tv Tonight From Washington CSPAN February 13, 2013 8:00pm-11:00pm EST
>> thank you, mr. chairman. to other members of the committee, i appreciate the opportunity to be heard today to discuss the cbs outlook for the budget and economy over the next 10 years. our analysis shows the country continues to face very large, economic and budget challenges. let me discuss the economy first and then i'll turn to the budget. we anticipate economic growth will remain slow this year because the gradual improvement we see an underlying economic factors will be offset by tightening the federal fiscal policies scheduled under current law. ..
the cuts in federal spending scheduled to take effect next month lemine reduce spending by households in the government. we protect inflation-adjusted gdp will increase by about 1.5% in 2013 but it would increase roughly 1.5 percentage points faster were it not for the fiscal tightening. under current law then, we expect the unemployment rate will stay above 7.5% through next year. that would make 2014 the sixth consecutive year with unemployment so high, the
longest such period since the 1930s. we expect the growth of the gdp will pick up after this year to about 3.5% per year in and 2014 in the following few years. the gap between the nations gdp and what it is capable of producing on a sustained basis that economist referred to as potential gdp will still not close quickly. undercurrent while we expect output to remain below its potential level until 2017, nearly a decade after the recession started in december december 2007. the nation has paid and will continue to pay a big price for the recession. we estimate the total loss in output relative to the economy's potential between 2007 and 2017 will be nearly equivalent to half of the total output produced in the country last year. let me turn then to the budget. under current law the federal
budget deficit will shrink in 2013 for the fourth year in a row, an estimated $845 billion would be the first in five years below a trillion dollars and at 5.25% of gdp only half as large relative to the size of the economy as the deficit was in 2009. our projections based on current law show deficits continuing to fall over the next few years before turning up again in the second half of the decade. totaling nearly $7 trillion over a decade as a whole. federal revenues are projected to reach 19% of gdp in 2015 and beyond. because of both the expanding economy and schedule changes in tax rolls, that 19% figure compared to an average of 18% over the past 40 years. at the same time federal spending will fall relative to the size of the economy over the next several years and then rise again.
the decline can be traced to caps on discretionary funding in the drop off in spending that tends to an economy is weak. but later in the decade a return of interest rates to a more normal level will push up interest payments to their higher share of gdp and years and throughout the decades the aging of the population, significant expansion of federal health health care programs and rising health care costs per person will push up spending on the largest federal programs. by 2023 spending reaches about 23% of gdp in our production compared to the 40 year average of 21%. projected debt by the public will reach 76% of gdp this year, the largest percentage since 1950. and under current laws we project the debt in 2023 will be 77% of gdp, far higher than the 39% average over the past four
years and will be on an upward path. such high and rising debt relative to the size of economies is significant concern for several reasons. first, high debt means the crowding out of capital investment will be greater, that you will have less flexibility to use tax and spending policies to respond to unexpected challenges like a recession or a war and that there will be a heightened risk of a fiscal crisis in which the government would be unable to borrow at affordable interest rates. second, debt would be the margin of current laws were modified to delay or undo certain schedule changes in policies. for example if lawmakers eliminate the automatic spending cuts scheduled to take effect in march if they prevent a sharp reduction scheduled to occur next january and extended the tax provisions scheduled to expire and if no offsetting changes are made, then budget
deficits will be substantially larger than our baseline projections and debt held by the public would raise 280% of gdp rather than a 77% under current law. third, debt might also be larger in our project -- projections because the original gap would reduce such spending to just 5.8% of gdp in 20203 a smaller share than for any year in the past 15. because the allocation of discretionary funding is determined as you know your annual appropriation acts, you and your colleagues have not yet decided for specific government services and benefits will be constrained or cut to meet those tasks and doing so might be quite difficult. fourth projections for the 10 year. covered in this report do not reflect long-term budget pressures. because of the retirement of the baby boom generation and the rising health care costs a wide
gap exists between the future costs of the benefits of services that people are accustomed to receiving from the federal government especially unemployment benefits for older americans and the tax revenues that people have been sending to the government. it is possible to keep tax revenues at a historical average percentage of gdp but only by making substantial cuts relative to current policy in the large benefit programs that gave the broad group of people at some point in their lives. alternatively its possible to give the policies for those large benefit programs unchanged but only by raising taxes substantially for a broad segment of the population. deciding out what combination of policy changes to make to resolve the budget imbalance would allow for gradual implementation of those changes which would give households and businesses time to adjust their behavior. thank you. >> thank you dr. elmendorf.
let me get into the debt itself. we have the state of the union address last night and as we all do we go to the microphones and give our play-by-play analysis of what we thought of the speech and what we liked him what we didn't like. one thing stood out that gave me a real cause for concern and i heard it in mr. van hollen's opening statement which gives me very big con -- cause for concern. the notion that we have our degout $2.5 trillion of deficit reduction taking taken care of and in the bank with not much farther to go to finish the job, this calculation, this $2.5 trillion in debt reduction does not count the spending that took place during that time. it doesn't count the stimulus spending of $831 billion doesn't account for
77% by 20203. i guess you know alternative alternate fiscal scenario meaning doc fix and all the other things you think congress will do based on reasonable assumptions. total debt is already above 100% of gdp. if you could ring up chart one, here's the question i have. the green is what you said revenues are historic leg. about 18.2% in the blue line and of all the tax increases the president has endorsed the loophole closers mr. van hollen talks about is the fiscal cliff deal enacted a good portion of blue. the revenues and the red are your projections of where spending is going. so even if we got every tax increase that the president has called for we are not even
scratching the surface. we are not even getting close to fixing this problem and so the concern i have is a couple of things. what happens if we don't get this under control? what does the debt crisis look like? what happens to a nation if our debt continues on this burden and if we don't ask later in the surround? what happens and that's question number one in question number two and i'm going to ask you this in writing, give me some different interest rate scenarios. what happens if they rise faster than you're projecting? what happens to our ability to control our fiscal situation what happens to our economy? >> quickly clarify two points monday said so people understand we have not yet updated our long-term budget projections and i presume this slide is our new projections for the coming decade and your extrapolation beyond that it is certainly is a
case in our long-term outlook last year and i presume our long-term outlook this year that's been a particularly on the large health care health care programs and social security will continue to rise in the share of economy of her time driven most importantly by the aging of our population and the rising number of eligible beneficiaries and also due to other factors as well. the second to clarify is the alternative fiscal scenario would not be a projection of what you and your colleagues will do great as you know it's a projection of what current policies would cost and we all presume you will make some changes in policies over the decades but it's an additional benchmark that many of you have found helpful in the past in our standard presentation of what would happen under current law. >> you have a new asf day fund. >> to understand their basic projections follow current law. for example now the tax
provisions scheduled to expire the end of this year many of which are routinely extended. our current law projection assumes they will expire and owned alternative scenario we extend the expiring tax provisions. current law includes a cut in the doc fix at the end of this year. we have routinely pushed off the dead and made changes in policy along the way. it continues to extrapolate the current payment rates and current law includes a sequester and many members of congress have argued that they would like to do something different instead of that so our alternative scenario takes away the sequester but we have replaced the original cap in august of 2011. under the alternative scenario total debt crisis by 2.5 chilean dollars more over the coming decade than under the current law baseline projections. >> mr. chairman u.s. what happens if the debt rises and
stays high and prices and there are some costs that i think are quite predictable and other risks that are created. over time, not under the current economic conditions but under the conditions we expect later in the decade of nearly full employment in the economy, at that point in time that large amount of debt will crowd out some private new investment that would raise wages and income and the higher the debt is, the more that investment is likely to be crowded out and the greater depressing effect on wages and incomes. we report those estimates to you. there are also risks that are involved. some countries that have had very high levels of debt and have not communicated and not persuaded their potential lenders that they have a plan for getting the debt under control have faced a fiscal
crisis which we defined at -- is the point in which the government is able to borrow at an affordable rate. currently there government is not in a position in treasury interest rates are extraordinarily low. our projection calls for a normalization of interest rate as the economy strengthens as the federal reserve stops pushing so hard to keep interest rates low. we have a normalization of interest rates and our basic projections but with the debt high and rising there is a greater risk that potential buyers of government that will get spooked and will be unwilling to do so at the regular level of interest rate. if interest rates were a percentagpercentag e point higher than we project over the entire decade, then the federal interest costs would be about $1.1 trillion higher. if interest rates were percentage point lower than we project in interest payments would be about $1.1 trillion lower.
the point is that given the large amount of debt for government has and will have under current law in the coming decade, fairly small movement in interest rates would have a fairly large effect on government just rates. [inaudible] stay where projecting short-term interest rates rise to about 4% and longer-term 10 year treasury note rates rise to 5.25%. those rates after adjusting for inflation are are a little above inflation-adjusted interest rates over the past several decades. reflecting in our view the effects of the higher level of debt relative to -- >> mr. van hollen and i are limiting ourselves to 10 minutes. i will be brief only to say that it seems we have this window that is narrowing on us.
as you mention america's right now now with respect to the bond market support in the port in the storm, the safe haven. that gives us a privilege and that gives us time that if we frittered this time away, if we don't deal with the core problem which is spending no matter what you try to do on revenues, then we will have lost this opportunity we have to get our fiscal house in order while we have low interest rates. the other problem as we see it is growth. if we keep chasing higher spending with higher taxes we will sacrifice growth. the best way is to get people back to work, good jobs with good wages, paying taxes and getting spending under control. and so when we talk about taxes and tax reform something we will discuss here, loopholes are part of tax reform. most loosed -- loopholes that we
are proposed for years is that necessary pay for to get the tax rate down to have a globally competitive tax code to help as this is create jobs and get people back to work. if we use loopholes to chase higher spending and we are forgoing tax reform and missing our opportunity for economic growth. that i just want to make clear for the record because i think we'll hear a lot of clinical record to -- rhetoric to the contrary. mr. van hollen for his 10 minutes. >> thank you mr. chairman welcome to dr. elmendorf. first is a little bit on they math. the chairman pointed out that while we will have $1.5 trillion in cuts over the the the next 10 years as approval of the spending caps, there were some other one time spending measures including the spending measures of the payroll tax cut which is the biggest single item in that issue and there was actually agreement that given tough economic times it was important
to provide a payroll tax relief and i actually think we should have phase that out rather than having gone cold turkey. the point is a big chunk of that number has to do with loss in revenue from a payroll tax cut that was supported by a great majority in this body. as i said in my opening remarks, i think our overall objective here in the short ,-com,-com ma medium and long term is to expand the economy, growing jobs and having a strong middle class so it's absolutely true especially as the economy recovers you continue to have high deficits and you will squeeze out that upward pressure on interest rates. in order to make sure we have good long-term economic growth we have to grapple with the deficit. that brings us back to the question of how we deal with the deficit and his doctor elmendorf pointed out you can do it into categorical ways. one is you can save you will do it all in cuts and as you
pointed out you can do it all in revenue. both of those we can argue the two bad results. cutting as dr. elmendorf says means undermining important commitments that we have made when it comes to retirement health and security for our seniors sook again the question is how we deal with those deficits. let me get back to the sequester issue that is looming right now. could you tell me dr. elmendorf in terms of the negative economic impact and the sequester, .6%, what does that translate into in terms of loss in jobs? >> our estimate is that the sequester alone will reduce gdp growth this year by 0.6 percentage points lowering the
level of gdp at the end of the year by the 0.6%. we think that would reduce the level of employment at the end of the year by about 750,000 jobs. >> 750 dozen jobs between now and the end of this calendar year 2013 right? >> yes. >> that as is a whole lot of jobs obviously and we should be working overtime to prevent that kind of job loss. if you were to replace the deficit reduction through that austerity program the sequester, with a plan that accomplish the same amount of deficit reduction spread over the 10 year period you would not have that big hit on jobs, isn't that right? >> that's right congressmen. >> we have also heard a lot about the impact is the result of the defense cuts and i should point out is not -- the congressional budget analysis in
our analysis and the republican leader mr. cantor had exactly right on the floor of the house when he said that we allow the sequester to take place quote unemployment would soar unquote and it would set back progress in the economy and he cited an estimate that the sequester would cost 200,000 jobs in the state of virginia alone. that was the sequester for this whole year. we were able to prevent the sequester for the first two months to a balanced approach i should say. that should be the model going forward and the model that we have apply to prevent the sequester now. just to be clear since there's been a lot of attention focused on the jobs lost because of defense cuts, the cuts were a result of the sequester and a dollar for dollar basis. as a result in the same amount of jobs lost? >> the effects of cuts in defense spending and non-defense spending are quite similar dollar for dollar but the effects depends on the timing of
defense spending and non-defense spending so in some circumstances it could be small differences but basically congressmen you are right that the government is paying people to build that'll ships were paying people to build all sorts of equipment or structures than those will have comparable effects dollar for dollar on the economy and output on jobs. >> i have never understood the logic as to how cuts to defense did not build as many tanks or battleships somehow cost jobs but cuts to other government spending somehow do not cost jobs. obviously when you invest money to build roads and bridges and other transportation systems you are putting people to work doing things that are productive for our economy. grants are being spent to find treatments and cures for lifesaving diseases that would
be absolutely counterproductive in terms of our long-term competitiveness let alone the health of our people to have those kinds of cuts take place among top of that the long-term negative impacts, the job loss of 750,000 jobs between now. let me just say something about the tax reform. i don't know if you have done a recent estimate of the amount of tax expenditures in the tax code. what is your most recent estimate? >> so, in last year's outlook for the longer document because we had a little more time we had a discussion of tax expenditure. we have not updated that this year but the new estimate of tax expenditures or they are working on one and tax expenditures are are -- amount to a very large amount of money and many economists agree that they are really best viewed at former
government spending because they are directed at reticular people or entities or designed to subsidize particular activities very much analogous to the way that government spending is often corrected. it is assumed essentially large complement of spending a big federal government even though its record is as lost revenue on the revenue side of the ledger. >> spending by the tax code sometimes based on -- that is revenue that will not come into the treasury and help reduce the deficit and is the chairman pointed out, we passed the 600 le in dollar tax increase focused on folks at the very high-end of the income scale but as the president pointed out in talked to the speaker his goal was to achieve 1.2 trillion revenue which i would point out to our
colleagues is less than the bipartisan simpson-bowles plan which said we should do tax reform but in addition to reducing the rates we should have a significant amount go to deficit reduction. in fact the bipartisan simpson-bowles commission would have a lot more revenue coming in than the president has proposed. i just want to make that clear to our colleagues. i would also point out that speaker boehner during those discussions with the president said he didn't want to increase rates but he could raise $800 billion by closing these tax loopholes and getting rid of these tax expenditures. those are all still there. none of the actions we have taken eliminate those tax breaks or tax expenditures that the speaker was talking about and in all the candidates in the last presidential -- talked about. it seems to me we should be willing to help eliminate some
of those tax expenditures for the purpose of reducing the deficit in a balanced way. and just to be clear what our colleagues to date have said is they are not willing to do that. they are not willing to eliminate any of those tax expenditures in the tax code for the purpose of reducing the deficit. we think that's important part of the balance plan. the last point i would say is if you look at the chairman's chare to deal with this issue. but as you know, you can pass changes to laws in this 10 year window that have a very important impact on the outcome. arbitrarily, trying to squeeze all of that into the 10 year window which apparently is what the speaker had to agree to do his part of extending the debt ceiling, is not good economics.
