through this program, which I will begin this summer,
I will become a highly qualified educator with a master's
degree. All fees associated with the cost of attendance will be
repaid upon completion of the program, which includes 4 years
teaching in Denver Public Schools.
This program is promising, and it is an exciting time in my
life. Yet almost $50,000 still awaits repayment. Student loan
debt has been the driving force of my decisions for the last 8
years of my life, and according to my current repayment plan,
it is projected to be for the next 25 years of my life, well
into the years for which I should be planning a retirement. It
should not be this way.
Senators, you have the power to make sure that it is not
this way any longer. You can take actions to help make college
more affordable so that students have a fair shot at pursuing
their dreams. Degrees not debt should be our collective goal. I
urge you to help increase student aid, especially for those who
need the most financial help. I urge you to help make student
loans more affordable, including by allowing refinancing of
those loans, as legislation from Senator Warren would do. And I
ask you to look for ways to make careers in public service,
like teaching, more attainable by expanding loan forgiveness
programs.
Thank you, Chairwoman Murray, and the members of this
Committee for the opportunity to share my story today.
[the prepared statement of brittany jones follows:]
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[GRAPHIC] [TIFF OMITTED] T0876.226
Chairman Murray. Thank you very much for coming and sharing
that with us.
Mr. Chopra?
STATEMENT OF ROHIT CHOPRA, ASSISTANT DIRECTOR AND STUDENT LOAN
OMBUDSMAN, CONSUMER FINANCIAL PROTECTION BUREAU
Mr. Chopra. Chairman Murray, Senator Johnson, and members
of the Committee, thank you for the opportunity to testify
today about the potential impacts of student debt.
You know, the financial crisis destroyed trillions in
wealth for families preparing to send a child to college and
contributed to large increases in student debt owed by
Americans who have already graduated.
In addition to considering how to make college affordable
for future students, we cannot ignore the impact of the $1.2
trillion already owed by more than 40 million Americans.
There has been growing consensus that today's $1.2 trillion
can have repercussions that threaten the broader economy. The
Treasury Secretary remarked that student debt is ``hampering
our economy across multiple sectors of society,'' and the
Federal Reserve identified student debt as a risk to aggregate
household spending.
Executives in the banking industry have also cautioned that
the condition of the student loan market ``is now having a
significantly negative impact on students, the economy, and
taxpayers.''
According to a survey by the National Association of
Realtors, 49 percent of Americans cited student loan debt as a
``huge obstacle to homeownership.'' And the National
Association of Home Builders noted that student debt can impair
the ability for graduates to qualify for a mortgage.
Higher debt burdens might not only delay household
formation but also other large purchases. America's largest
auto maker has cited the overhang of student debt as a key
factor explaining the low levels of car purchases by young
people.
Student debt can hamper entrepreneurship. Preliminary
research on student debt and small business formation finds a
negative correlation between changes in student loan debt and
formation of certain small businesses.
It may also have a longer-term effect on future retirement
security. Young workers who save early for retirement can
generate significant retirement assets over the course of their
careers. But student debt may be stopping workers from even
contributing at all.
The same can be said about the impact on labor market
outcomes. The American Medical Association noted that high debt
burdens can impact the career choices of new physicians,
leading some to abandon primary care altogether. Student debt
can impact the availability of other professions critical to
the likelihoods of farmers and ranchers in rural communities.
For example, veterinary students are graduating with debt
averaging over $150,000 per borrower, making it less likely
they can make ends meet in a dairy medicine or livestock
management practice. And the list goes on and on.
There are several areas that warrant attention: servicing,
loan restructuring and refinancing, and data availability.
First, to servicing. As the financial crisis unraveled,
many Americans faced improper foreclosures due to mistakes from
their mortgage servicer. And I am concerned that inadequate
servicing may be contributing to our growing student loan
default problem, now topping 7 million Americans in default on
over $100 billion in balances.
Last month, after referrals from the CFPB, regulators
ordered Sallie Mae to pay nearly $100 million for violating
multiple laws, including illegal treatment of servicemembers
with student loans.
Second, unlike other markets, refinance opportunities for
student loan borrowers are few and far between. When mortgage
borrowers see broader interest rates plummet, their own incomes
rise, and their credit profiles improve, they try to refinance.
Responsible student loan borrowers rarely have these options.
Third is student loan market transparency which we must
address. As Fed Chair Janet Yellen has noted, regulators
``missed some of the important linkages whereby problems in
mortgages would rebound through the financial system.''
Currently, financial regulators and the public lack fundamental
information on student loan origination and performance.
Unsurprisingly, the drivers of prepayment, delinquency, and
default in the student loan market are not well understood, and
we must work to close the transparency gap.
In conclusion, we must ask ourselves: How do we preserve
the drive to succeed for so many who feel that the dream is
just now out of reach? Ignoring the warning signs may prove to
hold back not only the future growth and dynamism of our
economy but also our entrepreneurial spirit. Addressing these
concerns in the near term may pay dividends for many years to
follow.
Thank you again for inviting me to participate today, and I
look forward to your questions.
[The prepared statement of Mr. Chopra follows:]
[GRAPHIC] [TIFF OMITTED]
Chairman Murray. Thank you very much.
Dr. Vedder?
STATEMENT OF RICHARD K. VEDDER, PH.D., DISTINGUISHED PROFESSOR
EMERITUS OF ECONOMICS, AND FACULTY ASSOCIATION, CONTEMPORARY
HISTORY INSTITUTE, OHIO UNIVERSITY, AND DIRECTOR, CENTER FOR
COLLEGE AFFORDABILITY AND PRODUCTIVITY
Mr. Vedder. Thank you, Senator Murray, Senator Johnson, and
other members of the Budget Committee. I wish to make three
points.
First, the current student loan debt crisis would never
have happened had college costs increased at the general rate
of inflation. The primary cause of the student debt problem is
increased university fees. You must deal with the root cause of
this, namely, runaway college cost inflation.
Second, there are many reasons for this university price
inflation, several of which I mention in my written statement.
But one that is relevant here is that rising tuition fees are
partially caused by Federal student financial assistance
programs themselves. The programs themselves are part of the
problem. Any significant successful solution to the problem of
rising college costs will work only if you radically change the
nature and magnitude of Federal finance.
Third, we are at or near a tipping point, where fundamental
change will come to higher education. These changes are
starting to happen. I believe many policy proposals gaining
prominence these days do not fundamentally address the broader
problems and, indeed, would likely worsen rather than improve
the situation.
Now, Table 1 looks at the inflation-adjusted increases in
tuition fees for various years over the last 75 years, along
the lines of Senator Johnson's earlier comments. We see that
for the first half of that period, tuition fees tended to rise
about 1 percent more than the overall inflation rate; but since
1978, inflation-adjusted tuition growth has about tripled to
well over 3 percent a year.
If college tuition inflation since 1978 were what it had
been before that day, say 1 percent a year, tuition levels
today would be almost 60 percent lower than they actually are.
Public 4-year university tuition levels would be in the $3,000
to $5,000 range instead of $7,000 to $12,000. Student loan
volume would be dramatically less.
It is a bigger burden, for example, for a citizen of
Indiana to send their child to Purdue University today than at
the end of the Great Depression. Even room and board charges
far outdistance food and housing inflation rates. Solve the
tuition fee problem, you will dramatically reduce the student
loan debt crisis.
Now, there are many explanations for rising tuition fees,
and three are discussed in my written testimony, but the most
relevant here is the explosive growth in Federal student
financial aid, and this has contributed importantly to rising
tuition fees. There will be no permanent solution to the debt
crisis without reining in Federal programs.
There are many ways to downsize these programs to make them
more progressive, which liberal Democrats should like, but also
smaller and cheaper, which Republicans should like. Existing
programs have failed miserably in providing greater access for
lower-income Americans. The proportion of recent college
graduates coming from the lowest quartile of the income
distribution is smaller than it was in 1970--before Pell grants
or huge student loan programs. Rising income inequality has
been associated with more Federal student financial aid
assistance, and I do not think that is coincidental.
In my written testimony, I show concerns about several
administration initiatives, including the college rating system
and gainful employment regulations. But I want to briefly
comment on the proposal of Senator Warren to lower interest
rates on loans to past borrowers. I think this is a bad idea,
for several reasons, beginning with the fact that it does
utterly nothing to address college tuition inflation.
Conscientious payers of debt obligations end up getting
punished relative to non-payers who get lower interest rates. A
bad message. It will also add tens of billions of dollars to
the deficit and national debt. There are other objections as
well.
We may be, as Senator Johnson hinted, overinvesting in some
ways in higher education. The advantages of getting a degree
are actually starting to decline, not increase, particularly
for young graduates. We need to reduce our aid programs,
probably doing away with tuition tax credits and PLUS loans and
constraining other grants.
There are no painless solutions, but merely doing more of
the same, lower interest rates, more loans, will worsen this
situation and probably enhance, not reduce, income inequality
in America.
Thank you very much.
[The prepared statement of Mr. Vedder follows:]
[GRAPHIC] [TIFF OMITTED]
Chairman Murray. Thank you very much. I really appreciate
all of our witnesses today.
For your information, there is a lot of attendance today,
obviously a discussion that many people are interested in. We
do have a series of four votes beginning in about a half-hour,
so I am going to be very strict with the time clock today and
allowing 5 minutes to each Senator, and we will be calling on
people in order of arrival.
So, with that, Ms. Jones, I wanted to start with you, and
thank you for sharing your story and being here today to
testify. Your story really resonates with me. All of my
brothers and sisters and I went to college on Pell grants and
student loans to finance our education, and I taught young
children early on in my career, which is what got me into
politics. But the financial burden of student loan debt is
considerably more than when I graduated, so I share your
understanding and appreciate your being here.
In your testimony, you said that you paid over $600 a month
to cover your Federal student loans. How much was your monthly
take-home pay at that time?
Ms. Jones. At that time my monthly take-home was roughly
$1,500.
Chairman Murray. Okay. And do you have any money saved?
Ms. Jones. I do not. I have been using my savings to pay
back the loans that I have taken out for my undergraduate
degree.
Chairman Murray. When you ran into difficulty repaying all
of your loans, did your servicer offer any alternative
repayment plan, like the income-based repayment option?
Ms. Jones. They did not. I did not learn of the program
until very recently, and I believe had I been offered that
program, my payments would have been roughly $150 a month as
opposed to the $600 a month I was paying.
Chairman Murray. So if you had been able to take advantage
of the IBR, you would have reduced that payment to $150?
Ms. Jones. Yes.
Chairman Murray. Do you know how much you would save if you
had been allowed to refinance your student loan?
Ms. Jones. Over 10 years, I would have been able to save
more than $4,000.
Chairman Murray. More than $4,000. How would that have
impacted your life?
Ms. Jones. Well, as educators, you know, we always have to
buy materials for the classroom because funding is limited, so
I think having the extra funding available would make life
easier. Definitely I would be able to save for the future, and
I would be able to plan for retirement as opposed to wondering
if it will be possible.
Chairman Murray. So I have to speculate that if you had
known about IBR, you would be in a much better place today. But
nobody told you.
Mr. Chopra, thank you for being here as well. You have
worked directly with a lot of student loan borrowers, and your
reports have talked about some of the macroeconomic
consequences. But let me ask you, have you encountered a lot of
stories like Brittany's?
Mr. Chopra. Yes. One of the top issues that a borrower has
identified is difficulties repaying, restructuring, and rolling
in loan modification programs and staying current to avoid
delinquency and default.
Chairman Murray. So our servicers are not reaching out and
helping young people, or even adults, learn what their options
are today?
Mr. Chopra. Well, we learned a very painful lesson in the
years around the financial crisis and the mortgage servicing
market. There is some fundamental incentive misalignment where
what may be good for the loan owner or the investor and what
may be good for the borrower is not actually the outcome. And
market forces, due to modern structured finance, can often
cause terrible outcomes for everybody.
Chairman Murray. I have heard from a lot of people today
who are paying back loans that they do not know how much they
owe; they are having trouble getting that information; they do
not get yearly statements. Brittany is nodding her head. Is
that something that you hear a lot as well?
Mr. Chopra. Well, I think it is not actually just not
knowing about it. It is also--we hear from many borrowers, and
we see it in the data, that a number of borrowers are reaching
out and are seeking help, but are often told to choose
forbearance. You know, we have continued to hear complaints
from servicemembers and military families that they call about
their Servicemembers Civil Relief Act benefits and are simply
told, ``Well, you know, you just do a military forbearance.''
That option will keep interest accruing. It will make the debt
burden harder. But it is certainly easier for the servicer to
accomplish rather than actually walking them through the steps
to enroll in their legal entitled benefits.
Chairman Murray. So it is hard for them to get good
information personally about what they should be doing. Okay. I
have about 50 seconds left. Tell me, in the last 50 seconds,
some of the larger implications for our economy.
Mr. Chopra. Well, in our discussions with the banking
industry, particularly the housing industry, there is general
concern about increasing debt-to-income ratios. So while the
advantages of going to college, the differential between
college graduates and non-graduates, is growing, most of that
is growing because non-college graduates' wages are slipping.
So if college graduates' wages are still much higher but
generally flat when controlling for inflation, but debt, which
is growing actually even faster than tuition costs, that means
that less ability to create new credit, whether it be for
mortgages or to use those funds for other productive purposes.
Chairman Murray. Okay. Thank you, and my time is out.
Senator Johnson?
Senator Johnson. Ms. Jones, first of all, thanks for coming
to testify, and to all the witnesses. Did any either high
school or college counselor ever go through the calculation of
taking on student loan debt and how you would be able to repay
it based on the type of profession you were looking at?
Ms. Jones. They did not. Actually, when we started the
conversations about college, they simply, you know, let us know
you can apply for millions of dollars in scholarships and
grants; they are available, you just have to apply for them,
and you can talk to your financial aid counselor about the
other options for paying for college.
Senator Johnson. So did you ever talk to a financial aid
counselor that talked about, you know, the ability to repay?
Ms. Jones. Not in the initial stages. They simply were
saying you have this much of a balance, you can pay with it
using this financial aid package of your subsidized or
unsubsidized loans, and you can take them if you want, or you
can borrow from your family.
Senator Johnson. Do you wish you would have had, like I
had, a finance professor kind of talk about--I mean, in other
words, if you could go back in time, would you do the same
thing over again? Would you incur this much debt? Would you try
and figure out maybe a different solution?
Ms. Jones. In my experience and for my profession, a
college degree was absolutely necessary. There was not--the
option to not get a degree was not available. So I would do it
because ultimately my goal is to become a teacher.
Senator Johnson. Have you ever heard of the College of the
Ozarks? They go by the moniker of ``Hard Work U.'' It is
basically a college university set up where all the students
work, and it is really set up so that nobody incurs debt. Does
that sound like kind of a good idea to you? Would you like--
again, to get a college degree, I agree with you, we are all
talking about it is a great investment. But if it is a great
investment, the amount of loans ought to match it so you ought
to be able to handle those when you get all done.
Ms. Jones. It should, and that is why I think being able to
refinance the loans that we have would be a great benefit for
students like me because the loans made it possible. There was
no other funding available to go to school. And, of course, we
have to have our degrees to teach.
Senator Johnson. Right.
Ms. Jones. You do not want an unqualified teacher in the
room, and I do not see myself doing anything else. So whatever
it takes to get to a classroom, that is what I will do. But I
think we need to look at what we can do to make it possible for
everybody to get the degree they want and not the loan debt to
go along with it.
Senator Johnson. First of all, God bless you for being
willing to teach our kids, and, you know, we certainly all wish
you the best of luck.
Mr. Chopra, you said that student debt is hampering our
economy, hampering entrepreneurship, hampering a lot of good
stuff. How would shifting this debt from a select few to all of
our kids and grandkids, how would that help our economy, help
entrepreneurship? Because that is all we would be doing here,
right? Really shifting the debt burden from those that incur
the debt to all of our kids and grandkids, because we are
already in deficit and we cannot afford it and it is just going
to be piling additional debt on our kids and grandkids,
correct?
Ms. Hoover. Well, being able to refinance a loan in other
product markets, such as the mortgage market, when broader
interest rate environments change, it is common not only for
homeowners but also for the corporate sector as well as the
Government to be able to match their debt to something that
potentially reflects better their own broader interest rates,
their credit profile--
Senator Johnson. Let me interrupt. Let me interrupt. Are
you supportive of the--I am trying to think what--that act I
was talking about, the 2007 act that basically forgives student
loan debt after 10 years of working in the public sector? Are
you in favor of that?
