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tv   Politics and Public Policy Today  CSPAN  February 16, 2016 1:10pm-7:01pm EST

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today before the committee. you've heard the deep concerns that many of our members have about iran policy and how it's being carried out. so i know that you'll want to continue to be in touch with members of this committee as we move forward. and at this time we'll adjourn the hearing. thank you again for your appearance. >> at 2:00 p.m. eastern live on c-span2 ryan crocker, former u.s. ambassador to iraq will join a discussion on how lessons learned in a decade of u.s. intervention in iraq can be applied to stabilize the country beyond the defeat of isis. that event takes place at the atlantic council today. again it's live on c-span2 starting at 2:00 p.m. eastern.
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tonight, on american history tv lectures in history. beginning at 8:00 eastern, the presidency of ulysses s. grant as seen by charles calhoun of east carolina university. at 9:30, battling nature and the korean and vietnam wars from lisa brady of boise state university. after that, brooke simpson from arizona state university lectures on presidents and war powers. and then at midnight a look at citizenship during reconstruction presented by susanna lee of north carolina state university. all that coming up tonight on american history tv. on c-span3. president obama is wrapping up a meeting of the asean nations today in rancho mirage, california, a political and economic group formed by southeast asian nations. c-span will have live coverage starting at 4:35 eastern this afternoon. and for that meeting the hill is reporting president obama will
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make his first visit to vietnam as president this may after attending the group of seven summit in japan. the president accepted an invitation from the vietnamese prime minister during the asean meetings. president obama's following in his predecessor's footsteps, george w. bush and bill clinton who visited the former u.s. adversary. both countries restored formal diplomatic relations following the vietnam war. you can read more about this in road to the white house began in iowa. the caucuses which date back to 1972 and then we move to new hampshire that quintessential first in the nation primary which has a long and rich history. now we really begin to test the candidates and their message. we move south to south carolina the first southern primary and then to the party caucuses in nevada for democrats and republicans. more than likely we'll see a number of candidates probably drop out of the race so the
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field will then narrow. and then we move into early march. super tuesday the start of winner take all primaries, which means that the delegate count will be critical. and as we watch that delegate count continue for the candidates we'll get a better sense of whose message is resonating and who's on the path to the nomination. >> every election cycle we're reminded how important it is for citizens to be informed. >> to me c-span is a home for political junkies and a way to track the government as it happens. >> i think it's a great way for us to stay informed. >> there are a lot of c-span fans on the hill. my colleagues, they're going to say i saw you on c-span. >> there's so much more that c-span does to make sure that people outside the beltway know what's going on inside it. >> when the justices to the u.s. supreme court return to the bench on february 22nd justice antonin scalia's chair will be
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draped in black the court said today. this is a photo tweeted out from the court this morning. the tradition dates back to at least the death of chief justice solomon chase in 1873 according to a court statement. and has not occurred in recent years because justices rarely die while in office. and those who have died were replaced while the court was out of session. treasury secretary jack lew appeared before the senate finance committee last week to discuss the revenue proposals in the president's 2017 budget requests. members asked about the administration's ideas for addressing puerto rico's financial crisis, tax code reform infrastructure investment and a new tax on oil.]ofhñ
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. >> the committee will come to order. today's hearing is on president obama's budget for fiscal year
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2017. i particularly want to thank secretary lew for providing -- for appearing before us this morning and providing his time for us. while there are some hints about some of the details in advance, congress officially received the president's budget proposal yesterday. and as has too often been the case particularly under this administration, what we received was not a practical vision for the future. we're going to have to have order here. and has said too often been the case particularly under this administration what we received was not a practical vision for the future but a medium logical document designed more to satisfy political constituencies than to advance at least in my opinion serious policy proposals. for example in his budget president obama once again looks to raise taxes on hard working americans including some special new regressive taxes that are
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being packaged at quote, fees unquote. with all the new revenue going to fuel expanded government and spending that is being sold to the public as quote investment, unquote. no matter what terms people want to use, this budget once again taxes too much, spends too much and never balances. it presents a vision for expand expanding government deficits as far as the eye can see and ever growing national debt. that debt by the way currently stands at an astronomical $19 trillion as of last week, i believe it was. close to 80% larger than when the president took office. and at a level relative to the size of our economy not seen since the years surrounding world war ii. i would also note that the budget contains provisions relating to puerto rico. the challenges facing puerto rico have received a lot of attention in recent months. and unfortunately much of the debate has been overly politicized.
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the president's budget calls for $6.6 billion intended to provide an earned income tax credit for residents of the island and roughly $30 billion for increased medicaid funds some of which are intended to offset what we are now being told wassinwas inequity written into the so-called affordable care act. apparently authors of aca wrote a medicare cliff into the law. now we are being told by some of those same authors no less that this funding cliff is unfair and must be undone. unlike someone maybe secretary lew or perhaps any of the members of congress who've drafted and supported the health law to explain why that was done in the first place. i've been working hard with a number of my colleagues to help the package of the people of puerto rico who should be the real focus of this. i have a bill with senators grassley and murkowski that
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offers assistance of more than $7 billion of fiscal relief to the island without adding a penny to the federal deficit or debt. and since last summer i have been asking administration officials as well as some of my senate colleagues just how much additional health funding they would like to see for puerto rico. in every case specific details have been withheld and congress has simply been admonished to fix this problem in a fiscally responsible way. yesterday with the release of the budget proposal we finally saw specific proposed numbers from the administration. why it took until now for these details to emerge is beyond me. but at least they're here. in addition to while we're on the subject of puerto rico, i do not believe the administration has been straightforward about the nature of the debt restructuring authority it is seeking for the territory. and while we keep hearing from our friends on the other side that republicans are ungenerously denying puerto rico access to the bankruptcy
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protections offered to every municipality in the u.s., that is actually not what is being sought. specifically the administration is advocating to provide unprecedented debt restructuring authority to puerto rico with an explicit preference for public pension liabilities over debt issued by the puerto rico government even though the constitution gives preference to some of those latter debts. we need to be clear about what's actually being debated and proposed here. and secretary lew i hope to learn more about your thoughts on this today and going forward. i sure hope to learn more about puerto rico's pension exposures. in fact, just this morning i wrote to the governor of puerto rico asking for details since all told puerto rico's debt and its unfunded pension liabilities amount to almost $120 billion. as we know, lurking behind a
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recent increase in ever larger municipal bankruptcies nationwide is a growing crisis of underfunded public pensions. and the underfunding of puerto rico's public pensions is striking. another issue that i look forward to discussing today is the provision of the recently enacted fast act regarding the inactive debt collection program. as we'll likely hear today from senator grassley if not others the report made clear that the intent of congress was for treasury and the irs to expeditiously implement this provision by utilizing approved private election contractors and debt collection centers. the law also requires that contracts be signed within three months after enactment. that deadline is march 4th just over three weeks away. so i look forward to a status update today on the efforts to get the contracts signed and the cases released and to ensure the
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taxpayers are made aware of the program and how it is going to be implemented. finally, in related to the large federal debt the treasury is supposed to manage, i want to make note of some disturbing revelations from the house financial services committee about contingency plans formulated by treasury and the federal reserve. secretary lew, as you know for nearly five years now i've asked treasury and the fed for details about plans the agency's had to handle debt default, whether caused by a natural disaster terrorist attack cyber attack or debt limit impasse. i've asked for these details in writing, in public hearings and in private conversations. and in response to my inquiries you, your predecessor, secretary geithner, fed chair yellen and former chair bernanke have all opted to cloak any contingency plans in secrecy sharing them only in private discussions with
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financial market participants. all of you failed to provide specific answers to direct questions, choosing instead to ob fi skate the issue. the highest levels at the executive branch have refused to share them with congress or the american people. i find this unacceptable. and because we've received virtually no voluntary cooperation on this issue legislation to require such cooperation and provide accountability is now probably necessary so the american people can know as much about our debt management as those working at treasury and the fed and in financial markets. so as you can see, we have quite a bit to discuss today. and i look forward to a robust discussion of these and other important issues. with that i'll turn to my friend ranking member senator widen. >> thank you very much for holding this hearing.