that is politics so i would hope as we go through this process, keep an eye on the point i raised, what is the impact on the economy, short-term, long-term and middle term and what is the effect on jobs? >> i would say balance the budget but i guess we disagree on that. dr. price. >> thank you mr. chairman. i'm going to follow up on that quickly. mr. director welcome. we appreciate your insight and are in point. is it better to have a balanced budget that not? >> congressman i think that depends on what your values aren't. the reason the studio doesn't make recommendations about the budget policy is because the course that you and her colleagues choose depend not just on these -- but on your budget. the level of debt that you described 72% of public debt help her down 80% under your
alternative fiscal scenario, i would suspect he would agree that a level of 87% is not as wise as the level of 76% given the propensity for fiscal crisis that 87 being higher than 76, sat rate? >> we certainly read a higher debt has look higher expected costs and higher risk. >> i would concur. i want to touch briefly on the fiscal cliff, the 600 billion-dollar increase in the taxes with that. it if you recall the spending reductions in that legislation, that spending reductions? >> congressman the cost estimates we produce is relative to current law so our cost estimate showed that legislation has a very large tax cut and not the tax increase that you just described. there were only small changes in spending and i don't remember how they netted out. there was additional spending in medicare but cutbacks and other
health care spending. the sequester was deferred and that was paid for partly as you know through other spending reductions. >> this balanced approach that our our our friends and the other side of the aisle to talk about his balanced until it isn't and that is what we sell at the fiscal cliff. i want to talk on the whole issue of revenue. the report cites the revenue has returned essentially to the 08 levels or than the 10 year average basically. is that accurate? >> that may well be right. i'm i'm sorry don't happen in front of me. >> i think that's right. the revenue the federal government has returned to the 10 year average. that being the case and if we look at the deficit in 2008 at about $450 billion the deficit in 2012 at $1.3 trillion, with revenue returning essentially to the 2008 levels, then isn't true
that the thing that is driving the deficit to a greater degree at this point is not that the revenues are lower than they have been but that spending is higher than it has been? is that an accurate statement? >> certainly in dollar terms congressman you're right that spending is going up very sharply. i think the problem you and your colleagues face in the perspective of many americans who are starting to retire, their benefits they are expecting individually. the fact that there are many more of them than beneficiaries 10 or 20 years ago appears to them as the benefits they are getting but the aggregate spending goes up and those are the challenges your colleagues face. >> it is indeed and we look forward to working through the budgetary process that will save and secure and strengthen those benefits in -- instead of
lopping off funding for the programs at the expense of those beneficiaries. i want to touch again back on the 76% and 87%. your alternative fiscal scenario has been in the past really, really has been more accurate compared to reality. is that a fair statement? >> i suppose that is true but the single difference is the extension of expiring tax provisions. in fact that congress chose a month ago to extend most of those expiring tax provisions so in that sense our dateline looks more like our alternative scenario. >> is more likely we'll be closer to 87% debt held as opposed to 76%. >> if you and your colleagues let current policies and that would be the case and whether you will or not will be the issue are debating. >> the question i want to get to is in a fiscal crisis occurs and when a debt crisis occurs what
is the triggering mechanism? what happens that results in that, the inability to borrow at an affordable rate as you describe? >> i think a loss in confidence in the government's ability to manage its affairs and to pay the interest on the debt makes potential investors more concerned and makes them expect higher risk premiums. >> which is not a predictable moment in time. >> that's right, congressman. >> thank you. >> ms. schwartz. >> thank you and welcome. this is an important debate we are having for our country and i want to thank you dr. elmendorf are being here in outlining where we are. you just pointed to some positive news and i appreciate that, the fact that we are in a recovery and you are seeing positive signs in economic growth in the housing sector is
you pointed out and of course you have heard already that disagreement is making it very difficult to fund their way back to a deficit in a fair balance way the strengths and the metal last. and does not hurt for a two economic recovery. we saw the arguments at the end of last year as far as the -- and the economy for the first time in three years so the significant debates we have here have an effect and of course we believe this is not just policy but there are very different economic theories about how we grow the economy and how we strengthen the middle class and are competitive in a global marketplace and how we meet our obligations not only to our children and future and to our seniors and that is what i want to ask you about. one of the things we have seen again the positive news this week and you pointed it out, the private sector institute said
pointed out that in fact we have seen slower growth in the cost of health care in both the private sector and the public sector that is quite significant contending with double-digit growth and cost and 100% increase in more in both the private sector and more so than in the public sector but in medicare and medicaid i think some of us would contend that we have seen the delivery system for very serious commitment that we have made to really 1 -- doctors and hospitals to give us a better value for taxpayer dollar and improve the quality of health health care for senioo deliver health care and a much more cost efficient way and the results save taxpayer dollars and improve the quality of our seniors health care. particularly to the demographic problems around medicare, it's serious business but could you
speak to the fact that we have seen other reports that have said we have seen very good reduction, 3% rate is really something when we have seen 10% in medicare. i will confirm that but i will also ask, as we move which is the intention and for the legislation do as well to move the way we paid positions -- physicians, to change the way we them verse all physicians under medicare that would require them to take the model that does save money and improve quality and outcomes for seniors has the potential and i hope you can document as we have said all physicians in this country moving in that correction the potential cost savings and cost containment not only the public sector but also in the private sector. >> first quickly let me
emphasize the point you made about the effects of the retirement of the baby boom generation because the numbers are quite striking. we think a 20203 there will be roughly 40% more beneficiaries on social security and medicare than there were last year. 40% more people roughly and that is a tremendous effect obviously on the overall cost of those programs. [inaudible] >> your point about health care cost growth is absolutely right. there has been a market slowing in medicare part a to pay for hospital care in part be for physicians and part d that pays for drugs in medicaid and the private sector. in the rate of health care cost growth. we another analyst thinks that part of that is because of the recession and slow growth of income and loss of wealth and people's willingness to pay money for health care but we think is significant part is in fact structural.
the crucial question is whether the structural changes are transient or will be enduring and that is a topic we are giving a lot of thought to and talking with outside experts and i think the right way to summarize it is we don't know. >> if we were to pass legislation this year if it would go into effect again and we'd see that kind of cut, if we pass legislation with serious and good discussions between republicans and democrats on innovative ways to pay physicians under medicare, would that give you the tools to say this is exley going to happen and this is the window it's going to happen again and this is the direction we are moving in? >> there is widespread support that we should be paying health care providers in a different way than we are paying them today. and i think widespread agreement that a shift in how we pay providers can improve the quality of care and keep cost down. exactly what changes in federal law willie to what particular comes is uncertain and we look
forward to continuing to work with you on that. >> mr. campbell. >> thank you mr. chairman and good to see you again dr. elmendorf. large and persistent deficits like we have had over the long term or bad thing for economic growth, job creation and potentially the debt crisis you discussed. >> yes congressman. >> the solution to that which is some kind of fiscal contraction be it through tax increases or spending reductions can cause a reduction in the short-term economic growth? >> exactly congressman. >> so the question is how do we get out of this? in europe the greeks and spanish italians waited too too long and they had to a substantial fiscal contraction in the short period of time which resulted in extremely high unemployment and
large contraction in their gdp. is that correct? >> yes. other factors were at work as well congressman but we think the sharp fiscal austerity in some countries in europe had contracted their economy. >> if we were to decide to fix the deficit in the next two years or if we were forced to do it by a crisis ,-com,-com ma that would plunge the country into a recession and unemployment will go up worse than it is today and be a bad thing. >> yes congressman. >> we don't do that but if we ignore it or we only deal with just a little bit and the deficits go on is the baseline or in the alternative scenario then we risk never getting to our potential growth and potentially have that debt crisis where few years ago -- a few years from now we would have to make that. >> that is a risk. >> it make a whole lot of sense
to solve this thing and not too short a time and not too long of a time and i don't know whether you feel comfortable answering this or not but looking at 30 years is too long and some more from eight to 12 years if it were done in an even approach and that sort of thing, we might be able to balance it and get us out of this with as little damage as possible and as much opportunity for growth? they really don't want to describe a particular plan but you're absolutely right that the longer -- though the risk of waiting longer is that by running with a high level of debt-to-gdp or rising level of debt to gdp the cost goes up in the rest go up and in 2007 the debt was 36% of gdp. by the end of this year will have risen by 40% of gdp or 76% of gdp because of the financial crisis. if we run at this higher level
of debt and encounter another crisis domestically or internationally the expanded deficit will not be there. >> right, okay. just a couple of other things in my final couple of minutes. mr. van hollen talked about the sequester and replacing it with one year cuts over something that would be 10 years. if you were to replace sequester with whatever, a similar amount and the maxi or for you with the sequester is with other spending cuts and tax increases and i understand the competition would have something to do with that but if you do the $100 billion in the fiscal contraction there are some negative impacts on the economy that matter where that comes from. >> i think that's right congressman and you're right that the timing is critical for the economic effect and the composition can also matter depending on how you and your colleagues do it. >> but if we put it off --
and one final thing on tax expenditures. i hate that term but you economists like it. it's not the vast majority of those if you look at the home mortgage interest, charitable contributions, i.r.a. and 401(k) and retirement plans i mean if you really wanted to make a big impact he would have to go into those things would you not? >> congressman you're absolutely right those are the largest components. how big an impact one could make we have not quite assess but in this nice -- -- that we had last year the single largest tax expenditure relates to health care with the exclusion of health insurance from taxable income. the second largest of all -- involve pensions and the third largest involve -- >> thank you very much. >> thank you congressman. >> thank you mr. chairman. dr. elmendorf thank you for
coming before us again and opening up the -- for the next two years. i think that i want to respond to my friend from georgia about how we have increased spending since 2008, beginning january january 2009 when president obama raised his hand. i think we are all here to roll up their sleeves and find a long-term solution to the debt. but just as you know that increased revenue is not going to solve the entire problem by any stretch, neither, we can't cut away of our budget difficulties either. so when you look at what has happened in terms of the budget in 2009, january 2009 and now,
when there was an increase in spending, and just talk about that out of context, why was there an increase in spending? are we spending just to spend or was this the governments response, our response with you voted for it or not, to a very serious problem in the united states of america. people out of work, health care costs going through the roof, so how do we do at? no one else is spending and if we don't have private capital investment and that started before the end of 2008, then how do you prescribe to provide an atmosphere so there is investment in the economy? we want private investment. we know that the government can't solve every problem. we understand that very very well, but when you talk about a
balanced budget, of course it's preferable. to think we have this tremendous deficit problem going into 2009, that all we need to do was cut across-the-board in view of the social and cultural things that were going on in this country and by the way much of the world, are we to think that if we simply cut and slashed then everything would be find? you have created a nemesis. you have created a situation where folks -- you want folks to think that you want to protect your tax dollar when you know very very well that in 2009 we had tremendous unemployment and the government didn't do anything. there was no recovery. the kid point out chapter and verse -- in creating jobs and what happened in the last quarter of last year?