Mr. Chopra. We do not know the results of that yet. Nobody
has actually received forgiveness from that program.
Senator Johnson. But, again, forgiveness will come on the
backs of the American taxpayer or additional debt burden on our
kids and grandkids, correct?
Mr. Chopra. Well, that is Congress' decision about how to
allocate--
Senator Johnson. I understand. I am just asking, are you
supportive of that program? And, again, I am going to your
comment. How does that not hamper our economy, not hamper
entrepreneurship, if we shift the debt burden from a select few
to all of our kids and grandkids? I am just trying to point out
what is actually happening here.
Mr. Chopra. Well, the distribution of the debt burden, it
will come in multiple different sectors, but I think the
marginal propensity to consume for young people who are at
prime ages of homeownership, who are at prime ages of purchases
of durable goods, this is something that is of great worry to
the financial sector, to a number of other industries--
Senator Johnson. But our debt burden is not--so there may
be higher propensity to spend in some sectors, but there will
be a lower propensity because of the debt burden.
Let me ask you, are you disturbed about the Politico and
the Wall Street Journal stories I was reading about, how the
law school graduate schools are gaming that program? Does that
concern you? Because it sure concerns me.
Mr. Chopra. As we saw in the run-up to the financial
crisis, the incentive misalignment between those who broker
loans or offer loans and their alignment with investors or
others can lead to very disastrous consequences. I do not know
the specifics of the schools that you mentioned, but aligning
incentives between schools, between financial services
providers, and others is critical to ensure that market
outcomes are efficient.
Senator Johnson. Okay. Thank you.
Thank you, Madam Chair.
Chairman Murray. Thank you.
Senator Whitehouse?
Senator Whitehouse. Thanks very much, Chairman.
One of the noteworthy things about student loans--and they
stand out from virtually all other debt in this respect--is
that somebody wangled a provision into the Bankruptcy Reform
Act years ago, a somebody who has left no fingerprints on the
amendment--I think it was actually snuck in in conference--and
to this day nobody takes credit for it. But it snuck in and
became the law of the land, and it provides that student loan
debt is not dischargeable in bankruptcy. Bankruptcy is provided
for in the Constitution. It is one of the sort of elemental
principles of American entrepreneurship and success, that you
have the ability to fail, to pick yourself up and get back in
there and do it again. And virtually every type of debt is
dischargeable in bankruptcy except student loan debt.
Mr. Chopra, is there an economic justification for
bankruptcy debt being treated differently than any other kind
of debt in that respect? Or was that more in the nature of an
unexpected blessing to the then largely privately held student
loan industry?
Mr. Chopra. Well, pursuant to a report that was required by
Congress for CFPB and the Department of Education to publish,
we analyzed data related to student loan originations,
particularly private student loans, throughout the past 15
years or so. And the 2005 change in the Bankruptcy Code, one
would anticipate that in an ordinary marketplace prices would
come down as Bankruptcy Codes become more strict. But, in fact,
we saw that prices actually went up, and this suggests that
broader capital markets' conditions may be larger contributors
to pricing in some of these markets. And it also suggests that
as a general matter the Bankruptcy Code is operating in a very
different way in the student loan market as it compares to
other consumer financial product markets.
Senator Whitehouse. We have had representatives from the
private student loan industry come in and testify that it would
be wrong to unwind this stealth provision that was snuck in the
dark into this provision because it would upset the settled
expectations of the loan industry, which is--I mean, Congress
is a hall of irony from time to time, but it is particularly
ironic that an industry that snuck this in in the middle of the
night, upsetting every settled expectation of borrowers as to
how their loans would be treated, now try to defend themselves
by the rule of settled expectations. I hope that this is an
issue that we can address, because I do not believe that there
is any rational distinction between student loan debt and other
kinds of debt.
Ms. Jones, thank you for your testimony. You have been a
terrific witness that has brought a real dose of reality to
this hearing. How has your student loan debt affected other
personal decisions in your life, like to own a home, to have a
family? How has that burden of debt changed what you might do
with your life?
Ms. Jones. I have this conversation with my mother a lot,
because she has now asked maybe 15 times why is it that I am
still pursuing the education field. Actually to pay for some of
my college education, she borrowed against her own retirement
so that I could, in fact, become the teacher I want to be. And
the decision to stick with education was driven because of the
desire to want to see the future generations have the same
chances we had.
I will say the decisions to take out more student loans
made going back to school a hard decision to make, as
referenced in my testimony. I could not justify using more of
my mom's retirement even just to pay for the master's.
Senator Whitehouse. And what has it done to your likelihood
of owning a home?
Ms. Jones. Well, considering I do not have any funds right
now for a downpayment, that has been put off for a few years.
But hopefully in the future I can work something out or we can
work something out with the refinance bill so that I can start
saving again.
Senator Whitehouse. Thank you, Ms. Jones.
Thank you, Chairman.
Chairman Murray. Senator Ayotte.
Senator Ayotte. I want to thank the Chair.
I wanted to just ask, Mr. Chopra, do we know--do we have an
estimate by the administration yet as to how many student loan
borrowers would actually take up the potential option to
refinance their pre-July 2013 student loans? And so do we have
a sense of what numbers we are talking about? And, also, do we
have an estimate of what that will cost? I just think it is
important so we understand given the challenges we are facing
as a Nation as we look at this piece of legislation. Do we know
what those numbers are yet?
Mr. Chopra. Senator, the CFPB is actually an independent
agency, not part of the administration, so I do not have that
type of analysis available. What I can say is that we do know
from our experience in various mortgage financing programs that
the economic impact of individual mortgage refinancings,
according to a study by the Department of Housing and Urban
Development, led to approximately $25,000 of economic impact
per homeowner who was able to refinance.
Now, that being said, a mortgage is a much larger loan, but
then, again, a younger person with student debt may have a
higher likelihood to be in prime age for certain purchases.
But, again, I cannot speak to that.
Senator Ayotte. Yes, I mean, what I am just trying to get
at are the basics. How much more are we going to add to the
debt? How much more is this going to cost? I mean, we ask this
important question about every piece of legislation because it
is basic information.
Dr. Vedder, perhaps with your background, let us start with
100 percent of borrowers. And we do not know that 100 percent
of borrowers will adopt this, and certainly there will be some
ratio to that effect. But if 100 percent of borrowers were to
refinance their pre-July 1, 2013, loans, or a large percentage,
what kind of impact--do we have any numbers that we can think
about here?
Mr. Vedder. I have not personally done any estimation of
that. However, you can do--the math suggests the numbers could
be very large. We have, what, 40 million borrowers, not all of
them prior to 2013, but most of them. So you have close to 40
million borrowers borrowing on average $25,000 or $30,000. So
you are talking over $1 trillion.
Just say for the heck of it you lowered interest rates 2
percentage points on $1 trillion, that is $20 billion a year.
That is real money. It is probably less than that.
I have seen one estimate of the deficit effects measured in
the tens of billions of dollars over a long period of time. So
I think it is a consequential amount of money.
Senator Ayotte. I think it is an important piece of
information that I would hope we would have.
Mr. Chopra, I wanted to ask you about this issue that Dr.
Vedder raised because I think it is a very important issue. In
fact, it is an issue that I hear from parents and students. We
are going to get to a point where if the rate of increase of
what it costs to get a college education keeps going up at that
rate, no matter what we invest, the Federal Government, if we
are thinking that we are going to be able to help, you know,
the debt burden of someone like Ms. Jones, then if it is going
up higher than--you know, I do not know. It may not be going up
higher than health care, but, you know, this is a big issue in
terms of how high it is going. How do we get at that issue? And
if we are going to with our investment, how do we get to more
accountability for these institutions to actually have to
really be market-based, think innovatively, and deliver quality
education at a more reasonable price? Because to me this is a
big issue that is going to just hit us all no matter what we do
here.
Mr. Chopra. Senator Ayotte, I completely agree. The rise in
college costs is an American tragedy, and we should do
everything we can to make sure that those people who are going
to college this fall, the class of 2018, the class of 2019,
that they do not incur a lot of debt. But we cannot ignore the
class of 2008 and the class of 2009 who graduated almost by no
fault of their own when they were--started as freshmen in 2004,
they could not probably imagine that they would graduate into a
financial crisis. And that is something that we have to work on
both ends, and it is not just looking at one of those issues
but both.
Senator Ayotte. Well, I appreciate that. But obviously we
are going to look back on all of pre-July 1, 2013, loans as a
large number of people, and it seems to me I would like to take
that--have you answer that question for the record. We are
investing already--regardless of what we do in legislation--a
lot to help students in this country get a good education. And
I would like to know what your thoughts are on how we hold
these institutions more accountable, how we force them to
actually make--
Chairman Murray. Senator Ayotte, we have a lot of Senators
and votes coming, so I will have him answer for the record.
Senator Ayotte. I appreciate that. Thank you.
Chairman Murray. Senator Baldwin.
Senator Baldwin. Thank you, Chair Murray and Senator
Johnson. I appreciate both of you for hosting this hearing on
such a critical issue.
The statistics are staggering nationally with $1.2 trillion
in student debt. I look at the statistics for my home State of
Wisconsin: 70 percent of students in Wisconsin are graduating
with an average today of $28,000 in debt. And these numbers I
think starkly demonstrate that there is a student loan debt
crisis facing our Nation.
Again, in Wisconsin, individuals with a bachelor's degree
report making average monthly payments of about $350; graduate
and professional degrees are making average monthly payments on
their student loans of $448. And that is just an average
figure. Obviously it varies below and above.
The length of student loan debt obligations was nearly 19
years for persons with bachelor's degrees and over 22 years for
persons with professional degrees. And as we have heard through
your testimony and the questions so far, this fact, these
statistics are underscored by millions of personal stories and
anecdotes, and they affect personal decisions, as I have heard
testimony in roundtables that I have held in Wisconsin on this
issue, people literally deciding whether and when to start a
family because of the impact of this debt, the career decisions
that Ms. Jones has talked about. You know, there are a lot of
folks who are getting a higher education because they want to
teach or because they want to do public service or work for a
nonprofit or a community-based service organization. And yet
the level of debt constrains their career decisions and career
choices.
And then financial decisions, we have heard a little bit of
testimony and discussion on that. You know, you get out of
college and start a business or put that off. Do you get out of
college and do you rent? Do you buy? Do you move back home with
your parents? I have heard a lot of people facing those choices
in their late 20s, early 30s. Do you buy a used car? Do you buy
a new car? All of those have rippled effects throughout our
entire economy.
And so I am glad, Ms. Jones, that you have been talking
about it in, you know, your own--sharing your own story, and so
many have stepped forward to do that, because this is a crisis
we need to confront.
I have in my very limited time just sort of two questions I
wanted to pose to Mr. Chopra about a couple of realities in our
current law on student aid. I have heard from a number of
students who have to hold down part-time work, sometimes almost
full-time work, while studying. And they are hit with something
that is known commonly as ``the work penalty'' because their
incomes may exceed the income protection allowance that is part
of the eligibility calculation for Federal financial aid under
the Higher Education Act.
I am working on legislation that deals with this work
penalty, that would raise the income protection allowance, but
I wonder if you can speak to the importance of the availability
of financial aid to working students.
Mr. Chopra. Well, there is no question that an enormous
number of people return to higher education after being
displaced from the labor force in the Great Recession and took
on part-time jobs to support their families, and that is
something we would be happy to discuss with you further.
Senator Baldwin. Okay. Well, I certainly know that that has
been a reality in my home State, and many of the factories that
were closed, you know, there were not a supply of a jobs
without significant retraining. So we have heard a lot about
that.
The other thing I wanted to follow up on is the work you
have done regarding servicers, you know, anything from simply
failing to provide quality customer service to ignoring some of
the legal obligations around notice and payment options and
fees to certain borrowers. I have heard from people in
Wisconsin about the challenges about getting quality
information and the frustrations and the additional costs that
come along with simply trying to pay back what they owe.
A constituent from Marshfield wrote me recently about loans
she took out for her daughter's education and believed that she
had finished paying it off years ago, only to find out of the
blue that there were claims that she still owed money.
I am wondering if you can speak to how stronger
requirements for student loan servicers like the ones--could
give students valuable information?
Mr. Chopra. Well, as I mentioned earlier, we learned a
valuable lesson from the breakdowns in the mortgage servicing
market. But I would also add we have learned as financial
regulators from the past 10 years another very important
lesson. In 2004, the Student Loan Marketing Association was
privatized and operated as a private company for the past 10
years. It has since restructured and is a different entity. But
despite the significant public benefits and subsidies that the
successor corporation received, Sallie Mae was ordered in 2008
to stop breaking multiple laws. They continued to break those
laws--
Chairman Murray. Mr. Chopra, I am going to have to move on.
We have got a lot of Senators who are waiting to ask questions,
and votes are going to be called shortly. So if we could get an
answer in writing on that, I would really appreciate it.
Chairman Murray. I want to thank both Senator Warner and
Senator Kaine for helping us get a witness from Virginia today,
and I know that you both have questions, but we are going to go
to--we still have Senators Merkley, Stabenow, Kaine, Warner,
King, and Wyden, and a vote is going to be called shortly. So
if any members want to go vote and come back, we will keep
going as the votes are called. But we will go to Senator
Merkley now.
Senator Merkley. Thank you very much, Madam Chair.
Mr. Chopra, one of the statistics that I find very
interesting is that, in comparison to Germany, a year of
college in Germany costs 4.3 percent of the country's median
income. Here it is 51 percent of the country's median income.
How does that affect kind of the aspirations of students in
those two nations?
Mr. Chopra. Well, you know, the lack of affordability of
college may not only impact the students themselves, but it
also might impact the broader family balance sheet.
As we saw, the rise in student loan debt was not only
because college was increasing in cost, it was also because
students themselves are bearing a larger share of total college
costs compared to their parents or other sources. That means
that because people had less equity, they had less savings,
they dealt with unemployment themselves, those costs got
shifted to students, so it may actually impact not only the
student but the family's aspirations themselves about how they
will prosper economically over the long term.
Senator Merkley. Does this reflect kind of a philosophical
issue over whether education is a public good that not only
benefits individual children but strengthens society as a
whole?
Mr. Chopra. Well, I am not a philosopher, but I believe--I
get your point there, that the positive externalities of a more
educated population benefits all of us. There is some empirical
literature to suggest that. But at the same time, we need to
make sure that people are completing, people are able to repay
their student debt and their student debt does not displace
other productive spending.
Senator Merkley. Let me put it a different way. If
colleagues of Ms. Jones are looking at the challenge of debt
and are deciding, ``I cannot pursue a path where I have the
possibility of a millstone, a debt equal to a home mortgage, a
millstone of debt around my neck pulling me down because of the
consequences of the struggle that is seen,'' that not only
impacts the individual, but doesn't that impact the future
prosperity of our entire society if folks in our own
generation, in our student generation do not reach the fullness
of their potential and their contribution back to the economy?
Mr. Chopra. Yes, I think behind all the facts and
statistics is a broader question about, you know, the American
tradition of entrepreneurialism and risk taking, and,
unfortunately, too many people feel that they cannot take those
risks; they cannot start that small business out of their
garage; they cannot start a family. And that is something we
should think about.
Senator Merkley. Well, let us think about how this
amplifies, if you will, the inequality of wealth. If our
students are unable to begin purchasing a home early in their
life and, therefore--and homeownership is the major builder of
personal family wealth for working Americans, doesn't that
amplify the inequality of wealth in our society?
Mr. Chopra. Well, as I note in my testimony, there is a
large gap in certain simulations of graduates who do have
student debt and those who do not in terms of what those final
outcomes might be for their retirement balances. So
traditionally younger workers have been able to stash cash away
for a home downpayment or saving for retirement, but if they
are not able to make those early contributions, they lose those
compounding effects. And so student debt, if it is soaks up
some of that ability to invest and save, the long-term
repercussions could be real.
Senator Merkley. May amplify the inequality in wealth.
Thank you. I just wanted to make that point.