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and secretary lew, we appreciate you being here for i believe what will be one final time on this particular item of business. i would like to start, mr. secretary, and you and i have talked about this about trying to put taxes your principle focus in what i think is the right context. right now in america there are two different tax systems. the one that most working people deal with is mandatory. their taxes come directly out of their paycheck. and then there is another system for the well connected. and under that system it seems that you can often pay what you want when you want to. the fact is most working americans earn one or two paychecks a month, they may have a mortgage, few kids, those
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taxpayers interact with a very small portion of the american tax code. but there are far too many shadowy, cobweb-filled corners of the tax code the typical americans never have to venture into. those corners are loaded with byzantine rules accountants and lawyers from white shoe firms can use to pry open loopholes. as a result of all this complexity you have increasingly slippery definitions of capital gains in income and an array of tax dodging strategies with names like wash sales and swap contracts. it is a mind numbing system. and it's no wonder somebody who works a line at a factory or worker at a mom and pop business would believe that the tax code is stacked against them. now, i don't think anybody would make a huge bet on a complete
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rewrite of the american tax code this year so as to address the entirety of the unfairness in terms of how our tax system plays out for those working families. but i do see a major opportunity for democrats and republicans in the congress working with the treasury and the irs to work together right now. and that major opportunity is to crack down on the tax avoidance schemes that have resulted in the corporate tax gap. now, i'm going to have more to say about that this afternoon when commissioner koskinen comes before the committee. but two-thirds of a trillion dollars in corporate taxes goes unpaid every decade. and in my view every policymaker ought to be doing more to figure
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out why and how you're going to fix this. and i also see this as an opportunity to free up resources so as to be able to take on a number of the big economic challenges of this time. and by the way, there are a number of proposals that are in the budget that are clearly going to be of significant benefit for workers. certainly the auto ira proposal would help a lot of workers start saving for the first time. as you know mr. secretary, a number of us on this kmietcommittee have proposed to expand the savers credit. we're all interested in helping those who are walking on an economic tight rope. the community college proposals in my view are going to be quite helpful to students pushing to find that first high wage, high skill job. and you have a number of investments in children's health that i think are very constructive. so there are a number of smart
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proposals that could be a huge help to working class families and small businesses across the country. and i look forward to working on a bipartisan basis with our colleagues here to pursue those issues. mr. chairman, i also want to wrap up by thanking you because i think it's worth noting here in the finance committee, chairman hatch has scheduled three hearings for us to come together on a bipartisan basis to examine the president's budget proposal. in my view that is a major responsibility that we have and also practical need to communicate with the administration. and that's true no matter which party controls the white house. and in fact these debates that we're starting control much of the debate over the course of the year. apparently some other committees are not exercising this same responsibility this year. and i just want to say that i hope that does not become a
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precedent. thank you very much, mr. chairman. >> well thank you, senator wyden. before we go any farther here, let me give an introduction to our secretary lew. secretary lew was confirmed to his current position on february 27th 2013. prior to his confirmation as secretary of treasury, secretary lew served as president obama's white house chief of staff. and before that director of the office of management and budget a position secretary lew also held during president clinton's administration from 1998 to 2001. after leaving the clinton administration and before joining obama administration as deputy secretary of state for management and resources, secretary lew served as executive vice president for operations at new york university and was taught -- and did teach as a clinical professor in public administration at nyu's wagner school of public service until
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june 2006 when he was named chief operating officer of citi group's alternative investments unit. in the middle of a long public service career, secretary lew received an undergraduate degree from harvard college and a law degree from georgetown university law center. detail the rest of secretary lew's public service career would likely take the rest of this meeting. and as such let me just say it has been long and productive. i want to thank you for all you've done for our country. and in your current job and continue to do. so we'll just take your statement at this time. welcome to the committee. >> well, thank you very much, mr. chairman ranking member wyden, members of the committee. as senator wyden noted, this is the last time i'll be presenting the president's budget. so there's a kind of nostalgic element to it but we enter this final year with a great deal of energy because there's still so much that we need to get done
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for the american people. as the president said in his state of the union address, this is a time of extraordinary change. and to make this change work for the american people, we need to foster economic opportunities for all. we need to leverage new technologies to solve urgent problems such as climate change, we need to pursue a smart foreign policy that protects our national security and we need to work together to improve our political discourse. what we do in each of these areas is crucial to our future as a nation. today, i'll discuss the major aspects of the president's budget and how it lays out a vision for what we need to do as a country. both now and over the next five or ten years and beyond to create growth and make sure that opportunity is truly broadly shared. in the seven years since president obama took office in a time of the worst financial crisis since the great
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depression, we've seen a sustained economic recovery and unprecedented decline in federal deficits. notwithstanding some of the recent volatility that we've seen and we're seeing in financial markets economic growth continues at a solid pace. since my testimony a year ago our economy has continued its record breaking streak of private sector job creation which has reached nearly six consecutive years and more than 14 million jobs. over the last two years we've experienced the strongest job creation since the 1990s. at 4.9%, the unemployment rate is half of its 2009 peak. real gdp expanded 1.8% last year, a pace of expansion that exceeds many of our major trading partners. and we continue on a sound fiscal path from fiscal year 2009 to 2015 the deficit is a share of gdp failed by almost three quarters to 2.5%. despite this progress we have much more to do to fully address the challenges associated with
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our new economy. the president's 2017 budget puts forward the building blocks of a social compact for the 21st century creating the conditions for sustained economic growth while upholding the basic american belief that everyone who works hard should get a fair shot at success. it shows that investments in growth and opportunity are consistent with and contribute to putting the nation's finances on a strong and sustainable path. and the budget substitutes more balanced deficit reduction and ends sequestration while making other critical investments and in addressing our fiscal challenges over the next ten years. today i'd like to briefly focus on three key areas of the president's budget including our proposals to reform the tax code, invest in infrastructure and support working families. first, fixing america's business tax system is essential to promoting long-term growth and broad based prosperity. the budget includes a number of concrete tax reform proposals to
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make our system more strong and more fair including a complete reform of our international tax system and a specific proposal to close the inversion loophole. while inversions may be legal, it's wrong for companies to take advantage of our infrastructure, education our support for research, our rule of law and then avoid paying their fair share of u.s. taxes. i look forward to working with this committee and the congress to close the door to inversions. second, we need to invest more in modern infrastructure that will create middle class jobs in the short-term and meet the needs of a growing economy in the long-term. to accomplish this the administration has proposed a fazed in $10 a barrel fee on oil production and import that will ensure we better manage the costs associated with fossil fuel use providing long-term solvency for the highway trust fund and offer new funding for clean energy investments. the budget also funds an expanded core infrastructure program and takes small steps to level the playing field for
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private investment and public infrastructure projects through the financing america's infrastructure renewal affair program. third, we must support working families. this budget seeks to respond to the changing relationship between workers and employers. for example, a propose expanded unemployment insurance and introduces a new wage insurance program to help families stay on their feet when underemployed as part of a job transition. this budget also proposes to expand access to workplace retirement savings opportunities, complementing our success with the my ira program launched last year to help those without savings or retirement options at work begin to save for the future. in conclusion, the president's budget will create a stronger, more inclusive economy today and in the future while also maintaining fiscal responsibility. of course we must also work together to respond to more immediate events. as the chairman noted in puerto rico there's work that we need to do.
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and i thank the chairman for working with us in december and since to try think through an approach to dealing with this critical problem. puerto rico faces unemployment at 12% and it's experiencing an unsustainable debt crisis. the administration's proposed a comprehensive plan to address the commonwealth's financial challenges and encourage congress to act with the speed that this crisis requires. this must begin with legislation to permit a financial restructuring along with new oversight, neither of which cost any taxpayer dollars. this budget does not address every challenge we face. as the president said in the state of the union address, progress is not inevitable, but rather it's the product of choices we make together as a nation. we face an uphill -- fiscal responsibility laid out by this
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budget gives us the time we need to address these long-term challenges. and the recent agreement on the debt limit and budget not only demonstrates that we have the capacity to find common ground on difficult issues, but it also lays a foundation to address the immediate challenges we face. i look forward to working with this committee to make more progress together over the coming year. and i look forward to answering your questions. >> thank you, senator lew. or secretary lew. demoting you. puerto rico's general obligation debt has specific repayment priority according to the constitution of puerto rico. yet your proposal at least in my opinion would blow right through that constitutional protection even while you argue that puerto rico's autonomy must be respected. and i understand your proposal would also give preferential treatment among unsecured
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claimants through obligations of puerto rico's public pensions and would in effect give those claimants preferential treatment relative to the general obligation bondholders. of course the issues here are very complicated. among general obligation bondholders are retirees in my home state of utah who under your formulation would be subject to less preferable treatment than puerto rico public pension claimants. i wonder if you could explain in your proposal a bit more and explain your proposal to provide payments for public pension obligations compared to others like in all of states really but in places like my state of utah who also have claims on puerto rico and thought they were protected. >> senator, the financial pick chaur that puerto rico faces is very complicated. they have 18 different series of bond issues. they're very complicated. they're different levels of priority, different
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constitutional protections. but the math is clear. with $72 billion of outstanding bonds, they don't have the capacity to support the debt service on that. and there's a need for a restructuring. and a restructuring needs to include all of the bonds or virtually all of the bonds in order to be effective because if you do it on too small of a base it doesn't work. we've never said that all bondholders get treated equally. so certainly there is the space to reflect the differences between different categories of bondholders, everyone the voluntary offer that the commonwealth put forward reflects that principle. and with regard to pensions, i think if you look at what's been happening in the last few months, pensions are being you know shifted. pension contributions are being moved to pay bondholders right now. so you have workers in puerto rico paying into pension fund, the money is coming out to pay bondholders. that's not going to be there for their pensions.
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that's not a tenable arrangement. the result in puerto rico's economy is clear. you're seeing thousands of people a month leave puerto rico. the economy of puerto rico cannot sustain the outmigration of the people who are capable of building the economic future. and i know that we've talked about this many times mr. chairman, there's a crisis here that we agree needs to be addressed. the question is how do we do it in a way that works? and how do we do it in a way that's fair? we put forward a proposal that we think is comprehensive. what we've made clear is the first steps have to be restructuring authority combined with oversight. that won't completely solve all the problems but that's where the time urgency is. and we look forward to working with you on approach to that that meets the standard of fairness that we can all defend. >> thank you sir. i often hear questions about why congress will not grant puerto rico retro activity.
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the same -- you know -- the same chapter 9 bankruptcy tools that many municipalities across the country can access retroactive chapter 9 authority is what senator blumenthal's bill and propose on the house involves. but your proposal some have called super nine is far different. representative indicated lack of support for your proposal. no one in congress has filed legislation with the super nine structure. state and territorial officials have expressed concerns about your proposal including concerns about moral hazard and increased borrowing costs for states and municipalities across the country that could result from your proposal. so it seems that your broad restructuring authority is not received broad public support once the details are known. now, i wonder if you feel that
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there is support for your proposal in congress? and if so if you have any thoughts on why no one has introduced your proposal as a bill in congress? >> well, mr. chairman, i've talked to all of the office holders in puerto rico, the governor, the legislative leaders i their representative in the house. i think there is a broad understand understanding and shared view that they need to have restructuring authority that will work, that will encompass enough of the debt. and i know there are concerns with how that's structured. those are details we can work through. as we've gone through this at a technical level, both with your team and with others in congress, we've erred issues. what doesn't work is to say that puerto rico should somehow solve the fiscal dilemma that it faces without some very broad restructuring authority because puerto rico's debt is
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principally the thing that is drawing down its ability to stay solvent solvent. it's a case of insolvency where the debt is just beyond what they can support. and unless it's restructured in an orderly way, what will happen is they will go through a decade of protracted litigation where different stake holders with different bondholder interests will be suing the commonwealth in court. you'll have a lost decade where i don't know if the commonwealth can recover from a five, ten-year period of litigation. so there's an urgent need to address this. and we would look forward to working with you and with others in congress. i know i've had conversations probably with 50 members of the house and senate, maybe more than that. there's a broad understanding that something needs to be done here. i guess what i just want to make clear is when we act, we have to act in a way that works or else the problem will be right back coming back at us. and i don't think that will serve anyone's interests. so we share the concern that
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this be something perceived and be fair. we share the concern that there be oversight to make sure that the future is a path which is sustainable. and i look forward to working with you and others to find a quick solution to get there. >> thank you, my time is up, senator wyden. >> thank you. thank you very much, mr. chairman. secretary lew, as i indicated in my statement you and i have talked about, when it comes to finding issues that democrats and republicans ought to be able to work together on, this corporate tax gap comes front and center. i mean, two-thirds of a trillion dollars owed in corporate taxes goes unpaid over a decade. and i recently sent a letter to the irs commissioner concerning the agency's apparent lack of cracking of these corporate tax issues. and i think there's some questions. and i know we can't five minutes get into all of the details that
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i think would be very helpful to get on the record. because i think there's some questions about whether the agency really knows the sources, the major sources of this corporate tax gap. based on your current knowledge what are the major sources of corporate tax avoidance contributing to this vast sum of money that goes unpaid? >> senator i think the challenge is is not just one or two causes. there are many aspects of our economy that are just not on the books. there are many aspects of our economy where businesses are organized to avoid taxes. if they do it legally, that's a different issue than if they do it illegally. and one of the basic challenges we've had at the irs over the last few years is by being deprived of resources we lack visibility into things we should
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have more visibility into. i think it's a very good thing that the end of the year we saw some restoration of a recognition that in order to have an effect iveive. you can get the data you need to answer the kinds of questions that you're asking. i totally agree with you. we should be able to put more resources in to working on identifying the sources of the tax gap. if there are enforcement mechanisms to get at it, to use our enforcement tools to do that. but enforcement is you know you don't enforce by turning on a computer. you enforce by having revenue agents. you enforce by having teams that can do investigative work. and i'm grateful for the increase we got, but frankly it wasn't for those purposes. the increases we got was for very important things, dealing with cyber security being able to answer our phones. we still have gaps in the irs budget that just don't give us the resources we need to enforce
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as effectively as we should. >> does the irs in working with the treasury have a modern database to track the major sources of the corporate tax gap? because based on the letter and the communication we've had with the irs, i don't think that's clear. i'm going to get into it this afternoon, but i know you look at that very substantial sum of money as i do and say not only is that not right, it's not fair to taxpayers who as i indicated just have their taxes pulled right out of their paycheck, you know directly. but it also would be an opportunity to show that we can make tough choices. we can make tough choices. we can raise money certainly by collecting, you know, taxes owed. and then make judgments about future priorities. so is there a database now, a modern database to track the sources of corporate tax avoidance? >> well, we do obviously have
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databases at the irs, but as you know they're old systems. they're systems that i think the team at the irs does a very good job making look more modern than they are by making it more accessible to taxpayers and others who are looking for information. but behind it is a very old computer system. one of the things that we will be doing mostly with the focus for cyber security and identity theft is upgrading the computer system with some of the additional funds we have. but this has been an ongoing issue at the irs. that it is an old computer system. i don't want to say it's a system that can't give us the ability to do this analysis, but i would defer to commissioner kos ki nen on the details of what needs to be in terms of data processing capacity. but overall it is a system that needs investment.