very interesting comparison. we have to came out of two wars and we never paid for them. we had to come out of to measure tax cuts in 2001 in 2003 and we never paid for that either. we didn't pay for the prescription drug plan that we passed eight years ago. there is a reason why we had to spend that money and if anyone is trying to acquire -- imply that if we simply stop spending the money -- though it is our money, it's the taxpayers money money -- that we would be in better economic shape. the american people didn't buy that in the last election. they are a lot smarter than we think they are. instead of the trickle-down economics which we had for eight years we will look at how many
jobs have been created over the last four years. i prefer trickle up. i prefer to not wait for the big guys because they have certainly flopped on their face in 2007 and 2008 when capital was not invested in this country. the most important way to achieve long-term deficit reduction to balanced approach of revenue and spending because that is what we keep on talking about and your report this month, the cbo inspector expected the deficit to shrink from 8.7% of gdp because we don't want to quote these things because it doesn't fit into our script. that will shrink to 5.3%.
is that correct? >> yes congressman. we have a lot of people here but if we wait until the clock is a zero to ask her question we are not going to get to the other members waiting patiently for their turn. >> your point is well taken mr. chairman. >> dr. elmendorf lets get to some basics here first. in order to pay for spending leave their tax it now or we borrow it now and tax it later. is it simply attacks on xm -- q.'s being gifted tenements -- depends on the level of debt. [inaudible] government cannot inject a dollar into the economy. if it's not first taking out by taxing our borrowing now and taxing in the future.
>> congressman under our current economic conditions if the government borrows money it is not taking a dollar out that would otherwise be invested. you can in fact increase the total demand for goods and services in the economy. >> if the dollar is being borrowed by the government presumably it's not there then to be borrowed by consumer. [inaudible] >> that logic is exactly right congressman. that is not the current economic circumstance. >> and a fully employed economy for the second half of the coming decade and higher debt as i mentioned crowds at private investment and reduces incomes relative to what they would otherwise be. in the economy we have today the effects are starkly different
and an economy we have today additional borrowing to support higher spending or tax cuts would provide the list of the economy in the short term. certainly if that extra borrowing is not paid down later later -- in the short-term provide a boost to the economy. >> you are borrowing a dollar from the same capital market that would otherwise be funding loans to the consumer or business is or to homebuyers for example. so it's the same dollar. the only question is whether it's borrowed by the government or borrowed by someone in the -- sector. >> under the current conditions demand for borrowing is very low. that is why the federal government interest rates are so low right now. under other conditions there would be more of a competition for funds that these conditions are unusual. >> i would suggest you talk to small business people or home buyers who are desperately
trying to get loans and they are telling us that they can get them. tell us about the economic impacts of taxes. >> so taxes have two effects. one is they take money that households otherwise have to spend in the other is they can affect the incentives for people to work and to save. in our economic rovlin we try to capture both of those effects. >> in fact didn't your office estimates that the tax increases and the clinton era rates on those earning $200,000 as individuals and 150 -- $250,000 as couples would cost jobs? >> i don't remember the specifics. i don't remember the precise numbers. >> we are also told by your office that the sequester reductions in spending was about 0.6% growth and 750,000 jobs
because government would not be spending that money on creating government jobs. but as we just established the government doesn't inject dollars into the economy without first taking it out of economy so i'm afraid we are getting into a situation where we are being told tax increases are bad for the economy and too much borrowing is that the economy particularly in the future we are projecting in spending cuts are bad for the economy will. that doesn't leave us with many options. options. >> commerce and the effects of fiscal policy on the economy are different under different economic circumstances. that is a widely held view of economists and that is the perspective that we take. under current economic circumstances with high demand for goods and services is low with the governments bring
additional private demand lower taxes can increase the overall demand for goods and services and thus encourage businesses to hire more. under different economic circumstances that we expect we will have again by 10 years from now than there is -- in the competition you're describing the between the government and the private sector loans become become -- and smaller government -- to. [inaudible] >> mr. met dermott. mr. mcdermott. >> it's good to see you mr. elmendorf. your budget analysis is very interesting. for three years we have had to listen to the republicans flighting their hair on fire and cable tv about the temporary arch deficits we have had and we were told that simpson-bowles is not a knack to the end world as we know it and if you notice on
that charge jobs are going up. we have 35 months of people increasing and the only places you see it dips if you check them out for when the republicans begin to play roulette with the budget and created chaos about whether we would pay our bills internationally or we have these big fights we have on the floor, the unemployment goes up because this doesn't have any confidence and they are not going to hire anybody and it seems to me that what you said is that the long-term problems in this country really are about health care costs. as ms. schwartz has already pointed out. when i came to congress in 1988 we were talking about the bit problem that was going to come in 2011. well, it's here. the baby boomers are now enrolling in medicare and it's
going to go from 40 to 60 million it's been absolutely predictable and nobody wanted to deal with it until now. it's nothing new. we are honoring our commitments to the people in this country. and it seems to me that the issue really here is whether we are going to tear the safety net out and safety seniors we are not going to cover you, you are on your own and you and your family do whatever you want but what is interesting, and i want to talk a little bit about that, medicare spending as i understand it is flat, per person. is that correct? >> i don't have this precise numbers in front of me but you are certainly right congressman it has slowed sharply in the pass from what it was before. >> in my reading of your analysis, at least to give some credit is not a good hit of credit to the fact that we enacted the affordable care act.
is that correct? >> congressman we have not attributed the slowdown to any particular factor like the affordable care act. what we said is that part of it is related to the recession, part of it is structural. the structural part could have a number of possible causes. one could be providers thinking about the current effects of the affordable care act that there are also pressures from private insurers. i think providers are driven by their own -- providing care in his way as possible. we haven't said anything because we don't know what factors are driving those structural changes. if we understood better what factors were driving it we would understand better the prognosis as well. >> that is my point, if you pass a law, even the threat of passing the law under the clinton administration suddenly
health health health care costs kind of leveled off. and again we see it when the congress acts, that we basically see the flattening. you can't directly tie it from point a to point b but you know that the whole united states is watching what congress is doing. and when we don't -- they stop hiring meaning to look at the graph down to the time that it happened. i think the thing that is most amazing about this is that the industry is actually responding because they know it's not sustainable. my question to you is, via facts of throwing people off of medicare or let's raise the age to 67 or 70 before you can get on it, how would that affect the
, one member heard and maybe someone threw this out to you because you were saying the projection of the 10 year going up around three said the interest payment on the debt will increase during that period of time. the numbers rose 1.1 showing dollars for a one or seven trees. you basically factor that into your projections over the 10 year, going from zero -- >> the increased magistrates is the projection of federal interest. >> one of the other uncertainties as the maturation to the said house on securities going out, inverted between long and short. gg take that into consideration as well? one of the numbers i heard was elected a 3% increase at around $140 billion increase in year one and that would only last for two to three years as the
maturation date changes for the securities. are you with me on that? >> you are right, congressman, that projections depend not just on interest rates at that moment in time, but what the federal government issued when it's rolling over maturing securities >> i guess one of the bottom lines as we go to the sequester issue trying to save roughly $100 billion or $8600 in interest payments and that pales in comparison if interest rates go up 1%. >> yes, that's right. >> sizable change, but historically accurate change. in other words -- >> about the increased bill to our projection, which is above their historical average level.
further increases are possible. >> the fha revealed in her report that cash reserves are down 45% from last year and chances of losses on the outstanding or folio could exceed 80% if it's not out of their norm, which are required for taxpayers at the fha going forward. further reports show their overleveraged right now. they are at a leverage ratio 400 to one, which makes bear stearns, lehman brothers pale in comparison. have you examined the fha's report and budgetary implications quite >> two things congressmen quickly. as you know, you refer to a government they allow. there's no explicit action required that people don't pay back mortgages.
sh is on the hunt suffer losses. >> they have a line of credit to give money -- did you take that into consideration? >> as you know, there's a few years of fha lending that has turned out particularly poorly in terms of delinquent be in default rates. we have not done a separate projection of what the draw on the treasury might be if there's a change as the credit we estimate. but we don't have a specific projection unaware as. >> is that something you could do and take a look at? >> we could take a look at it purely to talk more specifically. i don't know about the data, but we could try. >> it would be help whole to us. last question with regard to
medicare, as you well know, there's a line place that says when cost exceeds revenues by 45%, something has to happen, rate? the president has to issue a report on how to solve the problem, correct? >> yes. >> has ever been triggered? >> a threshold has been exceeded for a number of years. i don't want a per se series, but i take your word for it. >> 09, 2010, 2011, 2012. have you ever held the president's response to that? has the president ever provided a requirement -- a report is required and allow quick >> are not aware of any. >> he's violated the law ever since quite >> am not a lawyer. first requirement for puzzle to be made. i'm not aware, but i may be
unaware. >> you would've scored it, had you done that? >> it depends. we estimate the president's budget was here, otherwise things junior-college spring two s. >> generally from california, ms. lee. >> thank you, mr. chairman. first of all, that may save the honor to serve on this committee and we hope to work with the committee to create a useful roadmap that will create jobs, lift people out of poverty and into the middle class, grow our economy for everyone and reduce the deficit. i'm a tenured for your being here. it's a moral document that shines light on what the priorities are of our government in who we are as a country. our nation's budget must reflect
values and raise enough revenue so we can invest in our people and meet our nation's challenges head-on while our economy continues to slowly recover, we also must focus on listening to millions of americans living in poverty at the economic ladder and into the middle class. so in addition to policies that strengthen the middle class, i will continue as a member of the committee to remind the committee nearly 50 million people live in poverty. 60 million are children and this is done except double. unless congress acts by march 1st, the sequester will slash thousands of jobs, which we heard earlier and economic security at the middle class, but will also push for low income individuals over the edge. it will eviscerate any gains are recovering economy has made in
recent years. so there's no question we need to prevent these cuts are taking place and we must do so in a way that protects investments for creating continue economic growth. i think we need to take a hard look at the loopholes and tax expenditures and our tax code that allow individuals and businesses do not pay their fair share, but also look at the ongoing waste, fraud and abuse over at the pentagon. i can't figure out how we can budget when the single largest discretionary item cannot be audited. we can get to know where the money and tax dollars are going and adequately set priorities. let me ask you about the cbo report on the american recovery and reinvestment not. i'd like to just ask you this, director. can you explain our targeted investment in the american
people in our nation's critical infrastructure, high that created jobs and help to begin to grow the economy and also if we invested in a program to provide a coordinated benefits and social services that listed long-term economic stability and income, half of families in poverty, what impact would that be and what impact would that have in terms of our economic growth? >> congresswoman, as you know, we've estimate it consistently for the past four years that the recovery act taking effect at the time it did with economic circumstances the country phase increased output and jobs relative to what would've happened in the absence of the recovery act and we think it did that by some additional direct government purchases, by giving money to state and local governments that they then used
to purchase goods and services or provide benefits and cutting taxes to americans to let them spend their money themselves an additional demand for goods and services those that only part of the great shortfall in demand that it come about in the wake of the housing bubble and the financial crisis. rethink the path of output and employment has been higher than otherwise because of that act. this year with an economy stronger but not that strong yet, the easing of fiscal policy such as deferral of the sequester word boost relative to what would occur under current law. you also talk about longer-term effects of policy. i think those effects are ones we worry about, but are harder to know for sure. so what the government can
strengthen the economic -- strengthen people skills, help them have better education and more training coming i should make them more productive over time. overall economic effects depend on the government does that and where the money comes from to do it. spending a dollar in a certain place can be good for the economy, but in the longer run does come onto something else in the economic effects are what is coming out of. >> generally time is expired. thank you. >> thank you, mr. chairman. i want to continue in the same line of conversation about the long-term impact. is there an economic benefit to balancing our budget? not adding two additional principal year after year, is there a benefit to our economic development is the nation? >> yes, congressman, a smaller
deficit down to zero can be better in the medium and long run than a large deficit. at the economic effect depends on how you do -- >> i understand that. it's how you get to the balance point manners and has to be done in a way that makes sense for the economy itself. an iraqi family for the challenge challenge of understanding this and i want to know how this applies to their individual families. can you help or not john to the individual family? what is the effect of his eckstein $.5 trillion to on a family in what is the effect of how that grows sunshine dollars over the next 10 years, would affect that happen on individual family? and you can't name the failing address. i get back, but the overall impact on the family. >> over the next two years at the week economy, the government borrowing in order to keep taxes
lower in spending higher helps the average family by producing more demand for goods and economy in the chance will be employed and get paid more. is he going to the second half of the coming decade when people will be back at work, then the government's borrowing is competing with byron households want to do for their mortgage borrowing. it competes with byron businesses work for and at that point competition for borrowing makes it harder to invest. that will tend to limit extra equipment workers have to work with them because of that will lower their wages. and family income relative to what would've happened if the government had not been borrowing so borrowing so much of the credit markets. >> that's not something you can shut off if they were going to have a sugar high and balance immediately and correct that. that has to be corrected when?