The thing that I am most concerned about is the impact on
aspirations. I live in a working-class community. My children
go to the same public high school that I went to. And what I am
hearing is a feeling among high school students that there is
not a path in which they have an opportunity to thrive, that
is, to pursue their potential, which then affects actually
their behavior in high school as to whether or not they are
going to--how hard they are going to work to make that path
possible.
My concern here is that this is the heart of the American
dream, that there is a full opportunity to thrive for every
American, whether they are the child of a mechanic or the child
of a janitor or the child of a CEO. Given this huge hurdle of
college debt, is that really compromising that vision?
Mr. Chopra. I mean, the change in aspirations from the
stories that we are constantly submitting to the public record
illustrate many of the themes you just discussed.
Senator Merkley. Ms. Jones, would you like to comment on
that?
Chairman Murray. And I am going to have to interrupt
because we do have votes occurring right now, and we will let
you answer that for the record. But I appreciate the question.
Chairman Murray. The Senators next to be recognized are in
this order: Stabenow, Kaine, Warner, King, and Wyden will be
returning. I am going to go vote and come back. I would suggest
anybody who is on the end of that list go with me and come
back, and we will continue this through the votes.
Senator Stabenow?
Senator Stabenow. Thank you very much, Madam Chair, for
hosting this critically important hearing.
First, Ms. Jones, thank you for working hard and sticking
in there and doing what is right, what everybody says, to work
hard. And like most people, most of us when I was school, I did
not have the capacity to turn to my parents and say, hey, can I
borrow $20,000 or $30,000 or $5,000, or whatever it was. So
most people are not in a situation where they have a lot of
other options, I assume. And from what you are saying, you
would be in the situation that I was. Fortunately for me, in
the 1970s, we did a whole lot more on scholarships. I would not
have gone to college. I was fortunate to get a bachelor's and
master's, but top of my little 93-person graduating class in
Clare, Michigan, my dad was very sick, we did not have a lot of
money, and I qualified for a tuition-free scholarship for 4
years, and that got me to college. We do not have those
anymore.
When I look at the numbers, you know, unfortunately, the
State of Michigan now is one of the highest in the country at
cutting higher education, over 32 percent of the funding to
universities and community colleges.
Interestingly, the public universities have not increased
tuition by that same 32 percent. Now, they have increased it
about 19 percent, and that is more than we certainly would like
to see. But they are taking significant cuts.
What I find interesting is that the for-profit universities
actually have increased their tuition twice as much as public
universities. Twice as much. And 57 percent of the for-profit
school grads are coming out with $30,000 or more in debt--57
percent rather than 12 percent of public schools.
So there are a lot of things involved in this, all of which
we need to be looking at. But I do not think that we should say
that in the meantime students should not have the same
opportunity that all the rest of us have had when we want to
finance a house, which is to get the lowest interest rates that
are out there today. And I do also want to say before asking
questions that the good news for this refinancing bill, unlike
other things that Congress has done over the years--the bank
bailout, all kinds of other things--you know, this is paid for.
That is the good news on this one. So this is not adding to the
deficit. What we are proposing is actually to ask everybody to
chip in, pay their fair share to grow the economy and create a
fair shot for everybody. So it is fully paid for.
Dr. Vedder, I just have to say--I have to turn to you and
say I am so very surprised at your testimony in terms of saying
that we should reduce the Federal role and that we have too
many graduates in our economy. Wow. I have to tell you, in
Michigan, for Michigan, the Georgetown Center on Education and
the Workforce has said there is going to be--out of the 1.5
million jobs expected to be created in Michigan alone in the
next 6 years, a million of the million and a half will take
education beyond high school.
When I look at the National Association of Manufacturers
who say there are 600,000 jobs available right now that we
cannot match up skills, not all those are 4-year, maybe 2-year,
in terms of community college, but when we look at the need on
STEM, on science and technology and engineering and match, and
where we are going as an economy and so on, I am amazed that
you think that we have too many graduates going into our
economy. And I wonder if you might speak about that.
Mr. Vedder. Certainly. If you look at the Bureau of Labor
Statistics data, of people who are working with college degrees
in the United States today, nearly half of them are in jobs
that the BLS at least has characterized as jobs that do not
require 4-year degrees.
Now, that statistic has to be taken with a little bit of a
grain of salt. I am the first to admit there are judgment calls
of what is and what is not. The unemployment rate among college
graduates 21 to 24, just right out of college, last year was
above the overall U.S. unemployment rate.
Ms. Jones' story, which I think is a compelling story, is a
story of someone who has worked hard and so forth, but she is
making $10 an hour or $13 an hour. And this goes back to
actually Senator Wyden's great bill that wants to bring more
information to the students before they make these wrong
decisions. I think there is a huge information problem here. I
see we are out of time--
Senator Stabenow. Yes.
Mr. Vedder. Although I do not know who is running the
hearing now, so maybe we are not out of time.
Senator Stabenow. I think Senator Wyden is.
[Laughter.]
Senator Stabenow. Let me just say in conclusion that I do
not hear anywhere from any business or anybody that I work with
right now that we need less education for folks. But thank you
again, Ms. Jones, and we are going to do everything we can to
give you a fair shot to lower those costs so you can actually
buy a house.
Senator Wyden. [Presiding.] Senator Kaine.
Senator Kaine. Thank you, Senator Wyden, and thanks to the
Committee members.
Ms. Jones, as a Richmond resident like you, I really
appreciate your testimony, and let me just read for the record
again something you read, but I do not want it to pass
unnoticed: ``Student loan debt has been the driving force of my
decisions for the last 8 years of my life, and according to my
current repayment plan, it is projected to be for the next 25
years of my life well into the years for which I would be
planning for retirement.'' That is a powerful statement. That
is a powerful statement.
I would like to be a student in your class because somebody
who wants to be a teacher as much as you do, somebody who has
been willing to take on your shoulders that much debt and still
fight to achieve your dream of being a teacher, somebody who is
willing to move halfway across the country to get a master's
degree, you are going to be--I know you are and are going to be
one fantastic teacher. So I thank you for your commitment.
I really want to focus on the cost of this equation, as Dr.
Vedder did, bringing down the cost of higher education. I
support so many of the issues on loans, the ability to
refinance a student loan, but I really am focused on these cost
issues. And I think we probably have done a disservice to
students and their families by not laying out in a more clear
fashion as a public policy matter lower-cost ways to get the
kinds of skills or degrees that you need to succeed.
So, for example, one kind of skill you can get is not a
college degree but a license or a professional credential. The
Georgetown Workforce Center says that 27 percent of young
workers with licenses or certificates earn more than those with
bachelor's degrees. It is not that you do not get education
after high school, but sometimes the right education is an
American Welding Society certificate--my dad was a welder--a
Cisco Systems Administrator certificate. I do not think we
coach and counsel our young people that there are ways to get
the credentials to enable you to work that are not the same as
higher education degrees. And most of our financial aid
policies, you know, you cannot use, for example, military
tuition assistance benefits, $4,500 a year to active-duty
military, for college or community college courses, you cannot
use those benefits to pay a $300 certification exam. It is
foolish.
Second, we have dual enrollment possibilities for students,
and more and more States are embracing the notion that students
while they are in high school should be able to get dual
enrollment credits. You cannot use Pell grant credits, you
cannot use the current Pell grant program to pay for college
credits that you can obtain for a really cheap cost in high
school with dual enrollment. That is a cheaper way to get
college credit. I was able to graduate from college in 3 years
because of dual enrollment, and it was enormously helpful to my
family. My family could not afford the colleges I got into when
I first applied, and they had to tell me when everybody else
was celebrating their colleges, ``You are going to have to go
talk your way into someplace late, because everywhere that
accepted you is too expensive for us.''
But dual enrollment is a way to reduce college costs. AP
credits are a way to reduce college costs. Two Plus Two
programs, Ms. Jones, you know, a lot of students now today--
this was not happening so much for me, but a lot of students
now in your shoes are going to J. Sergeant Reynolds for 2 years
and then going to VCU. And when they do that, their total cost
shrinks. But for them to do that, somebody has had to sit down
with them and counsel them about this as a path. You can get a
4-year degree from the same college you did, and it will be 25
or 30 percent cheaper if you start at the local community
college.
What this tells me is--I am concerned about debt, but I am
probably most concerned about this college cost issue. And I do
think there are already a number of pathways for people to get
college degrees or the credentials and certificates that will
enable them to work. But we have an obligation to provide
better information. And we also have an obligation to provide
policies that do not discourage or treat as sort of second-
class education some of the things like the professional
certificates and certifications.
I would like to ask both Mr. Chopra and Dr. Vedder, in
terms of the information provision--I know, Dr. Vedder, you
have some concerns about the grading system, and I do, too,
because I think grades could obscure more than they reveal in
terms of quality. But in terms of providing students and
parents with information earlier in their lives so they can
make decisions, what more can we do at the Federal level using
the leverage of the investment we make?
Mr. Chopra. Well, one of the things that we have noted is
that it is also very difficult to even compute what the cost,
true cost of college is for many families. Not only do tuitions
change from year to year, but also it is a challenge to project
what your monthly payment will be when you take on a certain
amount of debt this year.
So just like we saw in the mortgage market, where interest
rates might reset or conditions change, people really are
rolling the dice. The CFPB has created a number of tools to
assist with this, but, of course, there can be more that should
be done.
Senator Wyden. The time of the gentleman has expired.
Our Chair has come back, and, Angus King, you are up.
Senator King. Thank you, Senator Wyden. Very good
testimony. Thanks to all three of you.
It seems to me that one of the things that we have talked
about--and, Ms. Jones, you touched on this in your answer to
questions from Senator Murray--is that there are programs like
the income-based repayment that apparently have a very low
uptake rate. Isn't one of the things we should do, regardless
of what we do about interest rates or refinancing, to make more
information available to borrowers, both at the beginning and
at the end of their schooling so they know what these options
are? Ms. Jones, that would have helped you dramatically,
apparently.
Ms. Jones. It definitely would have helped in the beginning
to know instead of--well, to know what I was getting into when
I signed my promissory notes. I think at the beginning you are
so--you were told, ``This is what you need to get through
college, and if you use this, then you can deal with it
afterwards. But right now, you will not be incurring interest
on your subsidized loans, take those first. Then you will take
your unsubsidized loans, and we will talk about that more once
you take your exit exam and your exit counseling upon
graduation.'' But what I realize is that in doing--even in not
knowing, we are losing potentially great teachers. They are
walking away from the profession because they cannot afford the
education they need.
Senator King. Right, but there may be options that they
have that they do not even know that they would have that would
help them stay in the profession, which is absolutely what we
want.
Mr. Chopra, what about it? You have worked in this field.
There are something like seven different repayment options. How
about streamlining those, making it more available, making more
information available? Isn't that one thing we ought to do
regardless of what else we do here?
Mr. Chopra. Yes, simplicity of how to repay your loans I
think is a very important goal. I am also struck by--I recently
heard from a former employee, a student loan servicer, and they
had told me that, you know, they are evaluated partially on how
quickly they can get someone off the phone who calls them for
help. So that can lead to very quick interactions or being
transferred, and you might get the short cut answer rather than
the answer that ultimately is better for the owner of the loan,
for the borrower, and maybe even the economy more broadly if it
avoids default. So addressing those incentives is also a major
concern.
Senator King. I think that is something we really need to
look at regardless of what else we do.
Mr. Vedder, I enjoyed your testimony. I will share with you
a story that you can use next time.
Mr. Vedder. Okay.
Senator King. In a former life, I was a talk-show host, and
I interviewed in the late 1970s a financial aid officer at one
of our colleges in Maine. And we talked about college tuition
and how it goes, and he said an interesting thing. He said,
``You know, for the past 40 years, the cost of a good private
college has been about the same as a new Ford.'' In the 1940s,
it was $1,000, and it gradually went up in the 1960s to $3,000.
But something happened, because a new Ford today is about
$20,000, and the cost of a private college education is
approaching $60,000.
I think we need to explore, Madam Chair, why that happened,
have colleges come and tell us why what they sell has increased
two and three times the rate of inflation and what it is they
are buying that costs so much that is causing college costs--
because we are talking about the financing costs, but the real
underlying problem is the cost of the product. And as you
pointed out, if tuition had risen at the rate of inflation
since 1978, we would not be having this hearing.
Mr. Vedder. Exactly.
Senator King. And so we have got to be focusing on that.
But I am concerned, and part of it is accountability. But I
want to be sure when we talk about accountability and holding
schools accountable that we apply standards such as gainful
employment and graduation rates and those things, that we do
not penalize those institutions that are taking higher risks
with lower-income and not-college-experienced students.
Mr. Chopra, would you comment on that?
Mr. Chopra. The CFPB is not--we are not exploring that
specific regulation. That is the Department of Education. What
I can say is, though, aligning the incentives between the
schools, whatever loan programs or financial services
institution, and the students are important. And we want to
examine how we can increase accountability so that outcomes are
improved for everybody, regardless of where they come from.
Senator King. I think we all want to increase
accountability. All I am saying is I think we have to be
careful how we do it, that we do not inadvertently penalize the
very students we want to get into the system by placing
requirements that would be--that would disincentive--that is
not really a word, that would punish schools that are taking
the risks to bring those students--to give those students an
education.
Thank you all very much. Thank you, Madam Chair.
Chairman Murray. [Presiding.] Thank you very much.
Senator Wyden?
Senator Wyden. Thank you, Chair Murray, and thank you for
your years of passion and commitment to this effort. And it is
particularly timely right now. I think we understand that our
students are just getting smothered with these costs and these
bills. They are up to their eyeballs in debt, and this is
having a huge effect on their ability to have the productive
life that they would want, and it takes a toll in a myriad
array of ways.
Recently, I was making a tour of college campuses in Oregon
and talked about a piece of legislation I will describe in a
minute, and a young woman came up to me and said, ``You know, I
owe $50,000, $60,000. What I want to do more than anything else
is I want to have a family, and I am not convinced somebody
will marry me when I am carrying around those kinds of debts.''
And, you know, she teared up, and we talked about various
kinds of options. But I think that is pretty representative of
what is going on out there. This is taking an enormous toll, in
effect putting students and young people in shackles. And it
seems to me there are two kind of pieces to the puzzle. The
first is we have got to help the students who are underwater,
and I appreciated what you and other students have had to say
about that, Ms. Jones, and whether it is refinancing, income-
based repayments, I am open to a variety of different
approaches.
The second is a different kind of issue, and that is,
making sure that not only do we get students in the door, but
they get more value for their education. And Senator Rubio,
Senator Warner, and I have introduced a piece of legislation
called ``The Student Right to Know Before You Go Act.'' So for
the first time it would be possible for students to get this
information in one place and, heaven forbid, when students and
families find out about a school that is doing a good job in
terms of graduation rates, a lack of needed remedial education
which you earn at a school, if a school is doing a good job and
another school is not doing a good job, the other school better
clean up its act or, you know, heaven forbid, market forces
would kick in and that would, in effect, advance the schools
that are doing a good job.
My understanding--and I want to start with you on this, Dr.
Vedder, but I know all three of you have views on this. To get
the kind of data you need to really do this right, it is going
to take a piece of legislation, whether it is the bill that
Senator Warner, Senator Rubio, and I have or something close to
it--and, by the way, other Senators have bills that, you know,
for purposes of Government work it is close enough. And I think
this is what is needed. Are we going to be able to get the data
that we need to really set up this kind of seamless opportunity
for students to get more value for their education along the
lines of what I have kind of capsulized here this morning?
Mr. Vedder. Well, Senator, first of all, let me say I am
very, very pleased that you have introduced this legislation,
and I have written on it publicly on several occasions. It is
ironic that the universities that are in the knowledge business
are sometimes very reticent about providing knowledge about
their own students, what they are learning, what they are
earning after they graduate. Of course, the colleges themselves
do not often have that information.
The IRS could provide enormously useful information on the
earnings of graduates by majors, by institutions, and so forth,
in this modern age without violating privacy or anything. Why
don't we do that? I mean, we collect all this data. The Social
Security Administration has the capacity to provide a lot of
information.
If part of the problem is student financial burden,
shouldn't the students know at least what is the probability
they are going to earn a certain amount of money when they
graduate? And so I think information bills are important. I
think they are low cost. They are consumer friendly. Markets
work better when there is more information around by all
parties, and I think the efforts that you and Senator Rubio and
Senator Warner and others are making is one of the few positive
developments in this area right now.