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>> one last question, if i might. as you know there is a big difference between the tax on wages and the tax on investment income. and the gap of course has increased. and particularly it ought to be put in the context of the last major tax reform when ronald reagan decided in conjunction with a lot of democrats bob packwood, a whole host of people that he was going to have equal treatment in terms of taxes for somebody who makes a wage and somebody who has investments. in your view, what does the president's budget do to begin the effort to close this gap in taxation between taxes on a wage and tax on investment income? >> senator wyden, the budget does quite a number of things. some are repeat proposals from the past, things like changing the capital gains tax rate, like dealing with stepped up basis. and, you know, some are new like our provisions that try to get
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at all forms of income no matter how it's structured so that you can't avoid self-employment taxes or taxes that were put in place to pay to pay for health care by categorizing your income a certain way. i think it's a real problem in terms of the concentration we see at the top, and the fact that the income comes -- is taxed very differently the system doesn't look fair to working people who just pay tax on every dollar that comes in. that doesn't mean we should have a punitive standard towards unearned income but when you convert earned income into unearned income to get a lower tax rate, it becomes a problem. >> my time is up but in the last effort, democrats and
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republicans said there was an opportunity for everybody in america to get ahead. one of the ways they did it was to treat wage and investment income the same. >> thank you, senator. senator roberts? >> thank you very much for holding this hearing. mr. secretary, welcome back. i just want to register right off the back my strong opposition to the proposal to play a new tax on oil i don't think it's an extraordinary opportunity. i think it is another blow to the oil and gas industry, which is hurting. now, i have read and heard the economists talking about placing a tax on carbon in order to quote address market failures. same economists content this would have little impact on the
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economy, and these costs will be passed through to consumers. can be implemented in a manner to minimize the impact on lower income taxpayers. i've also heard it said with the price of oil so low, now is the best time to implement a oil tax fewer people, quote, will notice this tax. well, you know, i know, they may not see it, but they sure as heck are going to field it. just because the hit would be less visibility under the current market conditions does not mean the impact would be less severe. i want to take a quick look at how this proposal will impact my state of kansas where we still endeavor to produce oil and gas, despite the war against oil and gas by the administration. the oil and gas industry is a major component of the kansas economy. over $700 million in the state. 10% either directly or in downstream industries.
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that's 118,000 workers that would be affected. that amounts to about 12% of kansas payrolls and over 15% of the state's tax revenue. all told, this is about $3 billion in family income in my at a time. it's no secret that global oil prices and demand issues have hit the kansas oil industry heart as well as many other states. some of the state's oil and gas companies have laid as off as much as 50% and some producers have seen layoffs of 20% to 25% of their work force. kansas production has dropped about 5.5% and state tax revenue from the industry has dropped by over 50%. these are real impacts, very severe impacts happening right now. this is just directly within the industry. think about the related manufacturing and service industries. it's a massive new tax and make no mistake, it will
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significantly burden the economy, directly spilling over into gas prices, almost everything else produced or transported within our economy. the kansas oil and gas industry is already hurting. i think this proposal would only make things worse. i find that unacceptable and hope we certainly do not approve this. my question as described in your treasury general explanation, 15% of the revenue from the tax would be dedicated for relief for households with particularly heavy industry costs sort of like a new national light heat program. i do not view this as an extraordinary opportunity. in kansas most of the oil exploration and production companies are considered by any standard small businesses. my question is -- does your department propose to set aside invite revenue to assist oil and gas industry workers or workers who lose their jobs or otherwise
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are harmed by the new oil tax? >> i think you've seen movement far more dramatic of the impact ever the $10 would be phased in over five years. we've seen prices moving much bigger than that every day now, so i don't think we should exaggerate what the size of the fee is. we do think it's important as a time tick larry when oil prices are low to put in place a mechanism that will both help to capture of benefit of making, you know, the price signal one that contributes to better usage, but also to put in place a mechanism for us to invest in the technology and the
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infrastructure that we need going forward in this country. it would put our highway trust fund in a more balanced, safe sound place, and give us the renewable technologies and new technologies of the future. it would apply to imported oil as well as as to u.s. development oil. >> are you going to set aside -- with regard to small business is that would be hurt. >> we have set asigh resources to deal with those who are low income, who have no alternative but to face higher prices, but no income to bear it. i'm hall to look at a prod. >> i think you ought to take a look at the harm this tax will have on the oil and gas
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industry, and make actually help those folks as well. >> well first you know we don't know what the exact amount that will be passed on that's going to depend on -- >> my time has expired. i appreciate your response. >> thank you, senator. senator schumer? >> thank you, mr. chairman. first question is on international tax reform. over the last year, to summarize, i think we need it for two reasons first american multinational companies should pay the taxes that they owe. right now our companies are making profits overseas can keep that money stashed offshore and avoid taxation. that's unacceptable. second we have to protect american jobs, as you're aware probably more than anybody else more and more of the nation's multinational companies are leaving our shores all together, partnering up with foreign countries moves headquarters
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jobs and intellectual properties overseas. so you secretary lew the administration and the president have put together taxation proposal that would transition to a new form of tax aches. how republicans have proposed similar solutions. i've been plized to work with a bipartisan gruch, including on this committee, and we're trying to bridge over, of course the divide between existing proposals. there's common ground. i remain at the table ready to work. i assume that's the case for you as well. >> absolutely senator. we continue to -- >> that's called a softball question. you're allowed to answer it. >> we continue to believe that working together to get business tax reform done is absolutely a high priority p we got closer
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last year than people outside thought. >> yes. >> there were very good conversationses going on with a broad sense of where there might be an agreement on international business tax reform in a way where we use one-time tax reforms reforms. it was disappointing that at the end of the year there seemed to be some pulling away from that but we don't pull away from it. our budget puts in place the proposal -- >> what's interesting in your budget it's the same proposal as last year, but the number of revenues by treasuries increases from 205 to 350. >> that's for the international tax provision. >> correct. that's because more companies are moving overseas. is that? >> it's simply a technical estimate of how much we think how much is being kept overseas and how much it's being subject
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to tax overseas and what could come here when the tax is put in place. >> that increase in revenues also means lost jobs here and it should be a warning signal, shot across the bow, to us. one final point. this is for our rep colleagues, and i've worked with senator portman and many others you, senator hatch on this proposal and that is i know the administration feels strongly, as do many of us on this side that international reform must be coupled with investments in this country because that's the way to take it -- not all of the money, but at least some of the money that we gain from getting these revenues, and without it it's going to be heart to pass something. so has your view stayed the same, that we won't get a deal on international tax reform this year or forever without pairing it with some sniff degree of
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investment? >> for several years we've been advocating links those issues for two reasons. one is if you don't use that revenue for a one-time expenditure like an investment in infrastructure, you can't cut rates with that amount or it would be losing revenue in the long run. so we think that solves the structural problem of how do you deal with one-time revenue. second le we have this eous infrastructure need. if we're ever going to get a business tax reform bill, it has to include the infrastructure. >> agreed. i agree, and there's -- now speaker, but then chairman ryan understood that completely. i hope that other people on the other side won't pull away from that. >> i was just going to say while we are going to put every ever we can, i want to underscore the
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urgency of dealing with inversions. we are seeing more and more companies of large companies going overseas. we could wait aee to deal with it. >> agreed. >> you can't if you wanted to deal with inversions on its own. i don't think that's idea at. we should deal with business tax reform, but i don't want to be leaving in a year watching more companies having moved overseas, and i don't think anyone on this committee wants to look at that, either, and the answer is you need legislation. >> can you answer this yes or no? because my time has run out. essentially to getting puerto rick on getting on track, it is necessary, it may not be everything, is a chapter 9 bankruptcy provision? that is the -- or a brought -- not a chapter 9. >> broad. >> that is the view of many of us here. is it the administration. >> absolutely. there's multiple ways the drafting it. it doesn't have to be drafted as a bankruptcy code amendment.