>> balance immediately -- >> i've written about this before. the senate and the congress acts to lower the level. it would be in the short-term. do you like it right now or six years from now. i'm current path, for five years if coming. >> i think it's coming. >> when asked questions about the size of the entries. we talk about the interest rates with another $7 trillion added to the data. what are we talking of the dollar size of the interest payment based on projection. right now we pay around a few billion a year in interest payments. what is your best guess i'm getting to the tenure when no?
>> are projection for this year, fiscal year 2013 if the government would spend $224 billion on interest payments. that would grow to $857 billion in 2023. that's an increase as a share of gdp from 1.4% to 3.3% to the internet interest payments. >> current path of yesteryear cut and everything else by the end of the next decade paying $857 billion in interest? >> yes, just in that single year. >> how many things we have at our budget that are a hundred $57 billion? >> not very many. this would be one of the largest components of federal spending. figure 13 shows by 2023 to major health care programs as a group
that social security be martha naches payments plus be higher than defense spending, higher than all nondefense discretionary spending and higher than all mandatory spending apart from social security and a major health care reform. >> thank you. i yield back. >> thank you. the gentleman from rhode island. >> thank you, mr. chairman. out to thank chairman ryan and chairman inhofe for this committee and thank you, dr. elmendorf. i've not heard heard from an economist or read of an economy city said we need to approach this serious economic challenge by reducing spending and generating new revenues. there's no question the articulation of that model is something we have to do. so we do it in the latest times,
but also at the same time making investments to grow our economy. we have to reduce spending, so we have to make choices about what we invest in. i'm wondering if you would share thoughts in terms of getting the most bang for buck. what are the kinds of policies while they are engaged in spending, were likely to produce the greatest economic growth in the greatest help to our economy because not all spending is the same. in that regard in particular registry thoughts about infrastructure spending, rebuilding the crumbling infrastructure of our country in the old-fashioned wpa way bush leaves behind an asset that contributes to economic growth and the ability to compete in the global economy can at the same time puts people to work immediately the leaves behind a valuable asset. how does infrastructure relate to economic growth would we make choices about spending and if you speak to a proposal the
president spoke about last night, which is to allow the lands of american homeowners to refinance their homes at a lower interest rate. the market race today which i suspect would produce on average $1200 a year in new spending opportunities for families providing substantial economic relief, but i also expect would be a huge economic generator in terms of job creation if he does speak to those issues. >> when we talk about bang for the buck, sometimes a short-term context and sometimes medium or long. in the short term what matters most is how much of the extra dollar of government spending or how much tax investments and how quickly it's back. giving more money to spending increases or tax cuts to low-income people tends to be more effective because they tend
to spend a larger share of the difference. infrastructure spending gets spent, but depending on the project it's somewhat slowly. so it cannot hyping for the buck ultimately, that may not have a large bang for the buck right now because certain projects take a while to get started on. infrastructure investment gets devoted to high return projects can have a big effect on state of the economy. half of non-discretionary spending can be viewed as investment either the school structures are people in the form of education and training. not at me is that while, the sum is clearly spent where it cannot otherwise provide. some have high rates of return and can boost the economy in significant ways over time. one concern people have raised
with the cutbacks as a share of gdp in place under the sequester, but even under the concern that could end up limiting what the colleagues have made specific choices yet. hoping households, i do not precisely what his proposal is. we have done analysis of different ways of encouraging more refinancing. that can have a positive effect on the economy in addition to households the overall effect depend how many refinance. crucially however program is designed, is eligible to do something differently than current. the effects can vary that across different ways of doing that. dollar for dollar can be effective as reported in the report about a year ago.
>> when you see depends on the amount, the more americans able to take advantage is an easy program to administer to have a greater positive impact. >> yes, exactly. >> thank you. gentlelady from tennessee. >> thank you, mr. chairman. thank you for being here today. i think i can thank you for the budget outlook because as you read through it, certainly bring a lot of concerns about where it going in the huge challenges that will expect going down the road. as i was reading through here, i made no sweepings are unsustainable. social security is unsustainable without reform will go bankrupt in 2033. medicare is unsustainable. social security disability insurance, which we don't talk much about and that is really an
important topic at the deceit of this committee or some other committee take a look at because i cuts concerned about this last year when i started reading it will go bankrupt in 2016. on the education side, pell grants, $1 billion shortfall in fy 15 and annual shortfalls of $5 billion or more from fy 16323. all these programs is very, very scary to see the go bankrupt unless we have some form of reform. let me now turn to look at the health care issue is cbo cites health care rising cost of the leading driver of debts and deficits. federal exchange subsidies are expected to cost $1.2 trillion on medicaid expansions are expected to reach $639.
and knowing all this, will this increase in spending -- first of all, the affordable care act or obamacare adds new health care entitlement spending or so here we go again. will this increase spending with medicaid expansions and neil subsidies reduce health care cost growth as a look at growth down the road? >> congresswoman, the affordable care act has a number of different pieces of different attacks. the expansion of insurance coverage we now estimate will cost $1.3 trillion over the 2013th two lakh 2023. >> dr. elmendorf, when the interrupt and make sure you understand this is 1.3 trillion more than what was anticipated in previous outlooks of the program? is that correct? >> now, the cost of the
expansion relative to a world that did not have that will be extra cost. we've made many, many changes to our projection of the expansion, but they've netted to very little change on balance for any given period of years. our estimates are 2019 or slightly below what they were when i first estimated the effects of the expansion three years ago. as one moves the budget window further along and the larger numbers from a still existing federal programs and tax revenue because the economy is growing over time. this particular part of the law raises federal cost to subsidize health insurance for people in particular ways. the law included changes to medicare to have the effect of bringing down growth rate of medicare spending over time.
taking pieces together would mean the law has increased the federal government's budgetary commitment to health care in the long run because ultimately the law as a whole include changes in tax provisions and is a small deficit producer. the government's commitment to health care is increased because of the affordable care act. how have medicare changes that the growth of medicare spending. it's an uncertain business and whether those changes to medicare was spillover, we don't know either. we've not offered abo and we don't do estimates. we try to focus the federal budgetary effects. >> about the chart up your reference in to share the major health care programs are the
greatest amount of monies and in any one category and were showing it does grow. does that curve down. it continues to grow and yet despite days, the point at the end of the day is we know there are going to be people out there , more people uninsured because there's a lot of dynamics also occurring here that are accorded to a reaction. >> checkout lady --
robin as washington had to say that andrew jackson, they loved emily. she covered everything. the women all liked her and the women's opinions meant more than people thought in washington. i'm only became his acting first lady. she had changed her plea. she was polished. some people thought she was rude and rustic from the country. >> house oversight committee leaders come and tear issa and
elisha cummings testify on viability of the u.s. postal service. their testimony came before the subcommittee one week after the post-general announcement of the military five-day letter delivery service. this is 40 minutes. >> i have a statement that i want to give. i'm going to just yield to her friends from the house, chairman issa, try ranking democrat on the elisha cummings. especially in the last months of last year, had a chance to bear down and try to get to -- we got in the red sun in terms of final solution we've made real progress. and when to forego comments initially and ask our colleagues
to just go ahead and pick it up from there. again, thank you for joining us. >> thank you. chairman carper, ranking member coburn, you are new to your positions, even though you are from assisting the body. mr. cummings and i came close to the last congress to what we thought was a bipartisan and bicameral deal. we start off this congress with a view that with you as team members and coaches about with and as a bipartisan bicameral problem and bipartisan bicameral solution, we believe we can get there. clearly as you can meet today, the subject of five-day delivery is going to be among the most important subjects. a day to emphasize that because i believe in order to get a comprehensive reform, we must
first realize free in the realize free in the hands of the postmaster general and away envisioned is a good first step. postmaster has determined going from a less than 50-cent single delivery on a saturday to a five-day delivery of that mail no matter how small an amount aware for the sunday dissents from a single flat letter will be delivered anywhere in america. but on saturday, a light day, relative to most other countries come and the idea there should be a small premium for flat air, $5.60, still less than the cost of a good hallmark card from cbs term you can have a letter delivered. more importantly, the postmaster's proposal will continue to see vital medicines and packages delivered in any other way at any other point in
america. the maintenance of universal service, better rightsizing of cost or benefit is the hallmark of what the postmaster is asking this congress to not stand the way it is. probably the postmaster is correct that he is the authority with the law and maintain service, but the lot number and tended him to do it at a loss. the postmaster had to bear over 15.9 losses last year. this completely depleted his line of credit. it cost 10 to make cash flows to virchow required and agreed payments of $5.8 billion for the second air in the row. this deferral does not mean eventually those amounts more common due. it is clear alternately to ratepayer a taxpayer will have to pay the over 25 and an
accumulated debt of the postmaster or the post office. and i say 25 billion eye to what statisticians to say it's only 15 alien. this deferral still has to be taken care i've asked you the eventual medical retirement and other benefits of postal workers. keeping that commitment currently is backed by full faith and credit of the u.s. taxpayer. as i said, the important thing to realize is guaranteeing six-day delivery in america, but doing it at a rate that allows the post office to become solvent again is critically something the postmaster has to be allowed to do as a preamble to the legislation we vision. australia, canada, finland, spain and as we often know but sometimes snicker, sweden have
all gone to five-day delivery. rural and urban countries have found that the advantages of electronic mail, with advantages of direct deposit, including social security, which is 100% correct deposit for seniors, the volume of five male has gone down and will continue to go down. we in congress often look at loss of jobs is it that thing. i want to close them making a conclusion. had we to years ago from a three or sicko, four years ago dealt with this problem, individuals of the post office who are long-time workers fully able to retire, could have been paid a full year of their pay as an incentive to retire not early, but in fact not later. the cost of a $50,000 buyout of
a potential retiree is swiped us and retirees for $1 billion. essentially, in less than a year, you could provide that benefit to every single person eligible to retire and still do it for less than we lost last year. i'm not suggesting we automatically pay large buyout, but if we can find efficiencies, we can find a way to encourage people to retire without breaking contracts, trust, having people have to go into their golden years are the post office has the right amount of people. one last point as a bargaining point we are so aware of. chairman come you enjoy a great many urban older homes in your state. many of those homes have shoots in their door. everyday a postman comes up and puts flat mail in there, but
more and more, the son home see about a piece of medicine or purchases from amazon placed on the stoop, crammed inside the door for some other way delivered as best a postman can with the reality that that system, the flat bell system did not envision what you do with a box that will be left if you're not home and more and more seniors and young people are out inactive. so the postmaster at his request would like to accelerate over the near future the ability to put in boxes pushed back the older homes in seniors to say what if i have to walk around the corner? ever tell you here today that providing a secure box large enough to take purchases and medical supplies in every neighborhood in america should be a goal we in congress pernell, whether it's a new neighborhood portal neighborhood, we find a way to
define acceptable boxes to reduce the time necessary to deliver mail, but increased security at medicines delivered to every point in america. i believe it to his largest single savings in the system, five-day delivery and modernization of to the curb delivery are both beneficial it done right. we now have the postmaster was to do it. the other should be a goal to make sure funding is available to provide appropriate secure storage for every american because more and more that the medicines are delivered and that's how purchases are delivered. with that, i'd be happy to take your questions and i yield back. >> mr. chairman, thank you for thoughtful testimony and now i'm pleased to welcome congressman cummings. >> thank you, it's my honor and