Senator Wyden. I want to let Senator Murray have a chance
to summarize, because we are going to have a vote in a minute.
I am something of a privacy hawk around here. You can see that
with the NSA and a whole host of other issues. So we have tried
very hard to have significantly stronger privacy protections
than you have today under a variety of these programs. And my
last request, you know, Ms. Jones, I have followed your good
work. We would very much like to work with you and the other
students on this so we really get this right, we lock in the
privacy that your generation deserves, we deal with the
refinancing or repayment or whatever is necessary, and we in
particular get the counsel you students who, as I described it,
are getting smothered and really facing these problems because
there has been so much foot dragging here. And I think now is
really the time. And, Chair Murray, again, for all your
leadership, my thanks, and I look forward to working with you.
Chairman Murray. Well, I want to thank our witnesses for
being here today. I really appreciate your input on this. I
want to thank all of our members. There was a very high
participation rate today I think because this is an issue that
is impacting so many families and communities and future
economic possibilities for our country. It is one we have got
to address. I am looking forward to working with all of you to
do that. So, again, thank you.
Thank you to Senator Johnson for filling in today. I gave
him an A as a former teacher for how he performed today.
[Laughter.]
Chairman Murray. But thank you again to all of our
witnesses, and this is a topic that we will continue to have
much discussion around. Thank you.
[Whereupon, at 11:30 a.m., the Committee was adjourned.]
[GRAPHIC] [TIFF OMITTED]
THE COSTS OF INACTION: THE ECONOMIC AND BUDGETARY CONSEQUENCES OF
CLIMATE CHANGE
---------- -
- -
TUESDAY, JULY 29, 2014
United States Senate,
Committee on the Budget,
Washington, D.C.
The Committee met, pursuant to notice, at 10:03 a.m., in
Room SD-608, Dirksen Senate Office Building, Hon. Patty Murray,
Chairman of the Committee, presiding.
Present: Senators Murray, Stabenow, Whitehouse, Coons,
Kaine, King, Sessions, Crapo, Johnson, and Wicker.
Staff Present: Evan T. Schatz, Majority Staff Director; and
Eric Ueland, Minority Staff Director.
OPENING STATEMENT OF CHAIRMAN MURRAY
Chairman Murray. Good morning. This hearing will come to
order. And I want to thank the Ranking Member, Senator
Sessions, and all of our colleagues who are joining us here
today. And I would especially like thank all of our witnesses
for taking the time to be here as well.
Today we are going to hear from Mindy Lubber, the president
of Ceres, Inc., an organization that works with businesses,
investors, and other groups on issues like climate change.
Alfredo Gomez joins us from the Government Accountability
Office, where he leads the Natural Resources and Environment
Division.
Sherri Goodman is senior vice president and general counsel
at CNA Corporation, and she is also the former Deputy Under
Secretary for Defense for Environmental Security.
We also have Dr. David Montgomery. He is senior vice
president for NERA Economic Consulting.
And Dr. Bjorn Lomborg also joins us, the director of the
Copenhagen Consensus Center.
Again, thank you to all of you for taking the time to do
this today.
It is well established, from the overwhelming majority of
climate scientists, that climate change is for real. And, in
fact, today we are already seeing its negative effects in the
United States.
Warming temperatures are disrupting weather patterns,
causing our sea levels to rise, and creating the conditions for
destructive extreme weather events.
But we are not here today to have a discussion on the
settled science of climate change; rather, today we are going
to be focusing on some of the consequences that have not
received as much attention: the economic and fiscal impacts of
climate change.
This is not just an environmental issue. It poses serious
risks to our economy and the Federal budget. And if we fail to
address these threats, it will weaken economic growth and
increase costs for our Federal Government.
These costs are too important to ignore, and it is time for
the Budget Committee to begin to assess the damage climate
change will have on our budget and our economy.
I know there are skeptics who do not believe the climate is
changing, or believe that addressing this issue will be too
expensive in the short term.
But what we are hearing from a growing chorus of experts,
including the White House Council of Economic Advisers, the
Risky Business Project, former Secretaries of the Treasury, as
well as our witnesses today, is the costs of inaction will be
far greater.
A recent report by the Risky Business Project found that
climate change will have, and I quote, ``specific, measurable
impacts on our Nation's current assets and ongoing economic
activity.''
It will increase risks and add costs for businesses, making
it more difficult for them to succeed, which is something that
Mindy Lubber and her organization have been looking into for
years. And I look forward to hearing more of her testimony
about the risks to businesses and investors.
Budget experts are also starting to see rising costs on our
Federal balance sheet. Take disaster relief, for example.
Climate change is causing more destructive and costly extreme
weather events--such as Hurricanes Sandy and Katrina. Those two
disasters alone cost the Federal Government about $100 billion.
The Government Accountability Office has been investigating
the ways climate change would add costs for the Federal
Government, and I know Mr. Gomez from GAO will discuss those
findings in more detail during his testimony today.
I think every member of this Committee should be worried
about the vulnerability of our Nation's roads and bridges and
waterways due to rising sea levels and changing weather
patterns.
In addition to the vulnerability of our infrastructure,
U.S. military installations and operations are also threatened.
Bases on the coast in my State and across the country face
rising sea levels and will need significant adaptation and
mitigation measures to remain viable bases and meet their
operational needs.
Climate change will also disrupt vulnerable populations'
access to basic resources like food and water. Because of this,
the 2014 Quadrennial Defense Review identified effects of
climate change as ``threat multipliers'' that will aggravate
stressors abroad such as poverty, environmental degradation,
political instability, and social tensions.
Climate change will increase the resources our military
will need to meet these new challenges, maintain its readiness,
and carry out its mission. So, Ms. Goodman, I am looking
forward to hearing more during your testimony about the
findings in your organization's report.
Taken together, the impacts of climate change will have
major implications for our Nation's economy and budget. Across
Federal, State, and local governments, it will further strain
budgets that are already being stretched. And its threat to our
economy and budget will only add to an already challenging
fiscal picture.
While budget projections have improved significantly in the
near and medium term, we still face long-term fiscal
challenges. But the added costs of climate change impacts are
not adequately accounted for in current long-term budget
outlooks. And the longer we wait to address climate change, the
worse its impacts will get.
Failing to act now will only make it more difficult to
solve this problem later and will force us to divert resources
away from other priorities.
So let me be clear on this point. Anyone who, like me,
wants to tackle our long-term fiscal challenges fairly and
responsibly needs also to worry about the impacts of climate
change.
There are those who say tackling climate change will cost
too much. But given what we know about the consequences of a
warming planet, inaction is far more costly.
Curbing emissions to prevent the more severe impacts of
climate change and adapting to the impacts that we cannot avoid
are our lowest-cost options. And if we want to fulfill our
responsibility to leave behind both a strong and stable fiscal
foundation and a safe and healthy environment for our children
and our grandchildren, we need to move forward with those
options now.
So I really want to thank all of our witnesses for coming
today. We look forward to your testimony and appreciate the
time that you are spending with us today.
With that, let me turn to my Ranking Member, Senator
Sessions, for his opening remarks.
OPENING STATEMENT OF SENATOR SESSIONS
Senator Sessions. Thank you, Madam Chairman. This is the
first hearing I am aware of that we have had in the
Budget Committee on global warming. I think it is not a bad
idea. We need to talk about it. We are spending right now
indeed a significant amount of money on this project, and even
more, we are requiring huge expenditures of the private sector.
Why? Because greater costs are ahead if we do not act now, we
are told. We need to spend more money now. That means an impact
on our budget.
So today we will openly, I hope look at some of the costs
and the benefits that would accrue from such a policy. Surely
if one has money, some wealth, that money should be applied for
the maximum benefit for the maximum number of people. We
certainly are not unlimited in the amount of wealth that we
have in our country that we can apply to any problem.
So ``The Costs of Inaction'' is the hearing title. Maybe
the better title should be ``The Costs of Action and
Inaction.'' Inaction costs may be real, but certainly they are
distant and somewhat uncertain. But the costs of action are
certain right now. They are real and immediate.
Government expenditures, economic slowdown, higher prices
all result from many of the proposals that are out there today.
These are indisputable costs right now. The economy is not
healthy. Wages are down; workforce participation is at a rate
as low as the 1970s; and we cannot hammer this economy, in my
opinion, with any unnecessary costs.
So, first, the temperature is not matching the computer
models. It is just not. It has been going on for a good long
time now, maybe 15 years, basically flat. We have had fewer
storms, not more storms. It has been 3,100 days since we have
had a Category 3 hurricane. That goes back to 1900. We are not
having more hurricanes. And, actually, tornadoes are flat or
down also.
So Dr. Lomborg believes that there is some warming
occurring in our country as a result of human activities, but
says let us not panic, let us be careful; let us consider
wisely what we do before we allocate a large part of our wealth
to the problem and how we should handle it. And costs can be
huge. Regulations like a tax impose burdens on the economy.
Economically, there is no difference--there is no difference--
in the Government taxing the American people to replace a coal-
fired plant than the Congress and the Government just telling
the company to spend the money. We act like it does not cost
anything to mandate these changes, and it absolutely does cost
to do this. And we have to consider this.
These costs for businesses and people, they reduce profits,
reduce tax revenues to the Government, and drive up costs for
everybody.
So the point is this: Every global warming action has
costs, often hidden but very real, and we must acknowledge
those costs and decide whether the wealth expended gets the
maximum results considering all the needs of America--and all
the needs of humanity, for that matter. That is why we get paid
the big bucks around here.
So there is some common ground. Let me say this: There are
places we can do. We can reduce CO2 in a way that is rational,
I think. More energy efficiency. We have made some real
progress on that. There is some more progress that can be done.
But it is not as easy. The low-hanging fruit has been taken in
many areas.
We need less and can unite around less harmful pollution--
the particulates, the NOX and SOX.
We need more American energy. I believe all of us can agree
on that.
We need more nuclear power. I think we all can agree on
that. But consistently we keep throwing up blocks, blocking
more nuclear power and driving up costs.
We need more cost-effective alternative sources,
absolutely, but we need to maybe do more research. I think we
can work on that to have better research and understand what we
can impose that makes sense economically. Prove technology
before mandating it.
So it is important, Madam Chairman, to consider our budget,
the cost of aggressive U.S. policy in this area and the
benefits we might reasonably expect and when we might see those
benefits.
Government expenditures, taxes, and regulation all fall
ultimately on the American people, the people of this country.
It is not enough just to say the danger is great; therefore, we
are free to demand the Nation spend whatever is necessary,
whatever the cost, to be a leader in the world on these issues.
So I disagree with that policy. I believe that Dr. Lomborg
and Dr. Montgomery are cooler heads, and we should listen to
some of their practical advice.
The predictions of experts have not been proven true so
far. They are off pretty significantly when it comes to
temperature. The basis for dramatic demands on our budget and
economy have been these computer prognostications that have
been produced by wizards. If they for 15 years have been off,
then it is time for us to be a bit cautious, I suggest. Those
who raise questions, who challenge some of the orthodoxy cannot
be and will not be silenced. This is a free country. We need to
have the best advice we can get from whatever area it comes
from.
So I felt it reasonable to assume that CO2 and other human
activities cause warming. It seems to be. Scientists tell us
so, and I do not see any reason to dispute that fundamentally.
But this Nation and the world have many challenges in working
to make life better in our country and on this planet.
So I propose we work harder to work together to find things
that can improve our planet, improve the quality of our life,
that we can do in a way that is bipartisan and actually get
done.
Thank you, Mr. Chairman.
Chairman Murray. Thank you very much, Senator Sessions.
We will now turn to our witnesses for their comments, and I
just want to remind everybody that we are not here to debate
the science. We are here to talk about the fiscal costs of
climate change. So I appreciate, again, everybody coming to
this hearing.
STATEMENT OF MINDY LUBBER, PRESIDENT, CERES
Ms. Lubber. Thank you. Chairman Murray, Ranking Member
Sessions, and members of the Committee, it is delightful to be
here. I am honored.
My name is Mindy Lubber. For the last 10 years, I have been
running an organization called Ceres that works directly with
110 investors, some of the largest asset owners, public pension
funds, as well as asset managers, and with 70 companies who
understand that climate is a risk, a financial risk, as well as
an opportunity, and are beginning to act on that.
The companies are firms like Nike and Mars and Starbucks,
Owens Corning, Jones Lang LaSalle, eBay, VF Corporation, and
General Mills. It is not just small green companies. And the
investors and the rating agencies who are looking at climate as
a fiduciary and a financial risk with us are some of the
largest investors in the country. This is no longer just an
environmental issue, although that it is.
And the risks are across our economy. For apparel giants
like VF Corp. and Nike, climate change poses risks to cotton
and other commodities that are being affected by reduced water
availability and drought. And for Jones Lang LaSalle and Owens
Corning, climate change poses risks to buildings and their
enormous use of electricity and growing vulnerability to
coastal flooding and insurance costs. And for General Mills and
Starbucks, climate change poses risks to coffee, to corn, and
to other crucial crops that are experiencing more volatile
growing conditions, oftentimes meaning higher food prices,
which I will get to in a moment.
Climate risk is a risk across our economy. The hundreds of
companies and investors we work with believe that it is not a
choice between protecting the climate and protecting the
economy. We cannot build a stable--without a stable climate, we
cannot build an economy that is stable. Surprises, massive
storms, not enough water depletion of natural resources are not
good for business. They are not good for our economy.
We have done extensive research over the years. I am going
to try and zero in on a few areas. One is the public resources
that are being spent due to climate change.
On the public side, we have identified five Government
disaster relief and recovery programs where the costs of
inaction on climate change are pronounced and profound.
First, Federal disaster assistance appropriations. One
conservative estimate puts the average bill that taxpayers can
expect to pay at $20 billion a year. That is funding to help
our communities from storms and hurricanes. And one storm could
push that up to $100 billion. Hurricane Sandy was a $60 billion
price tag.
Secondly, our National Flood Insurance Program, currently
in debt to the U.S. taxpayers for approximately $30 billion.
This vital program collected about $3.6 billion in premiums and
paid out over $7.8 billion in Hurricane Sandy losses and other
losses. We are seeing more storms. There will be more of a pull
on our National Flood Insurance Program.
Or our Federal Crop Insurance Program, vital to our
farmers. From the year 2001 through 2010, we saw a record-
setting $10.8 billion in 2001. And the devastating heat waves
and drought in 2012 shattered even those records when the
program paid out $17.3 billion in crop losses.
And our wildfire protection costs have grown, tripled since
the 1990s.
And our State-run insurance plans. In the insurance sector,
we are seeing private companies pull out of markets that are
most at risk, and State and Federal programs have to step in.
State-run programs, backstopped by State taxpayers, ultimately
have seen loss exposure grow from $54 billion in 1990 to $884
billion in 2011. Insurance companies are seeing the risks.
Where it is too risky, they pull out. When they pull out, the
State governments and Federal Government step in, costing our
taxpayers and costing our consumers. When insurance companies
stay in, the prices rise.
And it is not only through these increases of Federal
programs. We are paying for it at the grocery store. Let us
take this down to our homes. Prolonged droughts in California,
the Great Plains, and the Southwest have diminished the U.S.
cattle herd to its smallest since 1951, causing beef prices to
increase by 10 percent from a year ago.
In decisions which have devastated many Texas communities,
Cargill and other major livestock producers have been forced to
shut down feedlots. As a Cargill spokesman put it, the drought-
depleted beef cattle supply is devastating.
Extreme weather is also contributing to prices for fresh
fruits and eggs, rising by 5 to 6 percent, twice the 2.8
percent of food price rises over the past 20 years. And when
agriculture dies and cattle die, it is not only increased costs
to all of us at our homes, at our grocery stores, at our
restaurants; it is lost jobs, farm workers, truckers, and many
others in those industries.
And that is going to keep growing. Our corn industry, which
is the bedrock of our food supply, needs water and, climate
change is creating more drastic water problems as we see every
day.
As climate change increases the risks of extreme weather
events, our Federal and State disaster relief and insurance
programs will become increasingly unsustainable. By one
estimate, the net present value of the Federal Government's
liability for unfunded disaster assistance over the next 75
years could be greater than the net present value of the
unfunded liability for the Social Security program. We have got
to take this out from the closets and into the public
discussion, as you all are doing, and look at what are the real
costs of action and the real costs of inaction.