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it could be legislation that applies to the territories the effect would have to be broad restructuring authority. >> thank you, mr. chairman. let me start by thanking you for working with me and leaders in my state to help us in a number of different areas. we very much appreciate it. as i start, when you were stab been about the unemployment rate, when president obama took off in mish wand 16s 15.7% and at the verge of losing the major foundation of manufacturing in the country. and with the administration's help the president's help we have turned that owner. our unemployment is now 5.1. from 15.7 to 5.1 is a huge change. the challenge as you know all too well, is that not everyone
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is feeling the recovery. so when people lost the equity of their home, the primary way that middle-class families save or lost their jobs or even in the auto industry took major cuts to save the industry, those who have been threatened on all sides, it's very, very difficult, even though the brought aggregate numbers are incredibly positive. i want to speak about one of the areas, and ask your comments regarding one area of incredible insecurity and that's around pensions. colleagues of mine as well have spoken with you, and i share the concern about it is united mine workers. i am particularly from the standpoint of michigan, concerned about the multiemployer pension plans, and the reform legislation that passed at the end of last year, which as is know gave
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administrators of plans the ability to apply cuts to earn pension benefits for the first time since 1974. it was unfortunately part of a must-pass proposeses bill to avoid a government shutdown at the time that didn't give congress time to debate the impact on retires. from my perspective, a pension is a promise a key cornerstone of how we've had a middle class and the dignity and respect of work in this country, and i am deeply concerned about what we now face. on monday treasury held a public meeting in detroit to hear from retires who would be directly affected. more than 500 people showed up for that meeting they went into great de25i8 how they would be hurt by huge cuts, in some cases 50 to 7 on% of their proposed pension. these are folks that gave up
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increases, annual increases in pay to have a secure pension for the future. this is incredibly concerning. i would like to know what the administration would propose to address this incredibly serious issue, and really broken promises for folks who have worked hard all of their lives and are trying to figure out how to go on in retirement. senator, as you and i have discussed, it is a terrible problem, and there's no easy or good answer, and as a result of the legislation you described, written, you know, in co-sponsored by congressman klein and miller that that responsibility now falls to the treasury department to review the plans for working through
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but not ability to make their payments. you know, the challenge is they all go to an underfunded benefits corporation fund. if there's not enough money to pay the benefits, the quell is do you drain that fund and then have nothing for anyone? we are in the process through the hearings you described, we appointed ken feinberg to administration this for us. he's listening to heartbreaking stories. in the end we'll have to -- from the plans as actions are taken, and, you know, the first one will come up for review i believe in may. we'll continue looking at what
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options there are but at the core there's this tensions between not enough money to pay the benefit and very different changes in structure. since we don't have additional money to inject into the system, it doesn't give us the option of just saying, you know, kind of continue as you are, because that would end up hurting even more people. these are terribly difficult, wrenching decisions, and i appreciate ken feinberg taking the task to report to me on that and i'll continue to stay close. >> mr. chairman and mr. secretary, i hope one thist we'll look at is the laws that were changed in the last several decades that allowed overfunded pension plans to suddenly be available for various other purposes and changes that have
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nothing to do with workers that have created a large part of this so now we're talking about funding, but there's a lot more to it in terms of how pensions got to this particular point, and i think we've got a lot of hard questions to look at and decisions that were made not in the best interests of working people. thank you, mr. chairman. >> thank you, mr. chairman. mr. secretary just a couple general oceans about the budget. 3.4 trillion in new taxes retches to gdp end up at 20%, which has only happened once in the last 50 years the 50-year average is 17.4%. >> spending goes up to 22.6% of gdp that's only happened five times in the last half century. the 50-year average is 22.6%, and so spending is up, taxes are
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sup, and at the end of the decade, the debt goes from about $19 trillion to 27.4 trillion so the budget is more spending, more taxes, and more debt. and it just seems to me that you guys are on your way out. this was a chance to go big and go bold. i see it as another missed opportunity to do something that really matters about what we all know the fiscal crisis facing the country is and that's mandatory accounts. the mandatory spending. in fact the budget shifts more spending over into the mandatory accounts. so just some general observations. again i'm expressing my frustration and disappointment. i do have a question. this comes back to slightly changing gears here for just a moment. . with how the u.s. financial services companies respect treated under the trade agreements. my understandings is the treasury department opposed the idea of providing u.s. financial
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service companies the same protections with respect to ensure cross-border data flows that most other u.s. companies will benefit from under the tpp agreement. so we could give something
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arm that or regulateors would need, and as we go through this, we're sensitive to the concerns. it's certainly not something that is designed to put a burden on -- was mend to put a burden on u.s. financial institutions. we bargained very hard in tpp to get terms that are very favorable generally to u.s. financial institutions on a global basis. this is a case where what we in the united states -- we meaning the -- not treasury, but our independent regulators require in terms of data availability is one of the issues we have to work around. i know generally the agreements i thought, you know, those are things that we really prioritized but it seemed the financial services was a different standard. what you're telling me is that's actually something that you're working with the industry and the regulators to we've been
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very aggressive to make sure that lot data requirements are not put in place for example, to restrict the ability of a global system because we have big industries in that area. this is kind of a subissue because of the regulatory requirements, but we're working through it and sensitive to the concerns. if i might, senator, go back to your observation. i don't mean to take your time -- >> but you will. >> if i could take 30 seconds of it? >> okay. >> it is true that the budget would trend back up in the end to 20% revenues, a percentage of gdp. i remember well when we were at 20%. i was budget director at the time. we had a surplus on the united states and we were on a path towards paying down or national
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dead. it was a period of great economic growth. when you look at the growth of spending, you have to recognize medicare and medicaid will grow, and as a unified budget one of to look at are we doing what we need to do? i think some decisions made between 2000 and 2009 made it harder. so fiscally it's balanced and i think these are important conversations for us to have going forward this year and beyond. >> i would just say, though the tough choices with regard to those parts of the budget that we all know are growing dramatically, and in a matter of a few years, it would be entitlements and interest on the debt that eats up all of our revenue that comes in and everything we spend for is going to be borrowed money, dhs why we end up with a huge debt at the end. part of it, of course, is we've got to figure out how to
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meaningfully rein in those programs, so they fit the demographics and get growth up to a higher level which i think comes back to some of the issues which i won't have a chance to get into, but i think tax reform goes squarely out. so when you're growing at 1% to 2% or slightly -- i think earp saying 2.3, 2.6 over the course of the next decade. it doesn't get us there fast enough. that i am you, mr. chairman. >> thank you mr. chairman i guess a bit of what i'm going to do is vent also. senator thune laid the precedent for being able to do that. when you want this is your last presentation here before the committee -- presentation of the budget. you're welcome to have me back anytime.
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>> i would say you're relieved not to have to come back. every budget you've come to present has been soundly rejected. i think last year got one vote. previous years it's gotten zero votes, so you must think that to some point what a waste of time and effort goes into coming up here, presenting a budget, not having any support from either party. that's just an observation of mine. you state on your first page here that this is a vision for the future i look at this as something that's totally disconnected of the reality of where we are. senator thune talked about the big gorilla in the room that we haven't been able to deal with, and that's mandatory spending. as you know over the last five or six years s. the congress together with the president has tried to come to some solution to put long-term reforms in that
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would keep us from becoming insolvent and so debt laden that our children and grandchildren are simply not going to begin to have the opportunities that my generation has had. so that's a failure on all of our parts. it's not without trying, but the bottom line is it's a failure, and it's going to continue to put us in a very, very different situation. so i guess one of my questions is why do we go through this charade? speaking for my constituents, who i think has been reflected in these primaries simply say, you know you guys are spending stuff that we no longer accept and whether it's the democrat party or the republican party, there are messages being sent out there saying we've caught on to this shell game that goes on in washington. they sit there and talk about
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how to fix the future and the future looks ever more dim. so confide can't we sit down here and talk about the real problems we face and offer solutions, instead of simply saying -- you want don't worry, because everything we're going to spend in the future. it's offset by $3 trillion of more taxes. i don't know of any economist that says the way to prosperity and creating innovation and create activity and supporting our -- not only or businesses and innovators, but middle and lowercase is not to raise taxes, but to lower taxes. i would like to see your response to some of this, i think based on what we watched last night, the public is saying
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this is a bunch of jibberish going on in washington and we want something different, and radically different from both sides. both of our establishment candidates got shellacked in iowa, and shellacked last night. if we don't perk up and say, you know they're frustrated with d.c., i'm not talking ds or rs or independents, but these people have failed, and why can't we get to something that's more related to reality. >> senator, i recognize we have different views of how we should address the future, but i think this budget is a clear picture of how we believe we should address the future. i think we have also shown when we engage on different issues, we find pathways to make progress. we made real progress last year on a number of important issues so i think it's quite relevant to present a coherent vision. it's part of our system that
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there are different approaches, and if we could get back to the place with you take those differences and figure out where to work together, we ought to be able to do business tax reform. there's a lot of overlap here between the administration and rpg in congress on how to think about it. we should just sit down and do it. i think people would feel better if we had a tax systems where we doesn't have inversions anymore. we might be better ability to do it if you would bring forward a budget that gets at least a majority of support on a bipartisan basis. when you bring a budget year after year and it gets zero support, does it ever give you pause that your vision for the future is not selling with the american people? >> i've been working on budgets for the last 40 years and i haven't known a year where there hasn't been that kind of a difference between parties beginning the year and then you go to work on the things where you can get work meaningfully
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done. >> but regarding the major issue we all face, mandatory spending, over the last 40 years, we have not addressed. >> we actually have over the last 40 years done a lot of things on mandatory spending that have made a difference. i was pardon of social security reform that made a real difference. >> that's legitimate and that's 1983. >> if you look at the affordable care act, it's pretty clear this has helped reduce spending on health care in medicare extended the life of the trust fund the most important of turning the corner on health care in decades. that doesn't mean we don't have more work to do but i think when we have an environment where we can work together and the things where there's room to make progress we can give the american people something they should be produce of. it's not hard to understand how people get fed up with that. >> the chairman has been very generous with my time. thank you, secretary. >> thank you. senator menendez.
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mr. secretary thank you for your good work. i want to talk about puerto rico. 3.5 million american citizens, and i underline that, american citizens who have fought in our armed forces in just about every conflict this country has had for the last century, and if you come take a walk with me to the vietnam war, you will see a disproportionate number of their names on that wall. due to a multitude of issues, americans living in the island of puerto rico, they have a debt crisis that threatens to explode into a full-force humanitarian calamity. that's not politics. that's the reality on the island. it is the reality that i hear from many puerto ricans living in the state of new jersey who
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have loved ones there who telling me about their challenges of their families on the island. now, there are those who contend that puerto rico shouldn't be able to restructure it is debt, even though they had that right in the law at one time and it was surreptitiously stripped out and no one knows why, but they had that right. and instead they should simply raise taxes and cut spending to get their books in order. the problem is the debt payments are 36% of puerto rico's annual revenue a rate six times the u.s. average. so it seems that any solution that doesn't include restructuring authority will be woefully in adequate. and you know i know some people say this is being politicized, i think it's politicized for the hedge funds, the bottom feeders who bought cheap and want to maximize their profits.