privilege to be here this morning. i want to say to you, mr. chairman come you're absolutely right. we spent some time in the red zone, but america expects us to get in the end zone. i do believe and i was listening to you, senator coburn this morning on morning joe. i said to myself, we have to get this done with a reasonable guy like senator coburn and i believe we will. i really do. you know, i'm also pleased to be here with my friend and colleague, chairman and he said in the postal service is a vital link that binds our nation together, delivering mail to more than 150 million addresses in operating 32,000 post offices
nationwide for postal service connects families, friends and businesses across the vast distances of our great country. last year however the postal service reported losses of approximately $16 million. at last one but $3 billion in the most recent quarter. it is friday for a 50 alien dollars. it is authorized to borrow from the treasury and continues to this approximately $25 million a day. it also faces a burden not required of any other agency or business in this country. it must be billions of dollars every year to pre-fund health benefits for its retirees. as we all know, this not simply does not add up. the postal service needs a new formula for success. last week the postal service announced it intends to end saturday mail delivery and
accept packages in august. in my opinion, this announcement was an unfortunate development and will not solve the postal service's long-term fiscal problems. instead, congress needs to pass comprehensive reform legislation that addresses not only delivery standards come up with a range of reforms needed to fundamentally reengineer the postal service for the next century. to its credit, the senate last year passed comprehensive bipartisan legislation to reform postal operations, including extending the schedule for retiree payments, overpayments to the postal service made to the federal pension system and providing key tools to access the portal service workforce. everybody agrees we have to resize the workforce. i was pleased the senate included several provisions for
my legislation. too many people argue the postal service to be self-sustaining, like a business. at the same time arguing it should be banned from competing against the private sector. i believe we must allow the postal service to expand into new business lines in that bill would've done that. unfortunately, the most significant challenge facing the postal service today is not the delivery or declining mail volume or pre-funding health care to retirees. it's congress' failure to act. although the senate passed a comprehensive and bipartisan bill, the house failed to consider legislation. we cannot solve this problem if we continue to worry. that will only grow more desperate and more dire. there is some reason for hope
however that is the ongoing commitment of the members of congress in this very room. the people in this very room can make this happen. over the past 10 months we've come together to discuss potential solutions in a serious matter and i've been encouraged by many areas of agreement was reached. as a matter of fact, leader pelosi asked me today about the status of the bill and i told her that we've got 90% there. we weren't that far. i believe we were on me that the two-point line, mr. chairman and i just can't afford to fumble the ball because when we fumbled the ball, what happens if america loses. i believe we are close. if we would launch a renewed effort as soon as possible, we can have a bipartisan bicameral solution. i predict we can complete the legislation before the end of
march for the current appropriations expires. to meet the deadline, we need to do it right now. there's no time to waste. finally, let me conclude the issue closest to my heart in this debate. i believe we have a solemn obligation to honor the dedicated postal service employees who has served this institution for decades. a 60 how to resize the postal service workforce, i urge my colleagues to fight and fight very hard to demonstrate compassion and respect for middle-class american workers and their families. by the way, 21% of them are veterans. 40% are women. many of them single head of households. and so mr. chairman, i thank you for holding this hearing and i
look forward to recorded during our colleagues in the days to come in with that i yield back. >> thank you. another thoughtful and it struck to comment. thank you at the view. i like the visual here are the two review side-by-side, democratic republic and, rolling up sleeves to make this happen. a lot of us watched the super bowl and you and i are pulling for the same team. we have a quarterback, where's he from? >> delaware. that's right. as can imagine the ravens, but i didn't want to take it too far. >> at the end of the game, 40 niners headed in the red zone close to the end zone. couldn't get the balmy and sound to me is to make sure we get the ball in the end zone. we been joined by senator ayotte. delighted you're here today.
she brought with her a veteran, a great colleague, one i love to work with, make enzi. they been joined by senator baldwin from wisconsin is a member of our committee. i have a long statement i ask unanimous consent to be made part of the record. i went to leadoff witnesses instead. dross and pieces out of my prepared testimony. we need the postal service. the event of the postal service if the patient was born. 70 million people don't have a job today there relates in no small part because of the work the postal service does for all of us. 12 years ago when i was a freshman here, tom, i had my staff count the number of letters we got them for about
everyone e-mail we receive, we got about 50 miners. today is just the opposite. for every 15 e-mails a day roughly one letter. therein lies the problem. the way to communicate is changed or the postal service is trying to change but that induce some degree have succeeded in there's a number of other things we have to change further in our job is to facilitate that. when they come up with new ideas to try not to be an impediment to those ideas. the president talked last night about what we need to do on deficit reduction and i think there's a lesson in what he said forestier today. we need to resize this enterprise. the postal service is attempting not with a number of mail processing centers which are owned by now most a year or so from now. it didn't post thousands of post office, but we found a better
way to get the job done and save money by allowing community to say goodbye to have their posts post is open for two, six hours a day. take a postmaster and put them to work on an hourly basis. they're still provide an essential service. we have trajan make it possible to incentivize boats to try to retire. the postal service is beginning to incentivize people to retire. within the workforce strop from looking at the postmaster general, but i think it wasn't that long ago we had about 800,000 employees or so in the postal service. today were approaching 500,000. not year that. maybe below and moving lower than that. the idea is to resize the enterprise. the other thing the president talked about last night was entitlement programs, something tom coburn and i have tried to do a lot about.
we spend our money for health care in this country than any other country on earth. japan spent a percent of gdp. we spend 16. closest country to assist norway. they spent 52% less on health care than we we do. they get better results. one of the things post office is trying to do is figure out how to get better results for less money or better results the same amount of money. her anxious to hear what she had to say on this, mr. postmaster general to work to make that happen anyway that does not disadvantage employees or retirees. the other thing is the president talked about the need to grow revenues. he has some different ideas. he can't just be about cutting. it can't be cutting people, cutting services. when he took grow the pie of
revenue for our country. i heard on the radio the other day about paul simon song, 50 ways to leave your lover. the postal service says that to mr. make money in the gao here later today, maybe comment on those ways to make more money. we look forward to see how you do that and how to be less of an impediment when you come up with a good idea. last thing i want to say is this. postal employees are going through a time of great uncertainty. it hasn't been an easy time to be a postal employee. i want to remind them and all of us do most americans are the postal service does a great job. they have better approval ratings that even dr. coburn and me as hard as that is to believe.
[laughter] if you're over 85% -- i want to drink what you're drinking over here. >> a disconnect that the combination of not that high and a whole lot lower for us. >> i don't know. i don't know. at the end of the day, i want the postal service employee sued over critical for the work they do. they do vital service, important service and we appreciate the willingness to work with leadership to resize this enterprise. this is a problem that can be fixed. this is a challenge that can be met and our goal, michael and one shared by dr. coburn is a whole lot sooner than later. for an overtime right now. this is not going to be like notre dame the other night for week five other times were not going into five overtimes. are going to get this job done. that having been said, i'll
yield to dr. coburn. >> i want to thank you for your testimony and hard work on this issue. i was one of those who failed to vote for the postal reform bill because i felt it? some essential things required to solve it. i want both of you to know i'm firmly committed to getting a compromise bill that will pass both chambers and doing a forthright. you have a commitment to do that and i appreciate your testimony. >> have a question if i could. sometimes the members testified they don't anticipate answering questions. i'll ask a question if you have a thought that's fine. i don't want to put you on the spot. the issue of health care and deficit reduction if we don't figure out how to get health care results less money for same money, will never balance the
budget. the postal service has acknowledged fully we got to do more than just amortize, if you will, prepayment of health care over 40 years. my hope is in the compromise will change the amortization schedules. that's a more appropriate approach. the postmaster general was sure this ideas with respect to doing what they've done in the auto industry with the uaw and the big three. the big tree said were trying to run a health insurance program. they thought they could get better results for less money. would you will just react do you think that's crazy or something we can work towards click >> no, i don't this blue sky. we've all had good guidance for the postmaster on whether to do.
it's very clear the government can in fact transferred full faith responsibility for health care and a willing racist that's everyone best interest. we have to be realistic. you can't transfer something out but early if they were going to turn it over as general motors denoted did and so beautiful face. i support the idea that getting the government out of the health care business is a good idea, but i'd like to know something because your committee in the senate slightly different has complete control where we have a big chunk, but don't have it all. the question on health care is the federal government retirement system first or second relative to medicare? this is an import miss you when the federal government has to
decide from the standpoint of accountants consider it natural because it's two different pockets. from the standpoint of what would happen in the private sector, and the private sector no company would say are going to pay the bills and if there's anything that people try to medicare. they say medicare's been fully painted by men and women of the post office and we expect medicare to provide what it would provide further private sector and then we will supplement it. this is what states choose to do and a few that are fully in the system, this certainly with the private sector does. that's one of the key questions for your committee even within eyesight is are we going to look at medicare is the primary for federal workers including the postmaster's proposal and if so changes the calculation of what the ratepayer should pay for what is in fact a supplemental medical facility. that's not the way we put that
in the past. that's the reason the number were arrested with this obeyed. >> i've heard proposals of the postmaster and i think and i said to him that i don't have a problem with it has long history of get comparable coverage. you know, it's one thing to go out and change things. it's another when you have on the one hand at the present system 100% and another system you got 75%. he claims they can do that. if you can do that, that's fine. the two words i think we need to concentrate on, effectiveness and efficiency. and so, if we can affect nearly do it cheaper with the same kind
of effect, then so be it. but i think the jury is still out. i believe that he believes it can be done. i'm not going to doubt him, but i'd like for him to show me. let me leave you with this. but think when you will listen to the testimony today, i hope to concentrate on some thing you said. and that is, you know, i'm the one hand we want the postal system to write facets of to the effect that an efficient, to now adapt to a new world, but at the same time the question becomes they will mention all the things they can do to bring in money, but i know they will be frank in a tuesday when maybe congress is to give them the opportunity to do that. you know, in our committee we
had folks that the postal service would lift a proposal for how to bring a new revenue and say no, can't do that. not you, mr. chairman. [laughter] you can't do that, you can't do that. i know the postmaster would get very frustrated. i'm the one hand, fighting new revenue, do things the right way. he goes and tries to do it. don't touch that, don't close the post office. don't compete against the sky. in some way, we need to get past that and i hope is to listen to the testimony, that's the kind of thing we need to go to figure out if we're going to innovate, they have to have the license to get their do not be hindered by us. >> i love it when we agree. that's good. normally we don't ask questions.
>> were fine. >> senator tester, welcome. >> thank you, mr. chairman. i am one of those guys if they don't shut down mail processing center and i will tell you i because it has an impact that you may not feel in pittsburgh or miami or chicago or houston or l.a. or we don't get mail for five or six days. so if were going to have a mail service that will work for urban america come it well better for rural america, too. we've had many discussions that we disagree. if are going to cut the nose up her face, why don't we just turn the contractor to ups or fedex? is in the constitution which of the service and is something that's worked well for centuries we have to continue to make it work in the future. they may not be before someone spies, but when it comes to senior citizens, rural america,
this is something absolutely critical. we don't have broadband where we are cutting service to. so i'm one of the guys that says to make a service on saturday says no. are there any other options? by the way, we have given other options may have not seen results come from the zuckerman nation's recommended. i'm a farmer. the worst thing i can do is give my customers something they don't want a mess is happening world america. i cannot speak for big service areas. >> if i could respond, first of all, something you and danny ray bourque agree on. >> amen, brother. >> then he was a classmate of mine and he let me know he was going to serve any processing changes in mind cannot. ..