And the risks, while very real, are starting to be
addressed. Financial leaders, investors, and businesses
understand these risks. They are starting to act. Sixty percent
of the Fortune 100 companies have goals for renewable energy or
greenhouse gas reductions.
Chairman Murray. Ms. Lubber, if you can wrap up real quick,
we want to make sure everybody has a chance.
Ms. Lubber. Thank you. Companies and investors are acting.
They are making a difference. They are factoring this into
their portfolio assessments, their analysis. The rating
agencies are looking at climate risk because this is real, it
is profound, and it is now. And in each case, from the public
sector to the private sector, the risks are causing greater
economic impacts, and the data shows they are growing every
single year.
Thank you very much.
[The prepared statement of Ms. Lubber follows:]
[GRAPHIC] [TIFF OMITTED]
Chairman Murray. Thank you very much.
Mr. Gomez?
STATEMENT OF ALFREDO GOMEZ, DIRECTOR OF NATURAL RESOURCES AND
ENVIRONMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Gomez. Good morning, Chairman Murray, Ranking Member
Sessions, and members of the Committee. I am pleased to discuss
GAO's work on Federal fiscal exposures posed by climate change
and extreme weather events.
Last year, we added limiting Federal fiscal exposures from
climate change to our list of high-risk issues needing
transformation. According to the latest U.S. National Climate
Assessment, extreme weather has become more frequent, more
intense, including heat, heavy downpours, floods, and droughts.
In addition rising sea levels pose risks to coastal areas.
While scientists cannot link individual events to climate
change, observed changes in recent years have shown that these
events can affect the economy, including governments' budgets,
as it has already been stated.
Implementing resilience measures now creates additional
costs but could also provide benefits later. For context, the
U.S. spends hundreds of billions of dollars on infrastructure
each year, so making good choices now could prevent future
losses.
My testimony today discusses two areas: first, fiscal
exposure to critical infrastructure and public lands; and,
second, the need for improved Federal technical assistance to
all levels of Government.
First, regarding infrastructure and public lands, DOD has
about a half million facilities with replacement value of about
$850 billion. DOD's 2014 Quadrennial Defense Review said that
the impacts of climate change may undermine the capacity of
domestic installations to support training.
In May, we reported on the impact of wildfires and extreme
weather on military readiness and infrastructure. We found that
drought contributed to wildfires in an Alaskan base that
affected readiness because of delays in training. We also
described an extreme rain event at a base in the desert
Southwest where a year's worth of rain fell in 80 minutes,
damaging 160 facilities and causing $64 million in damage.
Hundreds of thousands of other large Federal facilities
face similar vulnerabilities. For example, NASA has 5,000
buildings and other structures valued at $32 billion, and many
are located in vulnerable coastal areas.
Regarding public lands, the Federal Government manages
nearly 30 percent of the Nation's land. These assets are
vulnerable to changes in the climate, including the possibility
of more frequent and severe wildfires.
Our work has found that appropriations for wildland fire
management activities have tripled, averaging approximately $3
billion annually in recent years, up from about $1 billion in
1999.
My second main point focuses on the need for the Federal
Government to improve climate-related technical assistance to
all levels of Government. With respect to the information needs
of Federal agencies, we have found that agencies have started
to assess their vulnerabilities, but they still need assistance
building resilience into their infrastructure and planning
processes.
For example, we reported that DOD personnel conducting
infrastructure planning efforts did not have information
necessary to accounts for the risks of climate change. We
recommended that DOD provide more information to installation
planners, and DOD agreed.
Regarding State and local governments that spend billions
of dollars on infrastructure, our 2013 high-risk designation
described challenges in developing a cohesive Federal approach
to information sharing that can inform all levels of
Government. Providing the best available information to State
and local governments can help them address climate-related
impacts when planning and building infrastructure.
Much of this infrastructure is designed to last long into
the future, but may have to be rebuilt or replaced if planners
do not account for future risks.
We have ongoing work assessing governmentwide options to
meet the climate-related information needs of all levels of
Government. We also have work underway that may identify other
steps the Federal Government could take to limit its fiscal
exposure.
It is worth noting that our work has not involved
forecasting or modeling the specific budgetary impacts of these
events. Instead, we have identified examples of actual and
potential vulnerabilities that we should consider to minimize
any future adverse impacts.
Chairman Murray, Ranking Member Sessions, members of the
Committee, this concludes my statement.
[The prepared statement of Mr. Gomez follows:]
[GRAPHIC] [TIFF OMITTED]
Chairman Murray. Thank you very much.
Ms. Goodman?
STATEMENT OF THE HONORABLE SHERRI W. GOODMAN, EXECUTIVE
DIRECTOR, CNA MILITARY ADVISORY BOARD
Ms. Goodman. Thank you very much, Chairman Murray, Ranking
Member Sessions, and Committee members. It is a privilege to be
with you today.
I am Sherri Goodman with the CNA Corporation, a not- for-
profit, independent--
Chairman Murray. Can you pull your microphone closer?
Ms. Goodman. --research and analysis organization
supporting national security and public sector leaders and
organizations. I am privileged to serve as the founder and
executive director of CNA's Military Advisory Board. In this
capacity, I am here today representing not only my own views
but the collective wisdom of the 16 generals and admirals who
serve on CNA's Military Advisory Board.
The board first convened in 2006 to look at pressing
national security issues, including climate change. Our first
report, published in 2007, identified climate change as a
threat multiplier, especially in fragile regions of the globe.
Since that first report, we have had over 30 generals and
admirals serve on the on the board, collectively with more than
1,000 years of experience in evaluating security threats and
mitigating risks.
Our most recent report, which I submit for the record along
with my written testimony, identifies the accelerating risk of
climate change and observes that in some circumstances climate
change has and will increasingly serve as a catalyst for
conflict.
From a national security framework, the costs of inaction
on climate change can be grouped into three areas:
First, how climate change may cause increased instability
around the world, which will likely lower economic prosperity
and trade opportunities while increasing demand for U.S.
military and diplomatic involvement;
Second, changes we are seeing in the Arctic today as a
special case, an important case;
And, finally, how climate change will impact our military.
My discussion today is informed by the MAB and reflects our
most recent findings, but what follows are my own views and
observations.
In the 7 years that have passed since our initial
assessment, we have witnessed more frequent and intense weather
events, including heat waves, sustained heavy downpours, floods
in some regions, and droughts in other areas. Nine of the ten
costliest storms to hit the United States have occurred in the
past 10 years, including Hurricane Katrina and Superstorm
Sandy. Speaking for the MAB, we assess that the nature and pace
of observed climate changes post severe risks for our national
security.
Having served for 8 years as Deputy Under Secretary of
Defense for Environmental Security, and 8 more years as
executive director of the Military Advisory Board, I have
learned how our senior military leaders approach risk and
uncertainty. To them, managing risk is seldom about dealing
with absolute certainties but, rather, involves careful
analysis of the probability of an event and the consequences,
should the event occur. When it comes to our national security,
even low-probability events with dire consequences must be
considered and addressed.
Today the risks posed by predicted climate change in the
MAB's judgment represent even graver potential than they did 7
years ago and require action today to reduce risk tomorrow.
It is undeniable that the world around us in changing. In
recent years, we have observed changing weather patterns
manifest by prolonged drought in some areas and heavier
precipitation in others. In the last few years, we have seen
unprecedented wildfires threaten homes, habitats, and food
supplies--not only across the United States, but also in
Australia, Europe, Central Russia, and China. Low-lying island
nations are preparing for complete evacuation to escape rising
sea levels. Globally, we have seen recent prolonged drought act
as a factor driving both spikes in food prices and mass
displacement of populations, each contributing to instability
and eventual conflict.
The MAB is concerned about the projected impacts of climate
change over the coming decades on those areas already stressed
by water and food shortage and poor governance. In the medium
term, those areas threatened by rising sea level are most at
risk. There will be only so much we can do to keep the sea out,
and in some areas the sea will not flow over the walls we
build. It will flow under or around and make the land and
aquifers not usable. Low-lying islands in the Pacific and great
deltas, including the Mekong, the Ganges, the Nile, and the
Mississippi are at increasing risk of not being able to support
the populations that live there. Migration will become a larger
form of adaptation.
The Arctic is a case that deserves special attention. Allow
me to tell a short sea story to illustrate.
While serving as Deputy Under Secretary of Defense in the
aftermath of the Cold War, I led the U.S. team that worked with
Russia, Norway, and others to manage waste streams from
decommissioned Russian nuclear submarines, including some that
had been dumped into the Kara Sea, north of the Arctic Circle.
In the course of that work, I became acutely aware of the
unique Arctic environment. Today, with increased shipping and
greater opportunities for extraction of resources in the
Arctic, the risk for a manmade crisis or disaster, such as a
major oil spill, is rising.
A recent report by the National Research Council finds that
a spill the size of Deepwater Horizon would have devastating
effects and last for decades. The world is not yet prepared to
respond to a major accident in the Arctic.
Some great work has been done to plan for increased future
operations in the Arctic. The problem is that the increased
human presence is happening now. Seventy-three ships sailed
through the Northwest Passage in 2013, up from just four in
2007. And preparations for energy exploration are well
underway. My colleagues on the MAB warn that today we do not
have the communications equipment, navigation aids, and
sufficient hardened-hull ships to respond to natural or manmade
disasters in that fragile area or to protect our vital
interests in the region.
Finally, the MAB has found that projected climate changes
will have three major impacts on the military: more demand,
challenges to readiness, and new and harsher operating
environments.
We expect to see an increased demand for forces across the
full spectrum of operations. Domestically, responses to extreme
weather events and wildfires in the U.S. will increase demand
for the National Guard and Reserves. The frequency, severity,
and probability that these events may happen simultaneously
will also likely increase demand for active-duty forces to
provide defense support of civil authorities. This concerns
us--
Chairman Murray. Ms. Goodman, if you can wrap up, we want
to make sure we have time for questions.
Ms. Goodman. Sure. All right. In a leaner military, many of
our capabilities reside in the Guard and Reserve, and if they
are being used domestically, they are less available to respond
to worldwide crises.
In addition to more demand, this will itself stress
readiness. Our bases will be increasingly at risk from the
effects of climate change. Our bases are vulnerable to sea
level rise and extreme weather, including drought and wildfire.
These vulnerabilities were assessed in that recent GAO report.
On the positive side, we have seen increased awareness of
climate risks in communities around the U.S. and constructive
planning underway in various regions--
Chairman Murray. Ms. Goodman, I am going to have to have
you wrap up.
Ms. Goodman. Okay.
Chairman Murray. We have two more witnesses and a lot of
questions.
Ms. Goodman. I will conclude by quoting the foreword to the
CNA MAB report, written by former Secretary of Homeland
Security Mike Chertoff and former Secretary of Defense Leon
Panetta, our most important message for this Committee is that
this is a bipartisan call to action. We make a compelling case
that climate change is no longer a future threat. It is
happening now. Actions to build resilience against the
projected impacts of climate change are required today.
Thank you.
[The prepared statement of Ms. Goodman follows:]
[GRAPHIC] [TIFF OMITTED]
Chairman Murray. And I would remind everyone, all of your
testimony is printed in the record. All the members have had a
chance to see it as well, so, again, thank you.
Dr. Montgomery?
STATEMENT OF W. DAVID MONTGOMERY, PH.D., SENIOR VICE PRESIDENT,
NERA ECONOMIC CONSULTING
Mr. Montgomery. Thank you, and thank you for your
invitation to appear before the Committee today.
I am senior vice president at NERA Economic Consulting. I
have spent most of the past 25 years working on studies of
climate change issues, ever since I was Assistant Director for
Natural Resources and Commerce at CBO and we did a study of the
economic impacts of the carbon tax. And I have continued with
that kind of work since then. I was the principal lead author
of the Second Assessment Report of the IPCC. I and my team have
been part of the Integrated Assessment Modeling Consortium. We
have published a number of studies on climate change issues.
And what I would like to do today, as I tried to do when I
appeared before the Committee for CBO, is to clarify some
policy choices that I think the Budget Committee in particular
faces in dealing with climate change.
I do not think it is helpful to catalog all of the terrible
things that climate change might do. The question for designing
policy is what damages would be avoided by particular policy
choices and at what cost, and that involves looking at real
alternatives, including inaction.
The example that I took in my testimony is something that
is not exactly a fully fleshed out plan, but it is clearly
stated and present. That is the Climate Action Plan announced
by the President. Its goal is to reduce greenhouse gas
emissions from the United States to 17 percent below 2005
levels by 2020.
It and the kind of actions of the past few years by the
administration make it clear that the approach will all be
regulatory. It will be command-and-control regulations from EPA
on the electric power sector, fuel economy standards, renewable
fuel standards on transportation, energy efficiency standards.
I understand that Dr. Lomborg is going to talk about the
potential costs and avoided damage from an ideal global policy.
Well, we have found in our research that this kind of a
regulatory approach would cost four times or more what that
ideal policy would cost. And so the estimates that I have made
for this hearing today are that by 2010 implementing the
Climate Action Plan goals in this way would reduce Federal tax
revenues by about $150 billion. It would cost households about
$1,000 per year in real disposable income. It would probably
involve a 7-percent or more increase in electricity prices. And
I would be happy to supply the Committee with more details of
this analysis.
And that is not even taking into account the revenue
effects of potentially extending tax breaks for renewable
energy, potential impacts of loan guarantees on the budget, all
of which are rationalized as part of climate policy.
Now, what would the effects of this be? I have to say even
the IPCC has concluded that it is not possible in the current
state of the art to do a calculation that goes from changes in
emissions to changes in global damages. It is just beyond the
state of our empirical knowledge and modeling capability.
Nevertheless, I think we can tell the difference between big
numbers and small numbers.
When I calculate the cumulative emission reduction that the
U.S. would achieve through the Climate Action Plan achieving
its goal versus cumulative global emissions over the next 50
years, I see what we would achieve with the Climate Action Plan
is about a 2-percent reduction in global cumulative emissions.
That is assuming, and I think quite realistically, that
China, Russia, and India continue on the course that they are
already committed to for economic growth, in Russia's case
territorial expansion and use of exports of fossil fuels to
fund its adventurism.
Anyway, this 2-percent change in global emissions would at
most, based on the IPCC's own calculations, produce about a
difference of a tenth of a degree in global average
temperatures. It is beyond the capability of any model of
impacts to tell the difference that that would make in the
global impacts.
So based on this, I think it is a very good idea to focus
on adaptation, and the Climate Action Plan does. We do not face
the obstacles that poor countries around the world face to
adaptation, but we do have policies in place that increase our
vulnerability. In particular, flood insurance, crop insurance,
our method of disaster relief all create moral hazards, and
they, I think, make a substantial contribution to what the IPCC
itself recognizes as being the cause of the concern about
weather events that we have been talking about for the last 15
or 20 minutes.
In its Fifth Assessment Report, the IPCC states, ``Economic
losses due to extreme weather events have increased globally,
mostly due to increase in wealth and exposure, with a possible
influence of climate change (low confidence in attribution to
climate change).''
So it is the choices that we have made as private citizens
to put our residences at risk. And if we are going to adapt
effectively in the U.S., I think we need to pay careful
attention to what is the proper role of Government and what is
it that can be done best by the private sector and needs to be
left to the private sector.
I think that we can protect ourselves and our property
quite well if we are not insulated by Government programs from
the consequences of our choices. I live on the Chesapeake Bay,
and I know the risks that I am taking there. And I get very
cheap flood insurance from the Flood Insurance Program that I
should pay a lot more for.
And once this is sorted out, then I think there certainly
are public goods. There is public infrastructure that only the
Government can invest in efficiently. But I would simply here
issue a warning that we are looking at things--we are looking
at public investments in things like roads, public health,
bridges and dams, flood protection, fire protection. All of
these have their own constituencies, agencies that carry them
out, and congressional appropriators who deal with them. And I
would just suggesting it would be a very good role for the
Budget Committee to look critically at these proposals for
increased spending for adaptation to make sure that they are
not just agency creep and really are focused on doing
something.
Thank you, and I will stop.
[The prepared statement of Mr. Montgomery follows:]
[GRAPHIC] [TIFF OMITTED]
Chairman Murray. Thank you very much.
Dr. Lomborg.