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it has nothing to do with the exodus that we're seeing where they will enjoy all the rights and responsibilities of nits other u.s. citizen, which by the way, will be far more costly. so i want to get from the administration to get this clear, and in fact, if they didn't have to pawn a billion dollar surplus, so do you great that providing puerto rico with the tools to restructure the debt is a necessary component? >> i agree there is an immediate crisis in puerto rico. i was just there a couple weeks ago. i met with business leaders, with working people i met with all the public officials. it's not a future crisis it's a
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current crisis. they talk about hospital wards being shut down, schools being closed, pensions that are being drained and people paying into pension funds that are being emptied out to pay for bond payments. this is not sustainable. people are leaving the island. the economy can't recover if the economy shrinks because people leave. when you're insolvent, it is by definition what you said your bond payments just cannot be supported any longer, and you have to restructure. that's what happens in the private sector when companies become insolvent. it happens when citying become insolvent. puerto rico has a unique package of debts,ist complicated. there is 18 different series of debt. they could be in court for five to ten years. i don't think puerto rico's economy could recover. there won't be an economy to talk about. >> if it was good enough to
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trump, it was good enough for the people of puerto rico? >> i will leave the comparisons to others but 3.5 million americans will be in chaos in congress doesn't -- >> does the chapter 9 authority open to municipalities? that really doesn't meet -- >> it doesn't really work. it addresses about a third of the debt. >> with large debt payments due in may and july, isn't there going to be a point where we will face the consequences if we continue to delay and act? >> you know, they have only managed to be in default on small bond issues by doing things that are almost unthinkable in terms of financial management. when you talk about prematurely emptying out pension funds to pay bondholders that is not something you do if you're not already bankrupt. when you talk about taking money that's dedicated to one bondholder and shift it to pay another, that can't go on for very long. i can't tell you at what point
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they run out of those extraordinary and very unhealthy kinds of tools, but it can't go on forever. restructuring authority has to be in place enough in advance that they can actually restructure to meet may and july as they come. so i think the first quarter is a meaningful period. if the deadline the speaker set for the house to act in the first quarter is very important, we willing to work with anyone and everyone who approaching this with the intention of solving the problem. we know there will have to be oversight along with restructuring. i do believe that doing something on the medicate reimburse my and eitc is important, but i totally agree, without restructuring there's not a solution. >> mr. chairman, there is a fierce urgency of now on this issue. i just don't get the sense that many of my colleagues understand that. i hope we can awaken them to that fierce urgency of now and the rights that 3.5 million
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americans have, and would have if they were living here in the united states. it's just fundamentally wrong. you ask they had to don the uniform risk their lives and at the same time you can't treat them with the same dignity and respect they would have here on the mainland. something is fundamentally wrong about that. i hope we can prick the conscientious of the senate to move on this, because this is really conquenchal. >> you raise a lot of good points and i'll be honest, we're in the process of it. i'm going to come up with a different bill that would at least get us started on it and time to do it even more thoroughly. i hope i can enlist your support when we finally get -- there's no politics as far as i'm concerned. i want to get it done. >> mr. chairman you'll have my support if at the end of the day
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what we are going to do is give the people of puerto rico the same opportunity that any united states citizen has here. i'm happy to work with the chairman towards that goal. i just have a real fierce sense of urgency and i can't, you know elaborate on that enough to drive that point home. >> i'm glad to get it done before the end of march. senator brown, you're next. >> thank you, mr. chairman. i want to throw in with the words of senator menendez about the 3.5 million citizens, emphasizing these are american citizen. secretary leu thank you for your work. in nigh state lorraine at one point had a higher percentage of puerto ricans than any city in america where 500 workers right after world war ii they came to lorraine to work in u.s. steel,
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and their girl friends and families followed to the point that there's a vibrant community there, and so many of them are still very connected to the island of puerto rico as american citizens. i want to talk for a moment mr. secretary, about something this committee did that was so very, very important part of the bipartisan tax extenders package we made permanent the temporary extensions. whether meshed you are in terms of the number of people lifted out of poverty or the additional money they have earned what this committee did, bipartisanly was the most important anti-poverty advance this country has had.
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in 2013 some 27 million families and individuals earned and claimed the itc, 6.2 million people were lifted out of poverty half of those children. there's a glaring hole. who can be taxed more deeply into positive, which is ironic considering we always brag about rewarding work. >> nobody who works full time should live in poverty. like 43 of my check introduced a probably to correct this problem. give you thoughts, if you would on the proposal the need it would address and particularly its impact on the economy. senator first, i great deal
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with your assessment of the -- i don't think there's anything we could have done, which is why historically there's been bipartisan support for the eitc. he's talked with the president about it as has been reported. i think this is an area where we could if we put others aside and concentrate, we could create a model for how you deal with problems of shared concern that help people getting back into the workforce.
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one of the reasons the it dr. was created was to make work pay, so people wouldn't have this per verse taxation of going to work at very low wages. >> i don't know that there's more elaborate economic response to it. i think you put an accurate point on it. if you have a solution, there's one that there auld to be bipartisan support for. it was -- it's been supported for many decades that i've been involved with. i hope this can be the next chap. i hope we can do it this year.
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>> i wonder whether you could describe for the committee, we have a vote on the customs bill and whether you could describe the i think the enforcement provisions are very important. while it's critical important to have trade agreements, it's equally important that we have meaningful tools to enforce fair trade and that we use those tools. they are important tools, and, you know, the customs conference report comes, you know after we
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have taken some action at the end of last year where we added to the resources we have in our depends to implement the andy-dumping and counterveiling duty laws. when it's passed there would be another round of enforcement tools. you know it would give -- it would create accountability for future administration this administration and future administrations for the prosecution of cases of duty evasion. the bill create deadlines by which the custom and border control would have to of anti-dumping and counterveiling duty. it gives the border patrol extra tools to protect intellectual property. it streamlines operations for facilitate the flow of legitimate trade, and, you know, it is -- it gives us tools on an
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issue that you have helped to craft to bring current sis issues into sharp focus. >> i appreciate your help on that provision. i wanted to gab to what senator thune was talking about because we are at the moment cutting our -- across the board, we're cutting defense spending. we are -- that's certainly not what we ought to be doing. simultaneously we now have trillions on the balance sheet which to the next generation is a lousy deal. that combination is toxic for the people coming after us.
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i would like to give you the opportunity to tell us what advice you're going to give your successor for how they could lead this congress in a by partisan way to actually begin to address this staggering imbalance that we are proposing. i mean, the time has come for us to actually get this work done, so what's your advice? lead us out of the wilderness. >> i think whoever takes my place will be coming into a very different situation than my predecessor and i stepped into. >> the last time we did have a balanced budget, so you have the budget director, so that's why i'm asking. >> thank you, senator, and i'm proud of that. we had a definite set 10% of gdp, it was climbing. it looked like the debt would cross 100% of gdp.
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we had a full-blown crisis we had to get our hands around. and then we had to start moving towards deficit reduction, both as the economy recovered and as we could reach consensus. we have a budget which is table. we have the deficit below 3% gdp. it stabilized around 70%. i'm not say that's something weather have but it's not like a hockey stick going off. whoever takes my place will come in where there won't be crisis management, but the long-term planning, where you can say 10 on, 30 years down the ride where do we have to be? >> we've got to shorten in the short and medium term that gives
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people a chance to have a stake and future that's bright. i think we could turn the corner, so to jump in what do we do 10 15 years from now when they are real needs in transportation and infrastructure. real needs in research that we're not meeting, we've got to fill that space. i think the budget agreement gives us a period of time where we can make progress there. the budget laze outlays out an idea, and whoever comes in will hopefully take the debate forward. it's not a debate that begins and ends. it goes on. when we ran a suraccomplice, we
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had 0% of gdp runelvyss as was pointed out. now, you know, if you're looking at a period now where we had the baby boom retiring, it shouldn't be a surprise to anyone that the demographics are a little rougher. you know when my generation was born everybody knew that 65 years later, you know people were going to be 65. that's not a surprise what we could have done was carried forward the fiscal position we are in in 20012 we didn't do that. we're now at a more stable place. if we can make progress we're going to have to work toward the politics that permits the civil debate to deal with these issues.
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>> thank you. >> senator lew,k@ one question and i'll be brief, because i have to run. i want to commend you for your civil service. this is your third or fourth chapter of significant service, and we're grateful. i was talking to you earlier today about an issue that i know you work on every day and the administration does as well, and probably doesn't get enough attention the strategy to focus on terrorism financing. especially the challenge now that eye says presents. just one question, if you want update us and if you would -- in
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addition to the thing that the senate has not done which is confirm adam suben. who is the leader on this issue, if you could give us an updade on what's going well? >> i appreciate your calling attention to the urgent need for this critical set of responsibilities. and we have to provide health and technical support and information to countries around the world to be effective. to do that job as effectively as possible and i appreciate your support. let mess just give you a bit of
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a background and current state of where were in terms of finance. isil has evolved over the last couple years, they have started by conquering territory and taking bank vaults and using the money. they then developed oil resources and extortion taxes they would call them but we consider the methods they use to be extortion, but to get renewable sources of funding, as they have changed we have changed. we have worked with the government of iraq to control 90 branches of banks in isil-controlled territory. we have worked with the military to destroy money that's in their control. we have worked to close the energy resources so that it's much harder, if not impossible, for them to sell the 0i8 in much
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parts of the world. obviously there's trade with syria in particular that's very troubling. when you look at what we're doing now in terms of what's call tidal wave two, we're not just striking the refineries, we're striking at the oil tanker trucks and we've been very effective. we worked with the government of iraq to shut down payments into the system. there are employees and retirees who aren't getting paid, because they live in isil-controlled territories. these are very hard in the non-isil people, but it's what you have to do to deprive them of an evergreen source of funding. i can't say that we're done. they are always evolving but what they have always done is grown so that they need more money than they can raise. that means they can't continue to grow. that means we have to keep
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cutting back on the sources of renewable funding, make it harder and harder for them to grow and force them to shrink. i'm just talking about what we can do on the finance side. we had a meetings at the security council in september, the first time in history the finance ministers met in the security council, and together with russia, we sponsored -- i sponsored a resolution that had the whole world agreed to treat isil the way we treat al qaeda in terms of threat finance. it's diminished their ability to keep their financial flows up to their needs. i think we have turned a corner in terms of making it hard for them to stay just where they are and they have to make hard choses, and we need to do more and we have powerful tools to do it but not the kind of tools we used with iran. it's a different entity. there's a lot of work we need to do bilaterally with countries in
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the region so we don't just shut down oil trade, but cement trade. it's not like trucks come with banners that say they're isil trucks. one of the things we did was make middle men liable at sanctions, so it's not just isil forces themselves, but anyone who touches is. we are working very hard at it and adam zubin is leading of effort for us. thank you mr. chairman. secretary, though i join my colleagues in thanking you for your extraordinary career of service and the effective manner in which you have handled the treasury. i'm very proud of your work. we're here on the budget. we're here on the sum of the tax proposals that are in the budget that's understand the judds of this committee, and i certainly support what you're trying to achieve in higher education to make it more artable for
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american families, to make pensions easier to individuals to accumulate funds. senator portman and i are working on some of these ideas. sure year energy proposals particularly making permanent the 179-d, expanding it to retrofits. thank you for the permanence and expanding the limits is very important in the state i represent. so there's a lot of good things in here. i want to talk about the fundamental sure on the competitiveness of our tax codes globally are making certainly recommendations made in the last budget. they certainly deal with parts of the problem but doesn't deal with the fundamental issues. the two fundamental problems we have one, we have two tax codes, one for the wealthy and one for the rest of us. the wealthy are always two steps ahead of us.