>> it's the point of which you have your neighbor, going to a processing center, how long before your next door neighbor gets that mail. >> i agree with that, and i tell you the problem is once it's done, it's done. once that processing center in wolfpoint, montana is closed, and that letter going to somebody who doesn't have a job in western montana takes five or six days, it's the last time the postal service is used. that's what i'm talking about. >> as you know, senator, the ups very muchments -- much wants to maintain a service
because that haul to montana, ups is delivered by the united states postal service. we have a partnership with the post office, the private sector, that's a win-win, but i assure you that we want to make sure that there are safeguards so that what is claimed to be a level of service, is, in fact, verified to be a level of service before any processing center is closed. that's what you need to insist in the bill, and that's i think what that all of us have to make sure we promise in the bill, and i know that alaska has the same concern. they, of course, have bythe -- bypass mailed. i have been to the rural areas. theyed need to maintain is service that's unique, and we have to preserve both of them. it's the right sizing in urban areas of not having, if you will, processing center that see each other and post offices that see each other. it's something the post postmasr wants to focus on, and we think
we can have a bill that maintains the service and post offices that are rural. >> i look forward to that. i think you touched on the issues that congressman and i both agreed upon, that standard the service delivery has to be kept competitive, and i tell you what i see going on in rural america with the proposals coming out makes it not competitive, and we count too. that's all. >> senator, let me say this, that senator collins kept this at the forefront, these issues at the fore front of all of our discussions, and this one who lives in an urban area and has grown up in one, i am very, very sensitive to this. i think when we legislate, we have to legislate all of america. >> that's right. >> and i get it. and i'm not anxious to see our postal service and with all do respect, the ups, but i don't --
i think we can do this. i really believe that. i don't think that we are that far, and being able to do it in a way that satisfies your constituents, we just got to make our minds up to do it. >> i agree, senator. i will just say this. the reason that i oppose some of the things that the postmaster general has recommended is because i -- i don't oppose them because i don't think the postal service needs to be solvent. i think it does. we have to work towards that and try to achieve it. my concern is is that the postal service will not remain competitive in rural america, and consequently, it will be gone, and that's a real negative for economic development. it's a negative for the seniors, for everybody. we're on the same page, but when i object to the fact some of the things the postmaster general's putting forth that i don't agree with, i'm going continue to do that. >> mr. chairman, two seconds.
i hope we understand that the post office can remain competitive with a much lower level of service. the reason we want to maintain the service and guarantee it in the bill is we want rural america to remain competitive, and if they don't get that level of service, it's harder to be a rural american and still compete in the 21st century. we totally support what you want to achieve. >> all right, good. anyone else? senator -- you were here first, do you have anything you want to ask of these witnesses? >> just a brief question for both of the witnesses. >> i'd ask you to briefly have your responses. >> i'm new to the committee, but what struck me in looking at the ga report because we're going to receive testimony on this report today was something that i think i'm hearing from both of you, you would agree on, so i wanted to get your comment on it, which is the report says if congress does not act soon, the postal service could be forced to take -- meaning implementing reforms to allow the post office to be sustainable that if we
don't act soon, the postal service could take daughter andc actions with a disruptive effect on the employees, customers, and availability of reliable, affordable postal services. i see this, many areas around here, whether it's preserving medicare, social security, if we don't act soon on this, the choices get harder. is that true? >> absolutely. i agree wholeheartedly. we have to act. that's why i said from the beginning, you know, we were so close in the last session, and i think that we can get there. we're not that far apart. we really aren't. >> okay, thank you. >> senator, do you have a question for the witnesses? okay. >> thank you very much, mr. chairman. thank you, both, for being here, and congressman, i just thank you for going up to alaska. i know we had a good conversation about that opportunity, and you got to see what we would call a hub, and then you saw real rural alaska.
>> nowhere else do they use hydrofoil to deliver mail. >> that's right. amazing place. no roads, you fly in, figure if it's a boat or what to get to the next location. i appreciate that. i also want to say thank you for your common here in the engagement with senator tester. alaska is unique, and i think you experienced the long flight, but, also, it's not just about mail. it's about food. it's about supplies. without that access and that affordable access, we would have situations out there that people could not afford to live or survive literally out there so i appreciate the work you both did, especially towards the end. i think we were, like, you know, you could feel the moment, i think, senator carper was constantly reminding us of the moment that we were so close, but clock ran out, and it was what it was, and i hope that we can get back to that, in that broad sense because it's so important for my state,
understanding the rural component, understanding the uniqueness of alaska and getting things to places where you just can't get in the car and drive down the street to the next walmart seeing we have no walmarts in rural alaska to say the leastment thank you for that understanding. i want to continue to work with you, through this committee, with the chairman on making sure alaska in the uniqueness of the delivery because that is it. i mean, that's how we get food. i mean, and timeliness with the post office is critical. as you heard, the examples when you were there that when food is shipped in, sometimes if it's delayed and bypassed mail consolidates, gets it out quicker, that food may come out in a other system, not consolidated, and what happens? it's rotten, spoiled, or can't get to the customer in time, and it's no longer valuable. when you pay, in some cases, for half gallon of milk or gallon of milk $12 you want it usable for
a couple days. i don't know if you have comments, but, again, congressman issa, we had a conversation, and then you took me up on the challenge, and i thawfng for -- thank you for that. >> senator, fixing bypass mail is strictly about finding greater figure sigh. -- efficiency. you're right. it's the most efficient way on a per mile basis one could imagine to the extent we bypass mail, our goal with the postmaster is to still make it affordable, to make it the least cost delivery system to those native islands, rural parts that even in montana they would call rural -- >> john -- jon and i would agree on that. >> exactly. i think we can do it. particularly, we are looking at simply trying to make sure there's maximum efficiency,
maximum choice. as you know, the concern that i started with was that i want to make sure that we not mix apples and oranges. there's another problem in alaska. it's not my committee's responsibility. mr. cummings is involved, but we have to make sure when we are done, we empower the mail to be delivered as inexpensively as possible, but we try to preserve that affordable passenger service that is also been intertwined with the same carriers, and that's a sensitivity that i know you have, and i want to make sure our committee has as we try to find a win-win solution. >> mr. chairman, a last comment. it's unique, and i don't know what plane you were on, but in alaska, we have when you get row 16, that's actually the front of the plane because the other front of the plane is all cargo. that's a unique mix that makes it affordable for passengers and
freight, and it's -- there's nothing like it in alaska, and, literally, i was in alaska this weekend. the day before i was ready to go to homer, alaska, the airline canceled total service. we had to switch. there's only one airline beginning into a community of several thousand people, problematic for food and passengers. i appreciate all your work, both of you. thank you. they are first front half is cargo, and the back half is passengers, and in alaska, cargo is higher value meaning it's food, supplies, and you can get easy kicked off a plane if it means bringing out food or bringing in food, and for our fish products, that's how it's shipped out, and just reminute folks here that 60% of wild cod fish in the country comes from alaska. they are high priority, but they move food so you literally when you get row 16, you should be excited about that. that means you got at least three foot of leg room, but
there's a blank wall. that's all the cargo in front deliveredded into it. >> all right, thanks. senator, would you like to -- okay. i just -- i said though when we introduced the first, a lot of times when members come and testify, true in the house, it's a deal, and they come courteous, give a testimony, no questions, and they head out on their way. i wanted to see more than that. it's been that. i said earlier, i love the visual of you two sitting side by side working on the important issue together, and before you leave, the last thing i wanted to do was quote albert einstein. you said a lot of memorable things, and what's especially memorable and appropriate for today, "inadversity lies opportunity." that's what he used to say, "inadversity lies opportunity." we have adversity and opportunity. we'll see the opportunity and seize the day.
with that, sending you on your way. god bless you. >> thank you very much, mr. chairman. >> now, more on the financial issues facing the u.s. postal office. they heard from patrick donohue ending saturday delivery in effort to cut costs in the financial ailing constitution. this portion of the hearing is just over an hour. >> our second panel comprised of generals, a postmaster general and comptroller general. they are not in uniform today,
but in uniform they wear every day. thank you for joining us. the first witness is don, the postmaster general. he's spent his entire career at the postal service beginning as a clerk at the age of 12. all right, maybe not 12. a young clerk in his hometown of pittsburgh spending many years in top leadership positions before appointed postmaster general in 2010. good man, look forward to working with you. glad you could be with us today. second is gene who served as the controller general of the united states and head of the u.s. government accountability office since 2010, acting controller when i first met him when he came on board, and he is one of the -- one of my -- one of the witnesses i most enjoy welcoming. this puts pressure on him because he never uses prepared
testimony. like, right off the top of the head, and we have hundreds of people who testify, and it's right there in front of them and people whisper in their ear, and this man just sits there and delivers. you heard the term "standard delivery," he sits and deliver, and the guess is he'll do it again today. with that said, that big buildup, gene, good luck. happy you are here. we look forward to your testimonies, and helping us to develop consensus to get the ball in the end zone. thank you so much. >> good morning, mr. chairman, thank you very much. dr. coburn, members of the committee. thank you, mr. chairman, for calling the hearing today to discuss the dire financial condition of the nation's postal service and for the opportunity to provide details of the postal service's proposals to return to long term financial stability. glad to be here to discuss
important issues which are now more urgent than ever. the postal service faces tremendous financial challenges. last year, the postal service regarded a loss of $15.9 billion. it's a fault on payments for the u.s. treasury of 11.1 billion. the postal service is exhausted the borrowing authority and continues to contend with a serious liquidity crisis. at one point last october, they had less than four days of cash on hand to fund operations. an organization the size of the postal service with revenues of $65 billion and a work force of 495,000 career employees, this is a thin margin. most private sector companies have two months of cash on hand. the postal service can cannot continue on its current path. we're losing $25 million a day.
we are weighed down financially by the increasing burden of health care obligations and financial losses unless significant financial changes are made to the business model. we have a responsibility to provide and finance universal service to our nation, but we do not have sufficient authority to carry out of the responsibility. fortunately, there is an alternative path. if congress enacted legislation and legislative reform, the postal service can return to profitability. the postal service can return to long term financial stability, and the postal service can avoid becoming the american taxpayer, and it requires the postal service have greater flexibility to adopt to a changing marketplace. within the current model, we have been very aggressive in the efforts to reduce costs.