STATEMENT OF BJORN LOMBORG, ADJUNCT PROFESSOR AT COPENHAGEN
BUSINESS SCHOOL AND DIRECTOR OF THE COPENHAGEN CONSENSUS CENTER
Mr. Lomborg. Thank you very much, Chairman Murray and
Honorable Members. I was asked and I think we were all asked to
talk about the cost of inaction, and so I have tried to look at
one of the global integrated models that actually tried to
estimate and approximate an answer to your question. So let me
just take you through.
You know, first of all, as you point out, global warming is
manmade; it is a long-term problem. Just to give you a sense of
proportion, this particular model from Yale, the Nordhaus
model, the so-called RICE model that indicates what is the cost
for climate change, also for the U.S., indicates that the total
cost of global warming to the U.S., discounted back until
today, for all the next five centuries, is on the order of 1.2
percent.
Now, again, I think we should be very careful. This is an
order of magnitude. There is no way this is the absolute
correct number, but it is one model, and I actually argue why
this is probably a slightly pessimistic model, so it does give
us an impact.
Also, let us just remember it is not just GDP, but it is
impacts on a lot of other things, as we were told before.
Agriculture, wetlands, storms, even catastrophic climate change
is in included in this.
So it gives us a good sense of what is the damage impact we
are talking about. So I think it is important, perhaps first
marker, to say this is a problem; it is not the end of the
world. So let us try and remain calm, and also I think David
made a good point in saying we need to think not just about,
oh, there are all these terrible things happening, but we need
to talk about what can we do.
So the Committee asked me, What is the cost of inaction?
This is likely the cost of inaction in this century. So over
the next 100 years, this is a percentage cost of GDP for the
U.S. This very clearly shows that by the end of the century,
the cost will be about 1.8 percent of global--sorry, of U.S.
GDP. That is a significant impact. That certainly would make a
lot of say we should do something about it. But, of course, we
need to think about what are the alternatives.
Now, let me show you, because the beauty of these models is
that you can actually try and see what are the ways that we can
make smarter policies. A lot of us would like to believe that
we can cut carbon emissions, and quite cheaply. But I would
like to point out, as the Ranking Member also pointed out,
there is also a cost to action. This is one graph, one data
point, I think it summarizes very clearly that there is a
strong correlation between more CO2 emissions and higher GDP
growth. So we have--and this is in all the economic models. You
can cut your CO2, but it has a cost.
Now, it does not mean you go down to zero growth, but it
means you have a lower growth. And I think this is very well
established in the track record for all nations across time.
So there is a cost. That is the cost the models indicate.
So this was the cost of inaction I just showed you.
If we manage to get the best possible policy for the entire
world, we can get this action cost instead. Notice it is
slightly higher in the first half of the century because we
actually have to take action. But it also rewards us by having
slightly fewer damages in the far future. It will actually
overall be a net benefit.
The problem, of course, is this requires pretty much
everyone in the world to do all the smart things all the way
through with no policy changes that have any negative
externalities. That is probably fairly unrealistic.
Let me show you another--and I describe it more in my
paper--a more realistic option where the U.S., European Union,
Japan, a few other of the rich countries take the lead and also
do so in the way that the European Union--we have good data for
how much that costs in the European Union. This is the cost, I
would surmise, for realistic action.
So my point here is simply to say there is a small space
where you can actually achieve a net benefit if you make
action, but there is a huge space where action can end up
making everyone worse off. And that I think is the real danger
we need to talk about.
If I could just show you this as a summary point, this is
the cost of inaction to climate change. The first bar, you see
the $3.4 trillion it is going to cost. But the cost of action,
as you can see, is both the remaining climate damage and the
climate policy.
If you look at the first one, you can actually achieve to
cut the damage from $3.4 trillion to just $3.2 trillion. that
would be wonderful, but it would require you to get China,
India, Namibia, and every other country in the world to
implement an efficient carbon tax in the next couple of years.
In some ways, good luck with that. I do not think that is going
to happen.
And so we need to look at the fact that if we approach, for
instance, a more realistic action, we could end up spending
$7.6 trillion instead over this century, and that is really--
and let me just skip behind this. That is why I think we need
to have a conversation about how do we fix global warming in
the longer run.
We do need to fix global warming in the longer run. I help
run the Copenhagen Consensus where we bring together more than
100 of the world's top economists, seven Nobel Laureates. We
looked also on climate policy, and basically what we found was
the solution cannot be to try to make fossil fuel so expensive
nobody wants it. It is infeasible. Certainly we have seen that
in the U.S. But it is also very, very hard to do in China and
India and elsewhere. It is also bad economics.
What we need to do is to make green energy so cheap that
everyone will want it, and that happens to be about innovation.
Yes, it is going to take more time. We would all love to get
started today. But I think the real value of this exercise and
looking at the cost and benefits is to recognize that there is
not just costs from inaction, there are also costs from action.
And we need to make sure that we make smart decisions, and that
is, of course, up to you to hopefully make the smart decisions
that will actually make us all better off.
Thank you very much.
[The prepared statement of Mr. Lomborg follows:]
[GRAPHIC] [TIFF OMITTED]
Chairman Murray. Thank you very much to all of our
witnesses today.
We will now start a round of questions, and, Ms. Lubber, I
wanted to start with you. You talked in your testimony about
some of the issues that businesses and investors will face as a
result of climate change. What reasons do companies that you
work with cite when they decide to address climate change?
Ms. Lubber. Companies and investors are averse to risk. I
mean, risk, as we all know, is an intimidating factor for
companies and for the investors who invest in them, when they
look at the depletion of natural resources. Can you run a
manufacturing facility if there is not enough water? From the
west coast and certainly California, where this is not about
models, it is not about the future, it is about today,
companies, ranches, agricultural farms do not have enough
water. They are seeing catastrophic risks, financial risks
today to companies, to consumers, to shareholders, and to
investors. So certainly physical risks is a big issue.
For large landowners, for people who are worried about the
impacts, whether you are Jones Lang LaSalle or any other large
company, the fact of the matter is the impact on real estate
matters, depending on where the real estate it.
So it varies sector by sector, but some of the largest
issues are physical risks, certainly some reputational risks,
litigation risks.
Chairman Murray. So they are looking at their bottom lines.
Ms. Lubber. It is all about the bottom line. The investor
network that we run is 105 investors, $13 trillion in assets
under management, who say climate risk is an issue they need to
address, they need to analyze, and they need to begin to invest
taking advantage of. None of them are environmental. They may
be environmentalists, but they have got shareholders, they go
to work having to make money and beat the guy down the block,
and they are focusing in a way different than we have ever seen
before on climate risk as a financial risk.
Chairman Murray. Thank you.
Ms. Goodman, my home State of Washington is home to a lot
of military installations that, as you know, are vital for our
military operations, both in the Pacific and the Arctic
regions. We have Naval Base Kitsap, which is the Nation's third
largest naval base, by the way, and it is an essential element
of the Nation's Strategic Defense Command and will need to
address threats that are now posed by rising sea levels. And as
you discussed, the Coast Guard's entire ice-breaking fleet and
other key assets for operations are in the Polar region. Those
are based in my State as well.
Based on what you have seen at other facilities, what kind
of resources will be needed to ensure these facilities and
others across the Nation are protected from the increasing
threat of climate change and are able to continue to support
the men and women in uniform?
Ms. Goodman. Thank you very much, Senator. The types of
resources that will be needed across our military and our force
structure will be, first and foremost, to maintain the vital
and critical infrastructure such as those in Washington State,
in Alabama, in Virginia, throughout all of our States, where we
have critical military installations that are at risk from
rising sea levels and extreme weather events. So we need to
build in now those metrics that will allow us to sustain that
military infrastructure, and that work is beginning to be
underway. I have seen it begin to happen in the Pacific
Northwest, in Virginia where there are efforts underway to
develop the new standards that will support that
infrastructure, and then new types of training as well to
ensure that our men and women have the types of training they
need, they can train under various and different conditions.
There is a very rigorous adaptation effort underway in the
Department of Defense today to identify those vulnerabilities.
The GAO report cited some additional methods. The challenge is
going to be ensuring in a very tight budget time that there are
the resources needed to support that.
Chairman Murray. Well, with the increased traffic and
competition in the Arctic and with the variety of worsening
threats actually in the Asia Pacific region, how critical, in
your opinion, is it to maintain a strong presence at facilities
like Naval Base Kitsap and Fairchild Air Force Base and Joint
Base Lewis-McChord if the U.S. is going to be able to respond
effectively to those challenges?
Ms. Goodman. Well, it is vitally important that we maintain
and augment our ability to respond to the changes of the Arctic
region, first and foremost, by addressing navigation and
communication needs; secondly, by looking at the types of
infrastructure we will need there; and then, thirdly, by
looking at the types of capability in terms of ice-hardened
vessels and related capability that we will need in the future.
Chairman Murray. So we need to maintain our presence there,
and in order to do that, we need to deal with the effects of
climate change soon.
Ms. Goodman. Yes. Yes, Senator.
Chairman Murray. Thank you.
Senator Sessions?
Senator Sessions. Thank you.
Colleagues, I really think we are going to have to do a
better job of dealing with science, and the three Democratic
witnesses here continue to say things like ``Superstorm
Sandy.'' Well, Sandy was not even a hurricane when it hit
shore. It was a tropical storm. We have not had an increase in
hurricanes. And I am going to ask some questions about it. I
want to see the data that shows we have had an increase in
hurricanes. We have had a decrease in Hurricane Sandy. While
temperature projections were going up, they have not gone up.
Tornadoes are not up. The IPCC says that droughts are not up
worldwide and that the soil moisture content under the Palmer
Index is better than it was previously.
So I do not--what is that? Do you speak to speak?
Senator Whitehouse. I was talking to Senator Stabenow, but
I am happy to say what I said--
Senator Sessions. All right. No, that is okay.
Senator Whitehouse. --if you want me to say it to the
group.
Senator Sessions. So those are things I have not heard
disputed, and so maybe Senator Whitehouse has data that would
dispute those facts. So now we have to decide what our policy
is going to be. We can ask a lot of serious questions about it,
what we should do, what we can do, what will work, and what is
cost-effective.
Dr. Montgomery, I understood you to say that the model of
action to deal with the threat of global warming is inefficient
and could cost four times as much as it ought to cost. Is that
what you indicated?
Mr. Montgomery. Yes, it is, and that I think is something
that we have found consistently in doing research on climate
policy for many, many years, that as Dr. Lomborg said, the
consensus among economists is that in order to achieve
reductions, substantial reductions in greenhouse gas emissions,
it takes a price on carbon that applies to every way that
carbon dioxide is generated, and that means basically a tax on
fossil fuels; that moving from such a politically infeasible
approach to a regulatory program will increase the cost by
ranging from, you know, several times to orders of magnitude,
depending on how well the program is developed. We see this in
California, where studies have shown that California's reliance
on ``complementary measures,'' as they call them, to achieve 90
percent of the reductions in their Climate Action Plan have
substantially increased the cost over what it would have been
if they had gone with a cap-and-trade program. And that is just
talking about implementing in the United States. If we talk
about doing something worldwide, once again, it is--you know,
we have always used the phrase, ``where flexibility.'' Unless
everyone is involved, every source of emissions, trying to
cut--do something about climate change with either narrowly
focused regulations or by focusing just on a couple of
countries multiplies the cost by four times or more.
Senator Sessions. Dr. Lomborg, you produced a chart that
shows the action that we take would have a minimal impact. And
using models that are pessimistic, which by that I think you
mean that more severe projections in the future than many think
are likely to occur, that is pretty interesting to me. I would
ask you to comment a little bit more about that, and also as to
whether or not you think the United States is more or less
vulnerable than other places in the world if climate change
continues as projected.
Mr. Lomborg. Well, to answer your last question first,
there is no doubt that rich countries are less vulnerable, and
the U.S. is probably also less vulnerable. For instance, much
of Southern Europe is more vulnerable; Australia is more
vulnerable; and very clearly, most poor nations are much, much
more vulnerable to climate change. So you actually have, as I
also indicated, the global cost of global warming is probably
on the order of 1.4 percent of GDP; whereas, the cost for the
U.S. is 1.2. So you are less vulnerable.
If we look at the costs of action and inaction, it really
is a question--as David also pointed out, it is a question of
realizing we need to get very careful legislation. And in some
ways, we can use the European Union as a good example of how
not to do this.
The European Union obviously has large amounts of leg-- I
cannot say that word, sorry. Leg--sorry about that. Yeah, that
approach. But they have--but, clearly, they are not as
integrated as the U.S., and yet they have managed to make an
incredibly inefficient climate program. Fundamentally, instead
of having one carbon tax across all areas, they have at least
29 different carbon taxes, and that still only covers quite a
few of the sectors. So you have a number of other ways that you
have, so you probably have hundreds, maybe thousands of
different carbon taxes. That leads to huge inefficiencies
because obviously where you have high carbon taxes, you cut
more, and where you have low carbon taxes or negative carbon
taxes, you cut a lot less, or you even start to emit more.
So the reality here is the costs are needlessly expensive.
We have good estimates that indicate the European Union's costs
are at least twice what they need to be. And that goes back to
the point of realizing between action and inaction there is a
very small gap where you can actually make good policy and
achieve a lower outcome where you can reduce climate impact so
much more that the increased costs of the policy will not
outweigh that entirely. But that requires all of you to be
really, really good. And I would urge you, if you want to take
a look, the OECD has done a study for all of their member
countries looking at all of the energy policies in all of these
areas and looking at what is the implicit carbon tax on all of
these areas, and basically all countries, including the U.S.,
have incredibly varying carbon taxes across all these different
areas.
So we are fundamentally very, very inefficient, and it is
very hard to get it right.
Senator Sessions. Madam Chairman, thank you for the
hearing. Colleagues, I think Dr. Lomborg's paper and that of
Dr. Montgomery would be valuable to us to study. If we are
going to enter this field, we have got to know what it is going
to cost and how best to achieve the goals. Dr. Montgomery noted
his background. Mr. Lomborg is cited as Time Magazine's one of
the 100 Most Influential People in the World. So we are glad
that you are here. Esquire Magazine has you as one of the 75
Most Influential People and 50 People Most Likely to Save the
Planet by the U.K. Guardian. And so you, Dr. Lomborg, have been
an international voice of, I think, common sense and wisdom on
these issues, and thank you for coming to the United States
today to participate at this hearing.
Chairman Murray. Thank you.
Senator Stabenow?
Senator Stabenow. Thank you, Madam Chair, and thank you to
all the witnesses. This is an incredibly important topic to all
of us, obviously in the short run and in the long run.
Let me just start by--I do not know where to start,
actually, Madam Chair. There are so many things here.
Let me just start by saying that if 97 percent of the
climate scientists surveyed in the proceedings of the National
Academy of Sciences agreed that climate change is real,
probably real. If 97 percent of the doctors said I was sick, I
would probably pay attention to that. So I think that we need
to start from that knowing there may be some variations on how
we got here.
As Chair of the Agriculture, Nutrition, and Forestry
Committee, I also want to start by just saying that, Ms.
Lubber, you are talking my song here about what is happening in
agriculture. We just wrote a 5-year farm bill, and the very
first thing we had to do was use the permanent Livestock
Disaster Assistance Program because of the droughts all over
the country. And we have forestry provisions to look long term
at preventing forest fires and dealing with disease. We are
stealing all the money from those preventative efforts to fund
fires. And so there is a huge cost.
I do have to say, Dr. Montgomery, I was very surprised to
hear you say that things like crop insurance have caused the
problem. You could also say farming has caused the problem. If
we did not eat, did not farm, we would not need to worry about
these things. But crop insurance is there to make sure we
actually have the safest, most affordable, most reliable food
supply in the world, which we do, and the costs, yes, are going
up. But they are going up because-- not that we have never had
storms, but as we heard testimony in the Agriculture Committee,
and we now have a USDA Climate Office we never used to have
before because of impact on agriculture and forestry, but what
we heard is it is more intense, it is more volatile, it is
longer term. It is not that we have never had storms, but the
storms are different now and more intense and causing more
damage.
But I want to take my time to ask a question regarding how
we deal with this. I mean, we are dealing in the Agriculture
Committee with paying for crises, which we are doing every day
now, and we better all care about that if we are care about
food for our families and the food industry, which is a huge
job creator. Sixteen million people work because of
agriculture.