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you have some proposals to deal with it, but if we pass that, they'll figure out something else. the second is we have high marginal rates compared to the countries we have to compete with. 35% corporate rate that you deal with and try (b t it lower. 39.6% individual rate. what's amazing about that is that this nation, among the nations we compete with relies less on the governmental sector so i want to know why we're not consideration something fundamentally different where we could have the lowest marge independent tax rates by five percentage points on both income and consumption. we could get a corporate rate down to 17%, individual rate down to 28%, that we could do it in a revenue-neutral way. it's all paid for within the tax code. you're not trying to take it from one sector to another. it rewards savings, it's very efficient. you can -- you don't use the tax
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code as much today for policy, but we use it to collect revenue. that may seem strange. it's progressive, more progressive than the current tax code. i would say that's not necessarily a high bar, but more progressive than our tax code which i would think most people would want. one of the complaints is well, it's visionnary long term. what can we do in the short term? we've been talking about this for 30 years. this is your last opportunity to give us good advice, and i would hope you would be visionary. and one more point -- there are now democrats and republicans both proposals this time of tax reform. this is not some that can't happen. it can happen. the more and more people look at it they say, gee why aren't we doing this? why is america the only industrial nation in the world that doesn't use consumption
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taxes. i understand the political hurdles. your proposals have political hurdles. some are so common sense, but everything has political hurdles, so why not try to correct the problem? obviously the question of income tax versus consumption tax is a very serious threeeoretical,age lit cal one we've never endorsed a consumption tax many other countries do and the overall tax burden may not be lower than ours. it's just the way it's paid is through different technisms so their income tax is lower but their overall tax may be higher. we do as you well know have sales taxes at the state and local level in many parts of the country, so this is an area where, you know, there's been a federal income tax and state and local authorities have tended to use sales taxes. it's not by the basic nature
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that a consumption tax is more progressive. by its basic nature it actually could potentially be less progressive. one would have to design it very carefully in order to make it -- >> we've introduced a bill to do this. this is not hypothetical. the two design factors is that it will be revenue neutral. it won't lose. it will be revenue neutral. the second is it will be more progressive than our current tax code. cash out the benefits that we have under the current system to make our tax code progressive. >> i understand those are the objectives that would be behind a proposal that you've designed. i'm saying inherently in the design of consumption taxes people at low income levels consume 100% of their income, people at high income levels don't. you have to overcome that by design. so it's not something we've supported or we are working on a proposal for. obviously it's an area of intellectual inquiry that anyone working on tax policy pays attention to and thinks about. and i'd be happy to have conversations about it.
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but it's not an area that we're currently looking at putting proposals forward. >> i didn't expect you would embrace it. that was not the purpose for the question. the purpose is this -- that we're going to have hurdles getting any of this done and we've been arguing about this for a long time and it's no longer theoretical. the fundamental problem we have is that we're not competitive. and there's no reason why we shouldn't be competitive. we should have an advantage in our tax code. as you point out when you add up the tax burdens of the country we compete with they have a higher tax burden than we do. so, why are we losing companies to great britain, for example? >> i think that our business tax system is the reason we're losing companies that -- >> over 90% of our businesses pay at personal rate. >> but those aren't the companies that are moving overseas. >> some are. >> senator your time is up. senator portman. >> thank you, mr. chairman and secretary lew, good to have you
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back with us. you're probably having nightmares about the budget hearings that you've had in the past and this is relatively easy. >> many fewer notebooks as treasury secretary than omb director. >> senator cardin talked about competitiveness of our tax code. you and i have talked a lot about it. i agree with senator cardin we got to have a broader reform to be competitive, but in the meantime we know as you've said today we've got a real problem with regard to our business tax as it relates to c-corporations and they are competitive and my one concern about what you said today you are focusing a lot about these inversions. i don't think inversions is the biggest problem. i think the biggest problem they're not competitive and even when you can't invert because we put some regulations out there we continue to have the problem. and i, you know, would reference schier which as you recall was going to do an inversion with
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schier. these are two huge pharmaceutical companies. they didn't move forward because they didn't want to go through the hoops that you required in your regulations and so what's happened? you know, over the last 13 months schier has bought now four u.s. companies. they've said, fine you guys put these regulations we'll start gobbling up u.s. companies. the last was a couple weeks ago $32 billion acquisition the fourth one. they take investments and jobs with them when they do this so we've got to get at the underlying problem. i know senator schumer talked about it. he and i have worked together on it. we have our working group and you work well with us trying to come up with a framework. i'm happy with some parts of the budget and not others as it relates to this issue. i'm maybe the last one on this committee who really believes we can get something done this year. but i think we have to. it's not so much it's the right thing to do it's that we have to because if we don't we'll continue to lose more people overseas and it's workers. it's wages.
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it's benefits. that's what gets affected based on all the studies i've seen so i just ask you to talk a little bit about that. >> i didn't mean to suggest inversions are the only problem. i think inversions are a big problem and it's indicative of the competitiveness concerns. and i am totally with you that we ought to get something done this year. i mean we had conversations last year where reasonable people could see a pathway forward. i don't think that any of us should feel comfortable just watching more american businesses leave the united states. be purchased by foreign companies because we failed to make the effort. >> yeah. i appreciate your comments and let's be honest, a lot of people are saying, well, the leadership in congress and the white house has kind of put this off. and what you just told me is that you aren't putting it off. you are prepared to roll up your sleeves and get re-engaged with us and try to do something this year. i think if we wait a couple of years which a lot of people are
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saying we'll lose so many businesses. every week or so we'll lose one in these boardrooms with activist shareholders that are pushing and the investment banking firms and others offering the big proposals, you know, that makes the owners of the company and the -- and the share -- and the board members well off but hurts the workers i think there will be more pressure. let me ask you something else. hardest-hit funds and you worked with us to make sure we had a better alallocation. we put more funding in. you have $2 billion of hardest-hits that you have to advocate. we've worked on this issue. this is something that affects ohio a lot, michigan a lot, some other states. 91% of our allocation has been drawn down. we have so many blighted properties, these are abandoned home that are not just a magnet for crime but they're also reducing the value of everybody else's homes in the neighborhood. could you just tell us today what you are doing with regard to distributing these funds.
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we'd like them to be directed to the states with the highest need and made available specifically for blight elimination purposes, of course, but could you tell us a little bit about the allocation formula and how you intend to distribute the funds. >> thank you, senator, and thank you for the work that you and senator brown and stabenow to make the funding available. we're working as quickly as we can to make sure to get it allocated. we are looking at a combination of approaches to get some money out quickly as quickly as possible, through, you know, through an automatic formulaic approach but also to keep mechanism to target based on where the need is the greatest on specific applications. we're very close to completing the process of putting that together. it's obviously only a few weeks since the provision was enacted. i've made it clear to my team that i view this as an urgent issue because i'd like to be able to commit the money and get
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it out there in use this year. that's what was the intention of the legislation and i'm very proud of the work that has been done on blight removal using hardest-hit funds. you know it was something that was at the time an innovative interpretation of the hardest-hit fund but i totally agree with you. if you have a house on a block with blighted housing on it, if you don't remove the blighted housing, your chance of staying above water are really tough. >> exactly. >> because blighted housing brings down all the vawlues and the economics are very strong and we're doing our best to get it out quickly. >> we appreciate your commitment to that and let us know if we can help you. we have 100,000 homes in ohio that we are vacant and abandoned that need help now and ready to be demolished and we appreciate your commitment to that and we hope the funding will go towards bliteed communities. >> it will be a national program obviously but we're very much keeping in mind how to be consistent with the purposes
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congress had in the legislation and we're as i say very close to being ready to -- i mean, time is of the essence. we don't want it to become a march, april, may issue. >> thank you, mr. secretary. thank you, mr. chairman. >> thank you mr. chairman. and secretary, thank you for being here. i had a chance to talk to you earlier but i want to just reiterate my concern with the budget on the $190 million cut, 19.2% cut to the hanford cleanup. it's very important that we don't miss cleanup deadlines and that we make sure that technically difficult aspects of this project are met and that the river corridor remediation is actually -- the challenges of that continue to have great focus. i know that have been always looks at the budget and thinks there's ways to get money big numbers, and they look at cleanup, but this is the largest cleanup project in the world and it has taken a long time and
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needs to happen. and we need to have the continued support, so i appreciate, you know, hearing your comments on that. i know you'll tell me that you're going to get back to me because of your position. but i want to put the administration on notice that this is something that we have grave concern about in the budget and we want to work with you on on it. i also would like if you would comment on where we are with trade promotion. i'm sorry, the tpp bill i supported trade promotion authority because i believe in a global economy the number of bilaterals that were being done without us was not where we needed to be. and that we should allow a lot of different ideas to come before the congress with different proposals. so, want to hear where you think we are for the rest of the year with that because i hope we're not going to have a delay by our colleagues on the republican side of the aisle on moving forward on that legislation. i know some people would like to put it off until the next election but to me we should
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use -- if we truly believe that this is about an effort of united states, making sure that china doesn't become the dominant player in a developing economy, what are we going to do to make sure that there is market access to u.s. products and goods that are important in the asian market. and last, to throw all this complexity at you in a variety of subjects, this issue of puerto rico because of my other responsibility as ranking member on the oversight of territories to me seems like that congress needs to really act on the restructuring. your budget proposal reflects comments that the administration made before the energy, natural resources committee that, again, has oversight over territories so we appreciate that that budget reflects a restructuring plan, but if you could also comment on why it's so important that restructuring plan take place immediately.
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that i know people think, oh, we might have more time june, july. we really need to act now and if you could address that i would so appreciate it. >> senator, let me try to quickly cover all three questions. on hanford i'll take back the comments you've made and share them with omb. when i was omb director i paid close attention to this, but as you noted not currently something that's directly in line. but i'll take back your comment. on tpp, you know, the signing of the agreement was an important step. the customs bill being taken up tomorrow is another important step and we are going to continue to press forward to have a vote on tpp. obviously we're working very hard to make sure when the vote comes up we have the support to pass it. if i could take one step back and look at where we were, you know in early december or, you know, middle of last year and where we are now we've done a lot of important things to promote u.s. economic leadership
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in the world and u.s. economic strength. we're not looking at a export/import bank that's unfunded. hugely important. we're not looking at imf quota reforms that are creating friction with the united states and the rest of the world. we've done our part. we've kept our commitment. and we have tpp signed and now queued up for a vote this year. so, we're going to keep pressing forward. but i think that u.s. leadership in the world economically is part of what makes our country strong and part of what makes our economy strong. and the trade agreements provide opportunities for the u.s. to participate in the future global growth are critical part of that tpp is that. on puerto rico to begin by thanking you for the efforts you've been making for months now to try to make sure this issue gets the kind of attention it deserves. i believe it is a crisis and i believe there's a need for action immediately on restructuring authority and on
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oversight. i think there are other aspects which we addressed in our plan where if we can get them done they're urgently needed but we can't put off restructuring and oversight and we look forward to working with you in the -- in your other committee or in whatever committee congress chooses to address this. but i think the people of puerto rico need us to act. that's 3 1/2 million american citizens who are going to be plunged into chaos if congress doesn't act. >> aren't we at the point that this could cost the u.s. economy billions of dollars if more and more people migrate from puerto rico to the u.s. because we've left this issue unresolved and the notion that they can restructure on their own isn't there. they don't have the authority. >> we're seeing thousands of people leaving puerto rico for the mainland. they are american citizens they can come anywhere. they have rights to go anywhere and they should have the rights. what's terrible it's further hurting the economy of puerto rico when people that are part
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of the comeek future leave the island and it does shift the cost burden to wherever those people go if there are costs that fall either on health care systems or public authorities. so the only pathway to a stable future for puerto rico has to involve them restructuring their debt. there's a variety of ways that authority could be legislatated. we look forward to working with you and others and do it in a way to meet bipartisan support. we have to remember at the core if they don't get to restructure their debt and they are insolvent, they cannot keeping make those payments without the economy grind into a place that it could possibly not because back from and without restructuring they'll default on another series of debts and they'll be locked up in five or ten years of ugly litigation and that is something that will set the economy back even more. so, the deadline the speaker set for the house committee to act in the first quarter of the year was very important.