since 2006, we have reduced the size of our work force by 193,000 career employees. we reduced our cost based by 15 billion dollars, consolidated more than 200 mail processing facilities, modifying hours at 13,000 post offices, and we reduced 21,000 delivery routes. we strive to retain and generate new revenues, seen strong growth in our package business. this is fueled by an effective marketing and innovation system as well as the continued growth of the e-commerce. marketing mail continues to serve as a valuable marketing channel, and we expect this part of the business to be stable for a long time. first class mail that businesses send continues to prove its value and also been relatively stable. fortunately, people like to receive hard copy statements and other business correspondence through the mail that
unfortunately, for us, they are electing to pay bills online. the result is that we have seen sharp declines and first class mail sent by residential customers, and this is a trend we think will continue to erode revenues. despite the efforts to increase revenue and reduce operating expenses, we look the flexibility in the business model to close a widening budget gap. this is the core cause of the financial challenges. the postal service must generate roughly $20 billion in cost reduction and revenue generation by the year 2016 to return to financial stability. we are taking every reasonable and responsible step in our power to strengthen our finances immediately, and, indeed, we've been directed by the board of governors to do so. last week, the postal service announced the new six-day package delivery effective the week of august 5th, 20 # 13. the anticipated savings from the
schedule implemented is approximately $2 billion a year. this approach to the delivery schedule assures continued growth in the package business and enables e-commerce throughout the u.s. economy and reflects the changing realities of the america's mails habits. we would urge congress to eliminate any impediments to the new delivery schedule. market research conducted over the last few years has shown high level of support from the public for a new delivery schedule. just this morning, cbs news released a poll showing 71% of the public supports the new delivery schedule. the postal service also conducted a poll this weekend, and it showed an 80% support level. although discussion about our delivery schedule gets a lot of attention, it's just one important part of a larger strategy to close the budget gap accounting for $2 billion in cost reductions while we are seeking to fill a $20 billion
budget gap. in the 112th congress, they passed one that included reforms sought by the postal service, and although the legislation was not enacted, we believe it could provide frame work for swift action in the current congress. there are several key provisions needed in legislative reform for our business model. these include requiring the postal service to sponsor its own health care system since a huge portion of the costs go to health care for employees and retirees. this will go a long way towards resolving our retiree health benefits prefunding obligations. reforming our business model to remove restrictive government issues. this would enable us to adapt much more effectively to the competitive marketplace and to changes in our finances. transitioning to a new work force, based on a redefined employer of the future defines a contribution retirement system for employees joining the postal
service after 2015 versus defined benefits. wet like to see a proper calculation of the surplus to use funds to pay down the debt of the postal service. allow me to discuss the important opportunities we have to talk about the financialship. this relates to how we provide to the employees. there is substantial opportunity for savings, up to $7 billion worth in 2016 alone for moving to a much more modern customer response focus system. this would involve having the postal system manage its own health care. we would competitively select a large national provider. by moving away from the federal system, nearly all employees and retirees get the equivalent or better health care coverage and pay less for it. the reduced cost to the postal service would enable a major recalculation of the retiree
health benefit situation and could eliminate the need to fund the future rhb payments in their entirety. the most important part of the health care proposal gets to the root cause of cost control. it bends the cost curve permanently downward, and there's little value to remortgage an unsustainable growing obligation. we have got to reduce these long term issues for the long term. as we look at the challenges facing the postal service, i believe we need to put every option on the table. we need to make decisions, and we need to act. this is fundamentally an issue of adding up the items to get us to a $20 billion total by the year 2016. resolving health care benefits, obligations will not get us there op its own, neither will the delivery schedule changes proposed. we have to do everything item we've got on our list. the financial problems of the
postal service get bigger every year. if we had reform the business model years ago, we would be in better shape today than if we delay another year or more, we may never get back to a steanble model and put tremendous pressure on our continued liquidity. we need your help to pass legislation that allows for more revenue generation and first time and effective cost control making fundamental changes to the business model. without your help, the service could be running deficits, operating deficits in the range of $10 billion to $15 billion annually. if congress acts, they can avoid a future scenario in which the postal service requires the taxpayer bailout which could be in access of $45 billion by 2017. we must change our business model. this is -- time is not on our side. it works against us every day. to preserve our mission to provide secure, reliable, and affordable universal delivery service and to do so without burdening the american taxpayer,
the postal service needs urgent reform to the business model. mr. chairman, let me conclude by thanks members of the committee for recognizing the difficult challenge we face and for the willingness to take them on this year. the postal service is a tremendous organization with tremendous employees and needs your help. the american people deserve a financially healthy and vital post sal service that stands ready to achieve that goal. thank you very much. >> thank you, sir, for the testimony and leadership from an early age. mr. darrell, you're on. great to see you. welcome. >> good morning, mr. chairman, ranking member, coburn, members of the committee, it's a pleasure to be here to discuss the postal service's financial condition. the financial condition has been on the high risk list for years. >> on and on, hasn't it?
>> on and off and back on. i put it on white i was acting so i knew it was a serious issue, and so that was back in 2009 it was back on. it was on in 2001, and then came off in 2007 after 2006 reform legislation, but that, obviously, did not work, and that was prerecessionary period of time where mail volumes declined even more. it's been on the list for years. our assessment is the financial situation is dire, that declining mail volumes have not generated enough revenues in order for the postal service to meet its expenses and financial obligations. they have been increasing their borrowing. they are up to the $15 billion debt limit and boar ring from the treasury department. they are accumulating large, unfunded benefits liabilities for their programs. if you add the debt and the
unfunded liabilities for the benefit programs together, currently, it's $96 billion, and as a percent of the revenue in the last five years, it's grown from 83% of revenues to 147% of revenues. as the post general master mentioned, there's severe liquidity problems right now, and they have not been able to come up with a financing plan to make capital investments in the delivery fleet, and many of the vehicles in the fleet are approaching the end of their life span, and looking ahead, the mail volume for first class mail, which is their most profitable line, is expected to continue to decline into 2020. these are not the ingredients for financially sustainable business model for the future. we've said for years comprehensive legislation and actions are needed.
postal service needs to act and the congress needs to act. now, from the postal service standpoint, since 80% of the costs are personnel costs, they need to continue to reduce the size of the work force in an appropriate matter and in a compassionate matter and look at the benefits, also, being prayed to their employees to make sure they are appropriately sized. there's also excess capacity in the mail processing system, and this, obviously, is a structural issue that they have, and at core, there is a structural issue between our ability to generate revenues and with their expenses. they also need, in my opinion, to look at pricing for some of the products where they are losing money. periodicals, for example, and, also, standard flat mail, catalogs, ect.. those two items together are not meeting their costs to the tune of about a billion dollars last
year. they also need to look at new revenue sources, packages are a bright spot in that regard, and there's a number of other issues and initiatives underway to generate revenues, but, really, right now, there's nothing on the horizon that's going to stem the tide or the need to address their expenses to meet expected revenues in that period with the exception of some of the package areas. now, with regard to the congress, there's three things i point out that the congress needs to deal with in this comprehensive legislative package. first, would be to modify the schedule for the prepayment of health care costs. we noted that the schedule included in the legislation had large fixed payments up front. the senate bill would have moved that to an ac --
actuary yal adjustment, but it's important that the prefunded to the extent that the postal service is able to financially meet those payments. otherwise, you push the costs down the road, and with the declining mail volume, you're not in a better position then to meet the costs than you would be doing on a rational basis. secondly, we believe the collective bargaining statutes governing the postal service have to be modified and modernized. they were set 40 years ago when the postal service was not in such a competitive position that it is now, and the business model being in question, and we think that the congress should require that the postal service's financial condition be monday story consideration and binding arbitration issues going forward for the postal service.
lastly, but certainly not least is, i think, the congress has to facilitate the post office to make changes to deal with market conditions, mail volume changes, and to be able to have the flexibility to adjust the business operations. now, this, obviously is very important as it deals with the service standards that have been set, and some of the constraints they have been operating under, and i think that real policy issues that need to be addressed by the congress is to provide flexibility and be clear on what standards it wants, and i think the other issue is that, you know, oftentimes the service standards are looked at in a one size fits all means for the entire country. i'm not sure that that is a necessary requirement going forward and that there be more
flexibility to deal with issues and unique aspects of the condition. this is a really important area because if you go back and think about the personnel costs or 80% of the costs, a lot of personnel costs are driven by the service delivery standards. you have a structural issue built into your expenses on almost a fixed basis, and you're faced with declining revenues coming from declining mail volume, and so that structural issue needs to be dealt with in the legislation. i commend you, mr. chairman, ranking member coburn, members of the committee for your commitment to legislation in this area. you need to act soon on this as everybody as said this morning. i just put my two cents in in addition to that because i think that otherwise you're going to face a lot of unintended consequences that nobody really needs to deal with in this particular situation, so i look forward to continuing to support the committee, and we at gao
will do our part to the extent we can to help as you deliberate and shape the legislation going forward, so, thank you for the opportunity, again, to be here this morning, and i look forward to responding to questions. >> as always, we appreciate your being with us and testifying and appreciate so much the work that your team does at gao and helping us in a lot of ways to get better results for less money. we look forward to working with you, i think, tomorrow, the gao high risk list, the to-do list, find ways to stop wasting money. we are grateful to that as well. i'm going to go back to what i mentioned earlier, and it was with health care costs. in terms of right sizing the enterprises, looking at the distribution system that we have now, i think it's a lot of what's been done to rationalize
it, and i think if you look what we passed in the senate in our legislation, moving to a modified one day delivery, metropolitan areas, the rest of the country, too, and three-day delivery, the idea of giving the postal service the option of going from six to five day week delivery within the next two years, and knowing that someone could go sooner, but there's probably a compromise out there somewhere that i think we can seize on to. if you look at the distribution center, postal distribution center, the way that, the smarter way we use post offices, especially in rural areas, not taking away or closing the offices, but providing service in a cost effective way. look at the rather remarkable reduction in work force to the postal service from roughly 800,000 employees not that many years ago to just under 500,000 without layoffs or firing people, being humane, and i think being hue mane, i think
that's real progress not acknowledged, but that, frankly, is the right sizing we need to do. the 800-pound gorilla in the room in terms of deficit reduction for the country is health care. if we can't figure out medicare and medicaid in a way that doesn't satisfy old people, poor people, we're in big trouble long term. it's a critical point for the postal service going forward. congressman issa raised the issue of medicare, postal employees, post office itself pays into medicare, but unlike most other employers around the country and their employees, they don't get much benefit as do my wife, when she reaches 65, in another 20 # -- 20 years -- [laughter] >> tomorrow's valentine's day, not today. [laughter] >> when their employees reach 65, no longer are they the
primary provider effort health care. it's medigap, and that's one issue. the second issue is do we have the ain't to create a -- not a larger purchasing pool, but actually a smaller purchasing pool compromised of postal employees, post retired, and, to me, it's counterintuitive, but, obviously, not impossible. i want to ask, just folks have an idea for pulling postal, creating a smaller purchasing pool, and things they can actually get a health care just as good, just as good for less money. your reaction to that. >> first, i want to be clear, set aside funding health care benefits is still operating at a deficit situation so this is a
big issue and it needs to be dealt with. second point i'd make is that the $7 billion that postmaster regime mentioned to include the 5.5 prefunding amount, and then there's 1.5 billion dollars in the estimates in terms of actually bringing down the costs of providing a health care. we're currently looking at that issue in response from request by the committee. we're carefully looking at what effect it would have on postal service employees, what potential effect it would have on the remaining part of the federal employee health care benefit system, and we expect a report to you by july this year: we're taking a careful look at it. there's no easy answers. i think a lot of people think they could drive down the cost, but we're carefully looking at how those things could be handled. >> yeah, we need your help. appreciate that.
another quick question and the time expires in a minute. new products. postmaster general, just mention, maybe, the best, most promising free ideas for new products to generate revenues. >> thank you, mr. chairman. three areas. first of all, securing the business first class mail is critical for us. it's the largest product. we introduced the option of two for the price of one giving mailers the ability to put extra messaging in their mail. we've seen a nice leveling off of products. that's good. good cash flow from the product, second of all, every door direct, offspring of direct mail, gives small businesses the opportunity to, you know, hit local customers in a real simple way. we've seen almost $700 million in growth in that product in the last year and a half. package perspective, a couple things there, it's early bird, you bring the packages in the morning, we deliver them the same day working with other customers that's worked good. that helped with the 14%
increase in package business over the last few years, and we have metro post, same-day delivery, starting that off in san fransisco. >> thanks so much. >> general donahoe, i noticed the numbers were slightly lower this year, but yet your expenses were up 15%. went from 70.6 billion to 81 #. what accounts for that difference? >> biggest difference there, the double payment we were responsible to make to the prefunding. when we were excused from that payment in 11 that had to make two and 12. >> accounted for how much? >> a total of 11.1 at 5.6 billion. >> okay. so if yod not had that 11.1 billion payment, -- >> our cost would have been
relatively stable. the approach has been from a cost stand point and number of areas, the consolidation of the operations talked about before, taking transportation costs out, trading in lesser cost hours, working with the unions through some either negotiated agreements or arbitrations to bring a person in for $35,000 a year versus $80,000 a year employee, those are things done to pull costs down. now, understand, during that time, like any other organization, we are facing upward pressure from inflation, health care, gasoline. we're the largest user of fuel in the nation. that's a net reduction based on a lot of efforts in the organization. >> okay. pricing power and the ability to have the flexibility to match pries with service, you don't essentially have that now? >> no. >> correct? >> correct. >> but i don't see that mentioned anywhere in your
bullet points of things that need to change. you know, there is a sweet spot for first class mail. one -- as a matter of fact, oklahoma mentioned the ability to have the pricing power, and i'd love your comment and gene's on why that's important and what that can do for revenues. >> it's critical. with the one chart we took down, third point on there is streamline governance meaning pricing power, product power, that means service power for our governors. when the postal service was mental anguished in 1971, they established with the board of governors like the corporate board of directors with all kind of power. in between establishment and final solution, there was a postal regulatory rate commission put in place with good intentions. you know, talking against the intention behind that, but that took the power away from the board to set prices and products. what we're asking for is to go back into that direction.