But let us say that we just put aside the debate on climate
change and just talk about how to create jobs, how to move
forward, clean energy because it would create jobs. And I guess
I would ask Ms. Lubber about that, and first say this: We have
had in place since at least 1916 permanent incentives for the
oil industry, oil and gas industry, embedded in the Tax Code.
It worked well. Folks say do not pick winners and losers. We
picked a winner, and they won, and so for 100 years we have
given tax incentives at, for 30 years now, for the last 30
years, about $166 billion after adjusted for inflation that we
have invested in the fossil fuel industry. And then we now go
to the fact that DBL Investors Report says that Federal
spending on oil in the first 15 years of deployment was five
times greater than what we are spending on renewables, and
certainly renewables are stop-start, stop-start.
So could you give us more detail about the investments you
see businesses making in new energy technologies, energy
efficiency, why on its own--I should say, by the way, I say so
many times there are 8,000 parts in a big wind turbine.
Somebody has got to make every single one of those. That is
manufacturing jobs. We, by the way, can do that in Michigan.
But why is it from an economic standpoint important that we get
these tax incentives right, with or without talking about
climate change?
Ms. Lubber. Right. Well, I do think markets and the economy
respond to honest pricing signals, so starting with the pricing
signals and then getting to the fossil fuels versus renewables.
The pricing signals right now are distorted. Fossil fuels
have had huge subsidies for decades and decades, and every time
we want to consider the wind energy tax credit or the
production tax credit, we renew it every year--some years we
do, some years we do not. Every person in that industry says
the stop and the start, the not knowing is there going to be a
tax credit or not, has hurt them. Now, despite that we are
seeing progress. But without question, we need to either cut
back fossil fuel subsidies or certainly equalize them with
renewable energy.
The second pricing signal--and I am not here today to talk
about a price on carbon, but the reality is when you price
something appropriately, capital markets work beautifully. And
if things are priced inappropriately, they do not. We know that
carbon pollution, regardless of whether we think it is 99
percent or 97 percent likely, carbon pollution has a price, an
enormous price to society. We have talked about that today. But
we do not put a price on carbon pollution. When something is
free--carbon pollution is--you get more of it. So we are seeing
carbon emissions in different parts of the world go up. So I do
think we have got to get those pricing signals and fossil fuels
right.
When we look at now, right now, $860 billion is going into
looking for new fossil fuels, fossil fuels that we may never be
able to burn. There may be stranded costs because we are going
to stay at a 2-degree world, we already have more fossil fuels
mined than we will ever be able to burn. But we are about to
invest $860 billion a year into more fossil fuels, much of
which will become stranded if we do not stop and think.
So what we are seeing, though, which is the good news side
of it, the International Energy Association says we need $1
trillion in investments in renewables by the year 2030. That
means a half a trillion by 2020. Right now we are at a quarter
of a trillion dollars of investments in renewable energy, and
that is growing. Solar energy is now cost competitive, price
competitive. It is growing enormously all around the country.
Wind energy is growing. And let us look at who is producing it.
It is Siemens, it is General Electric. These are not anymore
only the small, little shops in somebody's garage.
And whether it is a small solar company, though, or a
large, the installations are local. They are in our country.
They are jobs that are here on the ground. They are not jobs in
other parts of the world, and they are productive.
I sit on an advisory board to Jeff Immelt, to GE. The
largest producing revenue stream at GE is Ecomagination, their
line of products that are about renewable energy or about
greener technology.
So there is growth. We need to see more of it. We will see
more of it if we adjust the subsidies and we get the market
signals correct. If we continue to say carbon pollution is free
or price it as if it is free, free things, we get lots more of
it. We need to get less of it.
Chairman Murray. Thank you.
Senator Whitehouse?
Senator Whitehouse. Thank you, Chairman.
Mr. Lomborg--first, one question. It appears to me that
everybody on this panel agrees that climate change is real, it
is really happening, and it relates to carbon emissions. Is
that true across the board of all five of you? Yes? Okay. Very
good. That is a start. That is a start.
Mr. Lomborg, let me ask you to look at Figure 1 in your
testimony, which is a graph that shows, even using your
numbers, that by 2070, the cost of global warming turns
negative, and my question to you is: On that graph, once you
get past 2070, there is a very apparent trajectory of that line
downward, and then the graph ends at 2100. What is your
expectation for the continued trajectory of that graph further?
Mr. Lomborg. It will definitely go down and further down.
We do not--
Senator Whitehouse. At a similar rate, do you think,
roughly? Do you have any reason to think it will vary from that
angle of descent?
Mr. Lomborg. Well, it depends a lot on the projections of
what are we going to do in the 22nd and 23rd century, which is
probably very, very hard to make any, you know, reasonable
estimates on. But that is obviously why I say we do need to fix
global warming. The question is not whether we should do it.
The question is whether we should do it now or whether we
should do it with better technology.
Senator Whitehouse. And, of course, what you are
representing there is a net harm.
Mr. Lomborg. Yes, there is the net harm--
Senator Whitehouse. So a farmer in Siberia will do better
as things get warmer up there. Africa, Asia, places like that,
will suffer a great deal. Correct?
Mr. Lomborg. Yes.
Senator Whitehouse. Turning to your Figure 4, there is a
lower line, a curve that you describe as the cost of
unavoidable global warming. I assume that is the cost we have
already baked in by not having taken action already. Is that
correct?
Mr. Lomborg. Yes.
Senator Whitehouse. And then you have a higher cost, which
is the cost of unmitigated global warming, if we do nothing.
And at 2100 those two graphs end. It is denominated in
percentage of GDP. Could you give me a U.S. dollar equivalent
value for the gap between the bottom line and the top line at
2100?
Mr. Lomborg. I am trying to think. It is like 1.6, 1.8
percent, and the U.S. GDP is about $100 trillion. So it is a
little less than $2 trillion.
Senator Whitehouse. A little under $2 trillion, all right.
And then similarly, in Figure 6, there is a cost- benefit curve
on the difference between an optimal climate policy cost and
benefit, and by 2100 would that be the same number if you were
to translate the gap between your cost line and your benefit
line into a U.S. dollar equivalent--
Mr. Lomborg. No, not at all, because that is one of the
points, that--
Senator Whitehouse. So what would that number be?
Mr. Lomborg. It would be about--and, again, I am just
making this on the fly, but about $400 billion.
Senator Whitehouse. $400 billion.
Mr. Lomborg. Because most of the damage will still be
there.
Senator Whitehouse. And we are not exactly certain how this
unprecedented change to our atmosphere and oceans is going to
work out entirely, are we?
Mr. Lomborg. You are asking me whether these numbers are
absolutely true? No, of course they are not. It is a model.
Senator Whitehouse. In some of the hypotheticals as
scientists look forward, there is a credible view that in the
out-years there are really actually potentially catastrophic
effects, are there not?
Mr. Lomborg. Well, there is a lot of conversation on the
catastrophic impact, and this has actually been incorporated in
an economic perspective into this model.
Senator Whitehouse. That is my question, because when you
incorporate a catastrophe for humanity in out-years, do you
discount that?
Mr. Lomborg. You both discount it and you also look at what
is the probability. And can I just--
Senator Whitehouse. No, stop, because you have gotten me
right to the point that I want to get to, which is the question
that I have. An American family living in this country in 2114,
let us say, 100 years from now, if they are experiencing the
effects of climate change and if it is a harsh effect, will
they be experiencing a discounted effect or they will be
experiencing the full-on effect that we will have caused them?
Mr. Lomborg. They will be experiencing full-on effect, but,
of course, they will also be experiencing the benefits of all
the technology and all of the leftovers that we have left them
with, the technology that will make them--you know, we will
have--
Senator Whitehouse. Do you agree--
Mr. Lomborg. --$100 trillion--
Senator Whitehouse. Do you agree that there is at least a
moral choice being made when we discount harm to future--there
is something selfish about discounting that because we are not
going to be around for it. It is going to be other people
suffering--
Mr. Lomborg. Oh, we do that all the time. I believe the
U.S. has a very, very high debt, which, of course, is a very
explicit way of saying we do not care all that much about the
people who are going to be paying that debt later on.
Senator Whitehouse. It is a little bit different when you
are dealing with a financial characteristic that you can invest
against versus a change in the very operation of the planet's
oceans and atmosphere, no?
Mr. Lomborg. Unless we are talking about something that
basically eradicates humanity, I would say, you know, we have
looked and we have good models, for instance, on what is the
impact, for instance, of a 5-meter sea level rise. If I could
just give you another example--
Senator Whitehouse. My time has expired, so I will have to
let the other Senators take on the rest of the time. Thank you.
Mr. Lomborg. Madam Chairman, can I just make a very short--
Chairman Murray. If you can do it very short, because we
have a number of Senators who are waiting.
Mr. Lomborg. Professor Nordhaus has actually looked at a
similar issue where we know that there is a chance that
asteroids are going to hit us, and we know what is the cost of
ensuring that we can find another 9 percent of those asteroids.
We have not paid that price. So we have a very clear example.
We pay for finding 90 percent, but we do not want to pay for
finding 99 percent. That is an indication of how much we care
about the planet.
Senator Whitehouse. Not only an international celebrity,
but an expert on asteroids. I am impressed.
Chairman Murray. Senator Johnson.
Senator Johnson. Thank you, Madam Chair.
I am certainly somebody on this Committee that has tried to
look out 30 years in terms of our own debt and deficit, and
with a fair amount of humility, realizing even 30 years is
pretty hard to predict. And I also come from the State of
Wisconsin, though, and when we are looking at literally 100
years out and beyond in terms of what is going to be the mean
temperature, you know, what is climate going to look like, I
think it is just kind of hard to predict, and I am not buying
into the consensus myself.
What I would like to do is I would like to just take a look
at what we know what has happened in the past. And we did get
this slide up here for me. I appreciate that, the Budget staff.
This is a chart, a graph showing temperature differences from
the Vostok ice core data description, conducted in 1999, which
shows over the last 422,000 year-- and that is what we are
talking about here, geologic time. I am not a scientist. I am
not quite sure how they do this. They have got their methods. I
believe this has been pretty well verified that this is about
as good as we can do, trying to determine this. But whether you
buy the complete accuracy, it shows one, two, three, four--and
we are in the fifth cycle of mean temperature change, somewhere
in excess of 15 degrees over the last 422,000 years.
I mentioned I am from Wisconsin. Twenty-three thousand
years ago, Wisconsin was covered by a glacier, kind of
estimates somewhere in the 5,000 to 6,000 feet thick--23,000
years ago.
Now, something caused that glacier to recede. I know there
were men back then. I do not think there were enough men
building campfires to create fossil fuel CO2 emissions to cause
it. Something else caused that. I think this is just common
sense.
Now, if you take a look at this chart, we are up on an
upswing over this 422,000-year period. I guess I am just
asking, anybody else ask themselves this question: What caused
this? I know there are a number of theories. I know everybody
kind of raised their hand and said, oh, this is for sure
manmade. Again, I will not doubt that--I will not deny that man
has an effect on our environment. But what caused this?
And with these types of long-term climate change trends--I
get accused of being a climate change denier. I am no denier. I
fully acknowledge we have had climate change over geologic
time. Other things are at play here.
So I will just kind of go down the line. What is your
response to this type of chart, these types of long-term facts?
Not trying to project out 100 years but really taking a look at
the last 422,000 years, we have seen some pretty dramatic
changes in climate. Let us start at the very end there.
Ms. Lubber. Sure, thank you. And I am on my way to
Wisconsin following this testimony to the SC Johnson Wingspread
Conference Center, so I will be in your State.
As I said at the beginning, I am a lawyer; I am not a
scientist. I am cognizant of the 99 percent of the scientists
who say that climate change is now, it is manmade, it is
happening, and we are seeing increased changes in our
climatic--
Senator Johnson. Okay. Is there anybody here with a little
bit more of a scientific background, or is it all pretty much--
sir?
Mr. Montgomery. I am not a scientist, but I have been
participating in work--
Senator Johnson. Turn your microphone on.
Mr. Montgomery. I have been participating in the work of
the integrated assessment modeling community and talking to
effects researchers and the MIT climate scientists for a long
time. I think what I would say is, yes, there is general
agreement among climate scientists that anthropogenic emissions
affect greenhouse gas concentrations in the atmosphere and that
affects temperature.
I think there is a lot less agreement about whether what we
are observing--and I think there is general agreement, yes,
what we are observing today is probably associated with
manmade--anthropogenic emissions. But I think if you got the
climate scientists to be honest about it, they would all agree
that but right now it is making very little difference. And I
think if you eyeball the data, you see that. It is still very
hard to distinguish the signal from the noise.
Senator Johnson. That is what--I am trying to just put
things in perspective here. I mean, over geologic time, yeah,
we have had climate change. Glaciers have receded. Water levels
have risen. And that is always going to happen whether--you
know, it is going to happen long past man, the time of man on
Earth. Isn't that true? Okay. That is all the questions I have.
Thank you.
Chairman Murray. Senator King.
Senator King. Senator Johnson, I will see your 422,000 and
raise you a million. I am asking my staff guy to bring over to
you--I do not have the chart that you have, but the answer to
your question, why does it change? Over the last million years,
as you will see on the chart that I am about to give you, it is
almost an exact correlation with levels of CO2 in the
atmosphere. CO2 goes up, temperature goes up. CO2 goes down,
temperature goes down.
On the other side of the chart, what you see is the last
million years of CO2, and, yes, CO2 over the last million years
has varied widely, just as your chart does, up and down, for
all kinds of reasons. It was not people making campfires. It
was probably volcanoes and all other kinds of natural forces
that were going on.
But the real point is that in about 1860 that variation
that you see was always between about 200 and 300 parts per
million of CO2. In 1860, it took off, and this summer, for the
first time in 3 million years, it reached 400 parts per
million.
And if, in fact, the correlation between CO2 and
temperature holds that your chart demonstrates over into the
short-term future, we are in a crisis situation. It is all
about CO2 and the relationship with temperature, and I think
the data is pretty clear. Yes, there has been a variation, but
about the time we started burning fossil fuels in large
quantities, it goes up very dramatically, from a top level
prior of about 320 parts per million to this past spring 400.
That is the dig deal.
And I think Mr. Lomborg's testimony is fascinating, and I
think it really gets to the question of inaction versus action.
And to me it comes down to a formula. Divide the cost of
inaction times some kind of X factor for risk divided by the
cost of action. If the result of that formula is 1.0 or better,
then we need to act.
You would argue that it is below 1.0, at least under
various considerations. And, of course, the big question here
is: What is the rest of the world going to do?
I have a hard time telling people in Maine they have got to
pay $6 for a gallon of gas if China and India do nothing.
On the other hand, the question is: What is going to
provoke them to do something? And I am sure that our doing
nothing is not going to provoke them to do something. This is a
global issue, and it has to be dealt with on a global basis.
But somebody has got to lead, and it seems to me, as you
have pointed out, we are the wealthiest country in the world;
we are in the best position to lead, but not be stupid. I think
your analysis is very interesting.
There is another factor, though, and that is, the risk of
catastrophic climate change. The scientists at the University
of Maine that study this, we have a school, a division studying
climate change, studying Greenland ice cores. The last time I
was there, they used a word that scared me. The word was
``abrupt.'' And apparently in history things like the Ice Ages
did not start--I always thought it took thousands and thousands
of years. In fact, it took decades. And if we have abrupt
climate change that is triggered by this extraordinary rise in
CO2 that does something like, for example, the melting of the
Greenland ice cap and that changed the route of the Gulf
Stream, your country would be uninhabitable along with Britain,
Scotland, and all the rest of Scandinavia. That is what worries
me, is the X factor.
And I guess, Mr. Montgomery, here is my question: Do have
homeowners' insurance on that house at the Chesapeake?
Mr. Montgomery. Yes, I do.
Senator King. And what do you reckon the risk of your home
burning down is? Once every how many years? A hundred years?
Fifty years?
Mr. Montgomery. My wife worries about it more because she
actually had her home burn down around her when she was a
little girl. But it is--I think that the insurance is
actuarially worth it. It covers enough risk.
Senator King. But it is a pretty remote risk, but you are
paying $500 to $1,000 a year--and I do not know what your GDP
is, but $1,000 is probably a measurable percentage of it--to
ensure against a remote but yet enormously consequential risk.
It seems to me that is the analysis that we have to go through
here.
Dr. Lomborg, your thinking?