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we're going to work with them with you and everyone willing to engage, with the chairman to get something done that will work. it has to be effective. we can't just call it a solution. it has to work. >> thank you, mr. chairman. >> thank you, senator. senator hiller. >> thank you, i'll take my 30 minutes now. >> well -- >> first of all, thank you very much for holding this hearing and thank you also for your commitment to tax reform and i want to thank the secretary for being here also and thank you for your patience to get where we are now. the comments made by senator schumer and portman are very reflective on some of the thoughts i've had. you and i have had pretty good conversations. in this hearing room when we were talking about the highway bill and the use of repatriation and the fundamental way we deal with infrastructure in this country. with the passage of the five-year highway bill that was supported by the administration, is there a different use now for those revenues? you keep talking about infrastructure, but is there
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another use for it? >> senator, as you and i have discussed, the five-year re-authorization was important because going year to year is terrible. but it did not have sufficient funding to provide for the kinds of expansions of infrastructure that we need in so many parts of our country including the west. so, for us to be able to have opportunities to build the infrastructure we need for the 21st century we're going to need more funding. we think that using the funds associated with business tax reform are a win/win. first of all, the biggest advocates for infrastructure investment are the businesses of the united states. they need us to have better road -- >> i agree with you. >> there's bipartisan basis for agreement. so we're still very much in the view that bringing them together is essential. >> no. i'm pleased that you have continued view that perhaps we get something done this year. i don't know what the possibilities are, that's probably more up to the chairman than it is up to me. i certainly do hope that we keep
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open minds on this process. i want to turn to another subject and that's the irs. the gao report provided i'll say the quote, the lowest level of telephone service during the fiscal year of 2015. you have oversight. you have oversight. only 30%. 38% of the callers were able to reach an irs agent. >> that's terrible. >> what's the new threshold? i mean you oversee the irs. what is the threshold that you want to meet? >> senator, my goal would be for everyone to get their phone call answered. >> i would agree. what's realistic? >> but if you visit an irs call center you have empty seats where there should be people answering the phones. it takes people to answer the phones. at the end of the year we got an increase in appropriation that gave us the ability. we are hiring people. we worked as quickly as we could. this tax season we'll have more people in place to answer calls. it won't be perfect. we didn't get enough money to completely solve the problem but we'll dramatically improve --
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>> what should be the expectation? >> the commissioner will be here this afternoon and he'll probably be in a better position to give you a pinpoint estimate you know, we want to substantially reduce the weightait time and drop rate because frankly i believe it's unacceptable for taxpayers to call their government and not get an answer. but that wasn't because we didn't want to answer the phones. we weren't given the money to hire people to answer the phones. >> is that your responsibility or kokineen's responsibility? >> i'm very much engaged in making sure that we do better here, but what neither he nor i can say is that we can get the phones answered if we don't have enough people. we started in the -- >> what is the expect airings iation is i guess what i'm trying to get at. >> i don't have the number off the top of my head. >> we both have the same goal but what's the expectation --
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>> approaching 70%. >> better. >> whether it will hit 70% the commissioner can maybe give you a little bit more. i'll tell you the truth, they were recruiting people before the appropriation passed in the hope that the appropriation was passed but they couldn't hire anyone until they had the money so we're talking about from the end of the year until now standing up new personnel to be in place trained to answer questions. so -- >> let's change topics real quick because i don't have a lot of time here. he's not giving me my 30 minutes. on the omnibus as you know there's a two-year delay on the cadillac tax. in your budget you talk about a geographic adjuster. can you explain thee geographic adjuster? >> the idea behind the cadillac tax was always just to hit the top, most expensive plans and say this is a way to bend the cost curve and a way to make -- >> but that affected 1.3 million -- >> and it had geographical
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disparities because of cost differences in different areas and there was concern, fairly broad concern that it was getting beyond the highest-priced plans. where the proposal that we have is addresses the concern about geographical disparity and it also makes it clear that it applies to the most expensive plans. and we continue to believe it's very important if we're going to get our hands on the entitlement problem we've all talked about part of that is bending the cost on the health care. >> is there any other tax that has a geographical adjuster to it? >> i'm not sure if that -- looking at my tax counsel. pardon? yeah, i'd have to go back and check if there are others but -- >> here's my concern. it may affect california, it may affect new york but i have a feeling it's not going to affectve inaffect nevada. our senior citizens are all going to be affected by the
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cadillac tax in a couple years and this geographic adjustment doesn't affect nevada i've got some issues with it. >> the way it will work the threshold will be set at the gold plan level by states so states with higher costs will get a higher threshold. i'd have to check where nevada fits on the series -- >> can you get back to me. >> we can get back to you. it was meant to address, you know, the -- in a fair way across the country making sure that the gold plan reflected local costs but we can get back to you. >> secretary, thank you for being here. >> thank you. >> thank you, mr. chairman? >> thank you, senator, for your patience. >> i haven't planned to raise this senator heller has raised the issue of the cadillac tax. i remember five, six years ago when we were debating the affordable care act, the economists to your left and to your right from all across the spectrum and they said if you do
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nothing else on health care reform the one thing you need to do is to make sure at some point in time when the cost of health care coverage for a person, for a policy, which is a high level at some point in time it should not entirely be treated as a tax-free benefit. there has to be some -- and some consequence. and they all agreed on that. they all agreed on that. and we ended up with this, like, jury-rigged rube goldberg kind of approach the cadillac tax to try to scratch that itch. but i applaud your efforts to try to do something geographically in the president's budget. >> we have the support of those economists still. they all signed a letter. >> they sure have. they sure have. we got their names. i think it was mentioned the infrastructure and whether or not the repatriation for international tax reform should be used for that purpose. i said to the president and i
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certainly say to you, if the congress wanted to pass and i supported an actual tax reform, part of the working group led by senator schumer and senator portman, but i said if we could actually pass that use that money for at least for a while for infrastructure that would be fine by me. although it runs counter to what we've done for 50 years and that is to pay for the people the businesses that use the roads highways bridges actually pay for them. it's not a wild, crazy idea. it seems to work out pretty well for half a century. i was intrigued by the $5 oil fee that i think the administration's proposing. haven't drilled down on it. >> $10 over 5 years. >> i'm intrigued by it. i bought gas last weekend for my minlvy vy minivan with 413,000 miles on it and filled it for god only knows how many times but it's the
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cheapest gas i bought for my minivan a buck 73. and i was thinking while i was pumping gas if we'd raise the gas tax for four years gas would still only be a buck 89 in this country. maybe we should have done that but we didn't. just make the case for me for this proposal if you would. >> i think the fee makes sense for two reasons. first it does reflect the cost associated with fossil fuel use, which is something that makes good sense. and it would at a time when we particularly have low oil prices give us the ability to phase in gradually a fee that gives us the ability to invest more in infrastructure to give a boost to the highway trust fund and to invest in new technology which we need to have energy independence far into the future. so we view it as being something that will serve multiple
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objectives. understand it's not a proposal without controversy. but it also meets a number of very important policy objectives. >> all right, thank you. i just come off my hearing of environmental and public works committee and we're focused on the work the army corps of engineers as you know do a lot of important infrastructure work. mostly along our coast but also on rivers and so forth. and they're bemoaning one senator after another bemoaning the fact that there's not enough money for the army corps of engineers to do their work,s there a huge backlog and it turns out there's a huge backlog you've referred to and i've talked about many times in the transportation realm. and we have folks at the irs we don't have enough folks at the irs there to answer questions, you know, be good on the phone, help taxpayers with their -- with their concerns because we don't provide enough money. we provide some money a bumup but it's not nearly enough money. we could actually correct me if i'm wrong on this but we're
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always looking for pay-fors around here to pay for tax cuts or the offsets to pay for spending. i will ask the commissioner later on this when he comes in to testify. a good pay-for would be to provide additional resources to the irs. there's a multiplier. it's not just a dollar for -- dollar for dollar -- >> it pays for itself many times over and also creates a stronger tax system where people have a sense of fairness that everybody's treated the same way. so i've been a big advocate of more funds for taxpayer enforcement for many different seats of government. >> good. mr. chairman, i'm tom carper and i approved that message. i think we've made a good start last fall but we need to do more. and it's a fair thing to do for all these folks that are calling our offices they're not getting the kind of service they want. and it's the right thing to do for our country. >> i remember the 1990s when the problem was that the social
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security administration and at the time i considered it critically important that if you call social security you had to get your phone call answered. it's the point of contact with the federal government that people would most frequently have. the irs is right up there. and it's just not acceptable to have a system where people citizens, can't get through to the two parts of the government that they actually touch in their lives. >> and by doing this we actually provide some more resources for irs, it actually helps us reduce our budget deficit in the end. it's a win/win. thanks, mr. chairman. and thank you, mr. secretary. >> thank you. >> thank you. >> thank you senator carper. we appreciate you. mr. secretary, with regard to inversions, i doubt seriously that they're going to be able to get through before the end of the year the territorial recovery of moneys. for many reasons some of which are political, some of which are just time concerns, and some of
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which is come from being difficult to get both sides together. but we're working on a corporate integration program that may very well put a stop to inversions that really if we could go on a bipartisan basis could make a real dent in those problems this year. now we're -- we're stuck right now because we have to wait until joint tax comes up with its analysis. so far, it looks good. and i hope that you'll keep an open mind with regard to that because it's something i think is doable. and it would put a real crimp in the inversions that have been going on in our society, the corp rat in corporate inversions. and i think we'd get companies back once we do it. now, we all know the best way to solve that problem is to cut the corporate tax rates so that we're competitive. and -- but that's another matter that's very very difficult to
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do under current circumstances with the problems between both of the parties here in the senate. i'm looking for ways of bringing people together with the administration and see if we can solve these problems. so, when we get a little farther down the line i want you to come up and go over with me this corporate integration program that i think might very well be something that would help you help the administration and help this country to resolve these inversions that have been going on. you're willing to do that, i know. >> mr. chairman, i'm not familiar with the details of the proposal and it's hard to see how it addresses inversions without looking at it but i'd be happy to look at it as we have that conversation and i hope we can talk about whether the anti-earn provisions and the earning stripping provisions might be doable even if we can't do all of business tax reform. >> i'm afraid of those because i think those will cause more
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inversions rather than solve the problem. this would solve a lot of the problem. it wouldn't solve it all but it would give us time to do what really needs to be done. i think you and i could agree on that. i would ask you to look through the jct analysis of the earned income tax credit for puerto rico that i've made public just this morning. so, if you'll look at that -- >> i haven't seen it yet. i'm happy to look at it. >> i know you will. and i appreciate if you would. in the meantime i wonder if you've given any thoughts to difficulties of addressministering what you propose and the real concern about improper payments that can easily arise under your proposal. >> i think we have a great deal of experience dealing with the earned income tax credit -- >> 25% payments are wrongfully made. >> i think we would be able to work with the commonwealth to implement it in a way that was designed to have the compliance
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rate be higher. one of the things that congress enacted last year was a provision giving treasury the ability to provide technical assistance, in a more robust way, to puerto rico, and we have people working with them, so we would endeavor to work with them to set things up so that it was run in a very sound way. i'd be happy to follow-up with you and any concerns you have on that. >> i'll do everything in my power to solve that problem. i think we ought to get it out of politics and get it solved. there are good people down there that -- we're quite a bit to blame, too when we took the tax credit away it cost them 100,000 jobs as i estimate it. so, i think we got to resolve this problem. i hope we can keep it out of politics. >> i agree. i think we have to deal with it as a crisis that we need to deal with on a bipartisan basis. >> hopefully we can deal with it before the end of march. >> that is my goal.