we have no issue with a regulatory commission. they should be after the fact that lets us go fast, lets us get into markets that you already discussed here today, and as long as it's legal for us to do, we should be pursuing it. it also gives us the opportunity to change prices. i will say this from a price stand point. let us resolve cost issues before we push prices up. there's a real demand quotient in there, and we do not want to sink the system trying to generate mail from price increase. >> okay. >> obviously, in the dynamic factor and pricing is important. there's two tiers, one a monopoly or market dominance in the area, price caps, and then there's competitive pricing for other areas with the plex flexibility to recover their costs. i mentioned a couple areas in the opening statement, there's a periodicals, catalogs, whether or not covering their cost now,
they have flexibility, but demand issues, and the point of return where you don't want to drive down volume if you overprice in the area, but they definitely need pricing flexibility to move quickly in the environment. i mean, a lot of what's happening here has been driven by changes in technology. those changes in technology are going to continue to occur, and at a rapid rate. they need the flexibility to do that and have accountability and overnight structure as well to be able to, you know, provide the necessary accountability and authority. >> well, my time's about up. i want to say this for the record. i don't think anybody has a lot tougher job than what the postmaster general has, and the fact is that the post office's is in trouble, and i congratulate you. you know, there's really 536 postmaster generals. unfortunately, and the goal of our reform ought to be there's one, and that we give you the
flexibility to do the service to keep the standards there, and have a system that offers the best service at the best price with the best quality. i know a lot of things you have done are controversial, but leadership's about leading, and i want to congratulate you for having led. thank you. >> thank you. >> i approve that message. all right. senator enzi, you are next, and then senator tester. >> thank you, mr. chairman, and i'm pleased to be on this committee because, particularly, this first hearing affects a lot of wyoming people, everybody in wyoming, in fact, and we're one of those rural states, too. i appreciated senator from montana's comments earlier. the post offices are absolutely essential in our rural areas, and one of the difficulties that we've had was the list that was
sent out saying that post offices were going to be closed, and i think it was a completely wrong process to go through. said they were going to close, came in, and explained they were going to be closed, and then, of course; congress got in the way, but the best process for any of these people in any of the rural states who have to solve problems themselves all the time is to let them know how much it costs and ask them how to reduce the costs. i think you'll be surprised at the innovative ideas that the people have so that they can continue to get the kind of service that they've come to expect from the post office. another thing, because of our rural areas that we had difficulty with, is the mail sorting was moved to bigger areas, and you talked about what sounds like a great idea, same-day delivery. well, we used to have same-day delivery on the local stuff. they dropped it into a separate box, it's local, and the people that are local sort it and get
it out to the people that live in the town that day. now, you drop it all in one box, and it takes a day to go to another town, they sort it, takes another day to come back, and they get their local mail. the ones that i really hear from are the ones that have presorted mail. now, if it's presorted, it's all ready to go out. it's loaded on a truck, hauled 130 miles, and it's done nothing with it. then it's loaded back on a truck and it's hauled back again and delivered. they ask me how come that has to happen, and the people that have that presorted mail wonder why it takes longer to get the mail out than it used to. there's a lot of ideas in the rural areas that i think can cut down a lot of the costs. the post offices and essential parts of the community in most of those places solicit their
ideas and there's going to be a lot less problems. i'm new to this, so i probably got some questions that have been answered before, but the biggest one that i'm curious about, i know there's been this precipitous drop in mail volume across the country, and i know there's a number of reasons: the internet, popularity of e-mail and the lost art of letter writing, which you might want to encourage in english classes. i think that one of the biggest thrills people get is an actual delivered hard copied letter that they can keep or frame or whatever they want to do, and more and more are framed because they are so rare. with this drop in total postal volume, has the postal service reduced the number of employees to reflect the reduced need? how do the employee numbers compare with the volume today? is that number changed from five years ago? either woven of you.
>> yeah, thank you, senator. i'll address a couple of issues. answering the question first and then the service issues. first of all, our people do a tremendous job being very, very productive. you'll hear union presidents come up to talk about some of the things they know from the employee perspective that they do a great job. in 2000, we had 804,000 employees. today, we have 495,000. our reduction in the head count has been continuous. we've done that without layoffs. we're proud of that fact, but in that same time, mail volume has not dropped off that quickly. they are more productive on a yearly basis. until recessions, we messed quarters in there. we had probably about ten years of productivity improvements in a row, and we have three more years, even in declining volume. people do a great job. we are conscious of cutting costs ahead of time and trying to anticipate the volume loss that we've seen. from a service standpoint,
there's a number of reasons we do what we do as far as consolidating and moving mail to other locations to sort. it's more first time. it's more efficient to sort mail through a large automated mail sorting system that we have. i'd be happy to hear from our mailers locally in cities in wyoming to see how we can speed that up, but a lot of it is due to the cost issues that we're faced with, and i think going forward, your point, senator tester, from a rural perspective, there are special things we need to do. we have to listen to the customers. we've done that in the case of making changes in post offices. we had 13,000 town hall meetings over the past year across the country talking to customers when the best time is to serve them, how to serve them, and we made changes accordingly and also saved money that way. >> well, thank you. the -- i appreciate the 13,000 town meetings. i just want to reiterate that if
the towns could have been prepared before the town meetings, you might not have even needed the town meetings. i think they would have supplied ideas for cost savings so they could still have the great community at tribute, and i didn't want to imply the postal workers are not doing good work and efficient work because my father-in-lawfuls a postal worker, and his dad was a postal worker. we have a great interest in that in our family. thank you. >> senator tester. >> thank you, mr. chairman, and i want to thank both you guys for being here today. i appreciate you being here so we can get a little information. what's your loss for 20 # 12 in total? >> $15.9 billion, and 11.1 billion due to the default on prefunding for retiree health benefits. >> without the prefunding, 4.8 billion was the loss? >> yeah.
>> when -- you know, there's numbers floating around on what saturday delivery is going to save and what potentially is could cost in percentage of mail volume drop. were you able to look at that at all? >> last time we looked at that, the proposal at that time was also to eliminate packages on saturday as well, and that's changed. our prior analysis really isn't up to date, but i would say it's one of the areas where there's the largest opportunity for savings that we looked at, but it needs -- it would be dependent upon how they make the transition in terms of realigning employees to achieve the savings that are anticipated, and make changes and see what the response would be for mailers and businesses in terms of the changeover time.
we've said that change alone is not really going to solve the answer, and if it is considered, it needs to be part of a comprehensive package of reforms. >> okay. so before -- when the packages were not delivered, can you recall what the figure was? savings? >> i can tell you. >> what was it? >> original estimate was $3.1 billion, but pulled down to 2.97 with the loss. it's around $2 billion now because we have to add $600 million back in for dynamic routeing of packages on the weekend. if you recall, the original proposal was to keep post offices open, mailbox delivery on saturday, and so the transportation and the post offices were already open so those costs were considered. >> okay. what about the drop -- have you guys estimated what the drop in mail volume would be? >> i'll tell you, we have spoken
to a number of customers and have never been able to ascertain the number of. our best estimate is around $100 million in what we call contribution. the -- if you take a look at what's happened on saturdays, senator, there have been many, many people moving away from saturday as a requested delivery day. most of your circulars, super market circulars are monday through friday. catalogers, they like monday, tuesday, and wednesday, and so that was the choice was that if we had to eliminate a day because we have five days worth of mail deliver ri, it would have to be saturday. >> i got you there, and if you are going to eliminate a day, i agree with that. didn't the postal service commission a research that said with the closures and saturday there's a drop of over 10%,
10.3% to be exact in mail volume? >> i know the commission looked at -- when we went to the commissioner for a ruling and advisory opinion on saturday, their number was the total of 600 million versus our -- >> and that would reflect 10.3%. >> that's about 1%, 65 billion. >> okay. well, it'd be, you know, from my perspective, i don't know if you're going to deal with this anymore, gene, or not, be it would be good to get numbers we can take a look at. the fact of the matter is everybody on this dice wants to try to help postal service become more economical, and that's one of my arguments. that's the argument i made to congressman issa and cummings that we have to reduce the mail volume and profitability, we're headed in the wrong direction. >> if i can add a comment -- when i visited your state last summer, and for a couple reasons, number one, talk to the
customers what they want to see in the post offices, and that helped us to come up with a plan to modify hours to keep the hours available. what they said to us, and with the commission hearings, we understand mail's going away. you have to be efficient. our latest surveys this weekend including rural areas said the postal service has to be efficient, but you told me implement, a farmer can't wait on -- for monday delivery. we heard you loud and clear, and that's why we have this proposal. we think it's a win-win. it's tough taking saturday delivery, but with the financial situation we're faced with -- >> i just -- >> there's not any other answer. >> i'm not -- what i need is i need must numbers that work. gene, are you going to do anymore work on this or is it done? >> we definitely can. we have a good understanding there. we'll look at cost savings and the tradeoff issues in terms of
what the estimates have been made for mail volume, and we'll get that to the committee as soon as we can. >> thank you very much. i appreciate, mr. chairman, the time ran out, and i have a lot more questions, but we'll submit them. the issue is this, and i'll close quickly. the issue is this, we're changing mail standards in rural america, from one to three to two to three, and, quite frankly, with the closing of processing centers, it's going to be longer than that. you can argue, but i'll show you the mail when it's in effect. if i have a piece of mail that has to go somewhere, and it has to be there in a date time specific, you got to be competitive or i'm not going to use you. >> we're still the best solution. i'm more than happen to sit down and go through, getting the data that shows how much time it is. more than happy to sit down and go throw it, okay? >> thank you very much. >> all righty. >> all right. i think senator -- you talk more
about alaska? [laughter] >> mr. chairman, congratulations -- >> that alaska salmon, how good is it for us? >> it's the best. we don't like the genetically engineered fish. >> i wanted that on the record. >> i appreciate that. we'll get fda here for a discussion. congratulations, mr. chairman, you'll hear about alaska every meeting. first stop, thank you for being here, thank you for being a part of this, thank you for the work you've done the last period of time, last session in getting somewhere and mr. postmaster regime, let me, if i can, last summer you released a plan at some point, idea to keep the post offices open, but modify, reduce hours, kind of work that system versus shutting down, can you assure me, us, and, of course, i'm going to be parochial here from alaska's perspective, that means that post offices in alaska will not
be shut down in the rural areas, especially, but you will end up just modifying hours based on the plan put out last year? >> yes. we listened to our customers. >> you said, yes, i'll stop you there. >> yes. >> i never want to go further than an answer's that's positive. i appreciate that. second, you heard my conversation with the two congressmen here earlier with regards to bypass mail. we had multiple meetings on this about the importance of it. >> yes. >> i really appreciate your reck nice of that. >> yep. >> as we talked about, universal service includes getting to to everybody where. >> right. >> sometimes it's more expensive. sometimes it's less exceptive. that's your philosophy. is that still the same? >> it is still the same. we know how important the u.s. mail is in the state of alaska and many of the other islands we serve all throughout the atlantic and pacific. >> that's right. very good. how much of your business, and i think you told me once before or
in for the record, how much is the last piece for ups and fedex. you have a relationship, 1%, 5%, 10%? >> we have nondisclosure agreements. >> okay. >> just to give you a perspective, fedex is the fourth largest customer, and ups is now in the top ten. >> okay, that gives me understanding. how -- i mean, i'm assuming they want to see this reform done as quick as possible. is that a fair statement? >> absolutely. >> if you're unable or were unable to accomplish that, is there clearly -- we're the last mile in the rural areas. is that a fair statement? >> it's a fair statement, yes. >> what will happen? >> i don't know. i'll tell you this. it's not just fedex and ipse. there's banks and mutual funds looking for reliable, affordable, dependable mail service. that's the key to resolving the issue. we don't want companies like
citi bank, bank of america, and fedex and ups to seek other ways to get the product delivered. we do it affordably, depend by, and we want to continue to do that. >> assuming they can find a network like yours. there's no network like ours. >> now that we're coming out of the recession, and the economy's getting better. i saw a report, just read that indicated that treasury had a surplus for the first time in five years in the january moppet, which, because the economy's getting better, people are working again. are you seeing any stabilization, or is it still a deep slide? first class mail, general mail overall? >> let me -- there's three -- >> does that make sense, that question? >> yeah. >> okay. >> there's three key issues. packages are increasing. we're seeing double digit increases. 17% just for this month of mb