Mr. Lomborg. You are absolutely right. The question and the
crucial part of that analogy is you have to actually get your
money back. That is what you do from the home insurance. But we
are actually more likely--
Senator King. But you never get it back if your home does
not burn down.
Mr. Lomborg. No, no, no. But you do get it back if it does
burn down, and, unfortunately, the risk insurance--it is better
seeing this as a risk reduction because there is nothing paying
back. We are simply reducing the risk of, for instance,
catastrophic climate change if we make more action. So we are
reducing the risk, but we are not actually getting a premium.
There is nothing, you know, paying back the Earth if it burns,
if you will.
Senator King. But I guess--we know that there are costs,
but we also know that there are risks. And I guess the question
is: Who--don't you sometimes make expenditures in the short
term to avoid a drastic, unlikely but very dire consequences
risk rather than hope that that does not happen? I mean, it
seems to me that is the calculus. And, again, I come back to my
failure. It is cost of action divided by cost of inaction. But
you have got to multiply the cost of inaction by this X factor
for catastrophic risk.
Mr. Lomborg. Of course. And if you will allow me to
trivialize the metaphor a little bit, my problem is that there
is a real risk we will end up paying more than what the house
is worth, but actually to get less than the house back if it
burns.
Senator King. And I think that is a very valid point, and
what you are saying is--and I think you used this term-- we
have to be smart about this.
Mr. Lomborg. Yes, yes.
Senator King. We cannot just throw the kitchen sink at it.
We have got to really think about what are the costs and the
benefits.
Mr. Lomborg. And, Senator, could I just briefly point out,
I think the U.S. has one thing to really show the Chinese and
everybody else, because you have actually invested over the
last 30 years about $10 billion in fracking technology, and
fracking technology--now, let us leave aside all the other
issues that I am sure we can come up and talk about. It has
dramatically reduced U.S. carbon emissions. And it is
probably--we estimated in 2012 it reduced about 300 megatons of
CO2. Remember, all the solar and wind in the entire world has
cut 275 megatons. So you have actually cut more with fracking.
So, you know, the short-term solution over the next 10, 15
years and the only realistic way, if we could get China and
Argentina and many other countries to frack, they would switch
from coal to gas, and we would see a dramatic reduction in CO2.
Senator King. I am so glad you said that because--let the
record show that hydrofracking was invented using Federal
subsidies and Federal loan guarantees, and it is, as you say, a
dramatic benefit both for our economy and our environment. So
thank you very much for your testimony, and I just want to end
by saying I thought Senator Whitehouse made a very important
point. We have got agreement here that climate change is real
and that people have something to do with it. That is progress.
Now we are arguing about how to fix it. I am all in on that
discussion.
Thank you very much, all of you.
Chairman Murray. Thank you.
Senator Kaine?
Senator Kaine. Thank you, Madam Chairwoman, and to the
witnesses, and I want to pick up with the same point. We so
rarely have a hearing in this place where the majority and
minority witnesses agree on an important threshold question,
especially one that is as controversial on the floor of this
body as this question is. But the five of you have basically
agreed that climate change is real, that it is a legitimate
problem that needs to be solved, that it is significantly
manmade. I mean, it is just not that hard. It is just not that
hard to say it. And I am so happy that the witnesses were
willing to come and agree on that basic proposition, because we
cannot even have a meaningful debate about that. People will
not even use the phrase ``climate change'' on the floor of this
body.
Now, questions remain: How serious? What to do about it?
Over what period of time? But what you have just said is what
my constituents believe. Virginians are science people. The
person we most admire, the Virginian we most admire was the
preeminent scientist of his day--Thomas Jefferson. We are pro-
science people. And those who attempt to argue against the
scientific consensus and pretend that mankind does not have
anything to do with these climate issues, they do not get very
far in my Commonwealth. And they should not get far here.
And so I am really refreshed to hear--I mean, when--I am
just looking at Dr. Montgomery's testimony. When one of the
minority witnesses says, page 2, ``In the past few years I have
taken a particular interest in the relative merits of
mitigation and adaptation as responses to climate change risks,
and in particular in the role of political and economic freedom
in making it possible for poor countries to grow economically
and at the same time to reduce their carbon intensity and
become more resilient in adapting to climate change.'' You are
working with poor countries to help them be less carbon
intense. Good on you. To be more resilient to climate change,
good on you. I hope we have these kind of witnesses, Madam
Chairman, at every hearing we have.
So the question is: What do we do? What do we do?
Dr. Lomborg, I am going to start with you. I think the last
bullet on your last slide was basically kind of ``Make green
cheap,'' right? Figure out--and I think you are a pro-
innovation, pro-technology guy. And I understand from your
answer to Senator King that maybe you are saying natural gas to
do fuel switching is the short-term, next-20-year strategy,
while we continue to plow investments into lower carbon--either
low- or non-carbon energy alternatives. Is that essentially
your pitch?
Mr. Lomborg. Yes, the fundamental point is if we could make
solar and wind so cheap everybody wanted them, you know, we
would get China and India to do it in a day.
Senator Kaine. And is there any reason to doubt that solar
and wind will follow other--the computer example, other kinds
of technological examples? When they are new technologies
battling against mature incumbent technologies, their per unit
cost will be higher, but the more we deploy the investments and
learn from them and then make refinements and adjustments, the
gap in per unit cost drops. Is there any reason to doubt that
the same thing would happen with wind and solar, that the costs
of these energies, these low- and no-carbon energies, will
continue to come down?
Mr. Lomborg. There are two caveats to that argument. One is
if you take the computer analogy, it is a question of when do
you subsidize it. Remember, the computer--we subsidized the
research and development for a very long time. We did not go
out and say everybody in America should have a computer in
1960. Sure, it would have made it a lot cheaper, but it would
probably have been phenomenally costly to do that, to produce
all those computers. So we bought a few of them, and we put a
lot of money into research and development.
The second part is to remember--
Senator Kaine. So but the notion of a subsidy to some
degree, that was necessary, doing the subsidy the--
Mr. Lomborg. Yes, but the subsidy was to the research.
Senator Kaine. To the research.
Mr. Lomborg. But the point is to make them efficient so
that--
Senator Kaine. So we should not be cutting research budgets
if we are going to be going after.
Mr. Lomborg. No. The second part is that there is a
significant problem with solar and wind and other that they are
intermitting.
Senator Kaine. Episodic.
Mr. Lomborg. And so basically we need to have much more
battery technology if solar and wind is going to cover a large
proportion. Remember, right now--and this I think is some of
the numbers that we do not generally recognize. The world gets
0.25 percent of its energy from wind. The rich world gets 0.7
percent of its energy from wind. Very, very low proportions.
Even the International Energy--
Senator Kaine. But I think I heard a stat that about 35
percent of the power added to the grid in the United States
since 2005 has been wind. So it was not an technology that was
really used. It still as a proportion of the total is pretty
small, but it is coming on quickly.
Mr. Lomborg. It definitely is rising, but just to give you
a sense of proportion, the International Energy Agency
estimates that by 2035, which very optimistic assumptions, we
will get like 3 or maybe even 4 percent of our energy from wind
and solar.
Senator Kaine. I want to ask Dr. Montgomery a question. You
mentioned the Chesapeake Bay, so I just cannot resist since I
am a lover of the bay. So you are focusing on--we all have a
consensus here, but what is the right way to do it, and you say
adaptation rather than mitigation, or at least that may be the
most cost-effective way. How would you restructure the Flood
Insurance Program?
Mr. Montgomery. I do not have a specific design for it, but
I think that the first thing would be to make the insurance
premiums actuarially fair; that is, the more we think climate
change is going to increase the severity of storms, the higher
the premiums get, so that people make--
Senator Kaine. Make everybody who lives in a floodplain,
even though those floodplain maps are dramatically expanding,
pay the full freight.
Mr. Montgomery. Pay the full freight.
Senator Kaine. That would be your proposal.
Mr. Montgomery. That would be--I mean, I am sure other
things need to be done, but that would be the basic principle.
Senator Kaine. You talked about politically infeasible on
some of the other things up there. I think making a whole lot
of people, including, you know, poor people who live in places
that were not floodplains when they bought the house, suddenly
bear the full freight of flood insurance. That is as
politically infeasible as a carbon tax. We have got a lot of
tough choices coming up here.
Senator Whitehouse. More so, say some of us.
Senator Kaine. All right. Thanks. Great testimony.
Thank you, Madam Chair.
Chairman Murray. Senator Coons.
Senator Coons. Thank you, Madam Chair. Thank you for the
opportunity to have a robust and hopefully constructive
conversation on this difficult issue, but one that really does
have an impact on the long-term Federal budget, on State and
county and local budgets, on family budgets, on our national
security, and one that we really on the Budget Committee should
be engaging in and taking seriously.
On the train down this morning from Delaware, I got a
chance to talk to my Governor, Jack Markell, who is testifying
at one of the EPA public hearings about the new Climate Action
Plan today. He and I represent the lowest mean elevation State
in America, so while Florida and Louisiana certainly have their
exposures, we are one of the first to go as sea level rise
becomes a reality. And Delaware has invested a great deal in
actually mapping out and understanding what the impacts of
climate change may well be to our State, and under some
scenarios, rising sea levels will submerge more than 10 percent
of our State by the end of this century. This is not hundreds
of years away or--it is, frankly, within the lifetime of my
children, and the areas that will be submerged are really
significant because--since they are along our major rivers and
at the center of our major cities, they are concentrated areas
of major economic impact.
If I could, to Director Gomez, to what extent do you think
it is important for the Federal Government to help States and
localities model and predict and prepare for what are, I think,
likely significant impacts on their economy, on their
infrastructure? We can get to the issues of sort of global
security and competition later. I used to be a county
executive. Our Governor and I spent a lot of time hardening our
State against incidents like Superstorm Sandy. Here on the
Budget and Appropriations Committees, I have been very
concerned about our coastline. What kind of role do you think
the Federal Government ought to have in helping prepare for
these impacts?
Mr. Gomez. Sure. Thank you for that question. So that is a
very important thing to make sure that it happens. There are
about $300 billion that are invested annually across the
country on infrastructure. About 25 percent of that is Federal
dollars. But it is very important for the Federal Government to
provide technical assistance to those local and State
decisionmakers that are making decisions about how to build
that bridge, for example, or that seawall.
The Federal Government produces a lot of information. GAO
currently has ongoing work looking at ways in which the
Government can organize itself in terms of data that can be
useful to these communities. So I would say--and that is also
an area that we have in our high-risk designation, the need for
good technical assistance, not only to provide it but to
translate it to these officials who may not know exactly how to
use the information or where the find it. But also important is
for these officials, local and State officials, to start
integrating and using the information in their planning
processes so they can build resilience into their structures,
whether it is maintaining them or building new structures.
Senator Coons. That is right. In my county government role,
one of the challenges we faced was the future expense of health
care and pension plans. One of the greatest challenges we face
in our Federal budget is the future growth in entitlement
costs. And as we have often debated around this hearing room,
the sooner we begin to tackle long-term costs and the rate of
growth in costs, the easier the difficult choices will be.
Isn't there a clear parallel here with climate change, the
sooner that State and local government, the Federal Government
gets serious about tackling this issue, the less burdensome and
difficult the long-term consequences will be of those changes
in direction?
Mr. Gomez. Again, in our high-risk designation, it is very
much focused on limiting the Federal Government's fiscal
exposure by better managing climate change risks. And so we
identify a variety of areas, which you have all spoken about
already, whether it is the Federal Government as the property
owner of facilities, whether it is the Federal Government as
the provider of property insurance or flood insurance, crop
insurance, the Federal Government as the provider of disaster
assistance which is not incorporated into the budget. So we are
very focused on finding places and ways in which the Federal
Government can limit these exposures.
Senator Coons. I am very struck, Ms. Goodman, by your
testimony where you cite that the QDR, the Quadrennial Defense
Review, has literally identified climate change as a threat
multiplier and a catalyst for conflict. In my role as the
Africa Subcommittee Chair on Foreign Relations, I have seen the
steadily increasing challenges of growing famine, of changes in
climate in a lot of different ways on the African continent.
Do you think this poses a long-term security risk to the
United States if we do not deal with it responsibly now?
Ms. Goodman. Yes, Senator. Thank you for your question.
Yes, we do. The Military Advisory Board believes that climate
change is both a threat multiplier and a catalyst for conflict,
particularly in Africa, a region already racked by poor
governance, terrorist threats, and now increasingly natural
resource strains from drought that have pitted herders against
farmers and exacerbated conflict in a number of regions, from
Sudan to Mali to other parts of Africa. Yes, it is a serious
concern and one that needs to be addressed to face our own
threats to our own country.
Senator Coons. Thank you. And the last question, if I
might. In the exchange you had with Senator King, the metaphor
I think you were working through Senator King was home
insurance--I am sorry. It was with Dr. Montgomery, forgive me--
how much home insurance do you pay for fire even though the
risk of a fire burning your house down is right in--and the
conversation and the back and forth was about risk mitigation.
I would suggest, Ms. Lubber, the constellation of companies
that are involved in Ceres might give you better insight into
this than I Have. That is really not the right metaphor. A
slightly more complicated metaphor is the one that I think we
ought to be looking at, because this is not just risk
avoidance, it is also seizing an opportunity. Because in the
same way that climate change poses real security threats to the
United States and to our national security infrastructure, to
our communities and our States and our physical infrastructure,
it poses those same threats to our competitors globally. And in
my view, the country that invests in the research and the
development and the deployment of climate change adaptation and
climate change mitigation technologies will dominate the global
marketplace for everything, from transportation to
infrastructure, power generation in the future.
And so if we invest, it is really more like investing and
figuring out how to make the next generation fire truck that
puts out the fire faster so that we do not just have passive
insurance that we are investing in and we get no return unless
there is a catastrophic event. But it is literally proactively
investing in the technologies that will mitigate our losses and
create new market opportunities for us globally.
Is that what the companies that have helped form Ceres see,
is a market opportunity for us?
Ms. Lubber. We are seeing it not only--
Chairman Murray. You have to turn your microphone on.
Ms. Lubber. We are seeing that magnified every day. Let me
give you a few examples.
In a recent report we did on clean energy, we are seeing it
becoming the mainstream for U.S. corporations, some of the
largest corporations; 60 percent of the Fortune 100 companies
have goals for renewable energy and greenhouse gas reductions.
Through the initiatives, 53 of 100 Fortune 100 companies said
that through their own energy saving and investing in renewable
energy, they have saved for themselves $1.1 billion annually,
and their collective reduction in emissions decreased their
annual CO2 emissions by the equivalent of retiring 15 coal-
fired power plants.
Companies are seeing this is an opportunity to save money
and to look at resources. When they invest in renewable energy,
their employees love it. Their shareholders are starting to
love it. Their consumers like it. Even the utility sector that
makes up a third of the carbon emissions, we just released a
study showing how major utility companies in every part of the
country can both live with regulations and are starting to act
even now to increase massive--massive increases in selling
energy efficiency to their customers and renewable energy.
And think about it. It hedges our bets against erratic oil
and gas markets. It is saving utility companies money as well
as the largest companies. And it is being passed on to
consumers in many instances.
It is no longer whether they should do it, from Microsoft
to Dell to Time Warner. Companies are looking at reducing their
carbon footprint and saving money and investing in renewable
energy.
Senator Coons. Well, thank you. And in my own home State,
DuPont, one of our longest established--
Ms. Lubber. Major leader.
Senator Coons. --and major manufacturing and innovation
company, they have a chief sustainability officer, a
sustainability plan. This is not just something they do to
sound good in the press or to satisfy environmental critics.
This is a bottom-line, performance- enhancing business
opportunity for them, and I am pleased to hear bipartisan
enthusiasm for energy efficiency, an area where I really think
the United States can competitively grow our market
opportunities.
Thank you so much for your testimony.
Chairman Murray. Thank you very much.
I want to thank all of our colleagues and our witnesses.
This has been a very important and interesting discussion
today, and I especially want to thank all of our witnesses for
coming here and joining us and giving your expertise as well.
As a reminder to everyone, additional statements and
questions for the witnesses are due by 6:00 p.m. today,
submitted to our chief clerk.
Thank you again to all of your for participating. With
that, this hearing is closed.
[Whereupon, at 11:45 a.m., the Committee was adjourned.]
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