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>> we'll work with you. i'd like to thank my colleagues and you mr. secretary, for participating in this hearing. i think we've had a good discussion here today and i hope that we can continue working together in the future. if any member -- i'll just make this plain. if any member wishes to submit written questions for the record, please have them do so by the close of business on wednesday, february 17th. and so mr. secretary, you've been very patient to go through this long arduous hearing and i just want to thank you for your patience. with that, we'll recess until further notice. >> thank you, mr. chairman.
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tonight on "american history tv" lectures in history, beginning at 8:00 eastern the presidency of ulysses s. grant and 9 :30 battling nature in the korean and vietnam wars. after that brook simpson from arizona state university lectures on presidents and war powers. and then at midnight a look at citizenship during reconstruction presented by susanna lee of north carolina state university. all of that coming up tonight on "american history tv" on c-span3 c-span3. president obama's wrapping up a meeting of the asean nations today in rancho mirage
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california. that group is the political and economic organization formed by ten southeastern asian nations. the president will have a news conference. c-span will have live coverage of that starting at 4:35 eastern this afternoon. road to the white house began in iowa. the caucuses which date back to 1972 and then we moved to new hampshire that quintessential first in the nation primary which has a long and rich history and now we really begin to test the candidates and their message. we move south to south carolina the first southern primary and then to the party caucuses in nevada for the democrats and republicans. more than likely we'll see a number of candidates probably drop out of the race so the field will then narrow. and then we move into early march. super tuesday. the start of winner take all primaries which means that the delegate count will be critical and as we watch the delegate count continue for the candidates we'll get a better
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sense of whose message is resonating and who is on the path to the nomination. last week air force vice chief of staff general david fold foldfein talked about obama's budget request saying the air force is too small, too old and less ready. he talked about restoring aircraft readiness levels, the nuclear enterprise and restocking munitions and the personnel recruitment and training. the budget calls for 166.9 billion in spending a $5 billion increase from last year. good morning. we're going to call to order the subcommittee of readiness of the house armed services committee. want to welcome everybody this
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morning. thank our witnesses for joining us. before we begin i'd like to recognize a number of our great young airmen that are here from langley air force base. want to welcome you here to washington. we appreciate all the langley air force association does. we've got a great working relationship there as well as the langley civic association. taylor, thank you for your leadership there. i have to compete today. is there anybody here from andersen air force base? >> is there? >> is there? >> we had a little competition going. wherever we go there's always somebody there from gawmuam so i want to make sure we had the opportunity to recognize them here this morning. yes. yes. >> would you kindly stand up please? >> i knew it. i knew it. i knew it. i knew it. fantastic. she always does. she always does. well, good morning. i want to thank all of you for being here for the readiness
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hearing on the department of air force 2017 budget request and readiness posture. this is the first of four hearings on the service's budget request and readiness postures. in december and january the services testified on increased readiness risks due to reduced installation investments and today i look forward to hearing how the air force budget request enables a readiness recovery plan and where we continue to take risks. i'd like to welcome all of our members and distinguished panel of air force experts. this morning we have general david goldfein lieutenant general john raymond u.s. air force deputy chief of staff operations, lieutenant general john cooper, u.s. air force deputy chief of staff for logistics engineering and force protection. thank you all for testifying today and we look forward to your thoughts and insights on these important issues and the purpose of this hearing is for the committee to receive clarification on air force choices for its budget request
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to address funding priorities and mitigation strategies and to gather more detail on the current and future impacts of these decisions on operations and training. once again i want to thank our witnesses for participating in our hearing this morning. and i look forward to discussing these important topics and now i'd like to turn to our ranking member for any remarks that she may have. >> thank you very much, mr. chairman. and first i would like to thank the witnesses. general goldfein, nice to see you again. general raymond and general cooper. and, of course, all the airmen that are here and committee people, good morning. i have no doubt that your testimony before our subcommittee this morning will prove insightful and i thank all of you for your service to our nation. the air force has been engaged in constant combat operations overseas for a quarter of a century, while conducting global transport and mobile operations and we know -- we do know -- that this has taken a toll on both our airmen and their
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equipment. you are accomplishing this feat today with a force that has considerably fewer personnel and aircraft than it did 25 years ago. our forces continue to be deployed throughout the world countering threats ranging from terrorist organizations to near peer adversaries. the requirements placed upon the air force and our military as a whole can never be understated. because of unreliable and unpredictable funding resulting from sequestration and numerous continuing resolutions over the past several years you've had to maintain a delicate balance between readiness and modernization. at times this balance has cost readiness and the further we get behind this curve the harder it will be for our force to recover to full spectrum readiness. through our discussion today i hope we can gain a better understanding of the air force's plan to maintain readiness through personnel, training and infrastructure improvement. so, again thank you all for
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your service. and i look forward to your hearing. and i yield back, mr. chairman. >> thank you so much. i'm going on to go now to general goldfein. i understand you'll be providing the statement for the panel. i want to remind our panel members that all of your statements will be entered into the record and so we'll have that and if you'd like to add anything, we can do it through the questioning period. >> thank you, chairman whitman and distinguished members of the subcommittee. on behalf of our air force, secretary and chief of staff it's an honor to be with you today and a privilege to sit beside these two great airmen and in front of these incredible airmen. we're honored to represent the 660,000 total force airmen serving today and we request that our written statement be placed in the record. a little over 25 years ago then captain dave goldfein piloted an f-16 fighter on my first sortie in the opening hours of "desert storm."
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during the 100-hour that followed the air campaign we provided the same blanket of air power that had shielded u.s. forces since april of 1953. the last time an american service member was killed by enemy aircraft. in addition to providing top cover america's airmen defended the base perimeter, refueled and maintained aircraft controlled air traffic, managed supply lines tended to our wounded air dropped humanitarian aid and supported the joint team with global vigilance, reach$[gv and power. to many americans and to others across the globe "operation desert storm" set the standard for american air power and it's what they remember. in the quarter century since "desert storm" your air force has remained in combat operations without respite. as we sit here today airmen are standing watch over our nuclear enterprise and they are conducting the lion's share of strike air refueling and
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intelligence surveillance and reconnaissance sorties over iraq and syria. however 25 years of continuous combat operations coupled with budget instability and lower-than-planned top lines have made the air force one of the smallest oldest and least ready forces in its history. to put our relative size, age and readiness in perspective in 1991, we deployed 33 of our 134 combat coded active guard and reserve fighter squadrons in support of "operation desert storm." we were 1 9 46000 airmen strong, the average age of our aircrafts with 17 years and 80% was ready for full spectrum conflict. in contrast we have 55 total force fighter squadrons and 660,000 total force airmen. the average age of our aircraft is 27 years and less than 50% of
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our combat air force is ready for a full spectrum conflict. couple this significant readiness reduction with a rising china russian aggression in eastern europe and syria iranian malign influence in the middle east, nothrth korean nuclear and space ambitions and our ongoing fight to degrade and destroy isil, and you have an air force too small, too old and less ready for what the nation requires. simply put, if we were to remain the most lethal and effective air, space and cyberspace force on the planet, we must take steps to rebuild our readiness now. in order to accomplish this goal the fiscal year 2017 budget aims to build, train and equip an air force capable of responding to today's and tomorrow's threats. it balances capability, capacity, and readiness in support of our five core missions. air and space superiority, intelligence, surveillance and
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reconnaissance, rapid global mobility, global strike, and command and control. our number one priority is our nuclear mission. and our budget reflects this importance. including investing in -- the f-35 kc-46 will change the calculus on any adversary. for an air force failing to push the technological edge equals failure. -- needed to ensure the health of our nuclear forces aircraft maintenance teams battlefield airmen and other critically undermanned and overtasked crews. this budget marks the return of a committed investment to global
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vigilance, global reach, and global power for america. a return to bca level funding in fiscal year 2018 will further decimate our readiness and modernization and will place the nation at unacceptable risk. mr. chairman, decisive air, space and cyberspace power and the ability to command and control these forces have become the oxygen the joint force breathes and are fundamental to american security and joint operations. the fiscal year 2017 president's budget and the flexibility to execute it as we have recommended is an investment in the air force our nation needs. america expects it. commanders -- combatant commanders require it and with your support our airmen will deliver it. on behalf of our secretary our chief of staff and the 660,000 active guard and reserve airmen who give our service life, thank you for your tireless support and we look forward to your questions.
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>> general goldfein, thank you so much. thanks for your testimony and thanks for your commitment as well as all the other airmen in getting our air force back where it needs to be. i want to ask, in that context, where we are in restoring readiness. we know that the rebuilding point for readiness is set for the air force essentially at fy-'2020. so, if you can give us some perspective on staying on that glide path based on what the budget request is this year and the resetting beginning as a benchmark in 2020, how far are we going to be able to go in restoring air force readiness? and give us some ideas of the time frames. and along the way obviously you're going to have to make some tough decisions about risk. tell us what core functions you will have to make some tough decisions about, where risk will be placed. in this readiness recovery effort.
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>> thank you, sir. so, we have stated previously that our readiness recovery plan is dependent on a couple of key variables. the most important is a reduction in deploy-to-dwell time which actually allows to us have the time to do the training we need for high-end conflict. that's something quite frankly that we really can't control given the global situation and while we're incredibly proud of the fact that air power is a requirement in all the contingenceyies we face currently and in the future it has resulted in a demand signal that reduced our ability to do the high-end training that we need. while we testified previously that we believed we would be able to achieve full-spectrum readiness on a certain date, it's a rolling time frame. and as the chief and secretary have testified it's an eight- to ten-year time frame when we actually get the conditions set to be able to rebuild that
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readiness. in the last time we testified and we said 2025 was about what we were targeting that was based on some assumptions that haven't panned out. >> right. >> and some of those assumptions were that we wouldn't be increasing our activity in the pacific, that we wouldn't be increasing our activity in europe and that we wouldn't be increasing the activity that we are now seeing in iraq and syria, so as long as that activity continues and the demand signal is there what you'll see from us is a continuing rolling eight- to ten-year cycle to get full spectrum readiness. our prediction right now is for the next two to three years we'll probably just be able to hold our own in terms of our current state of readiness. as the chief and secretary have testified, where we currently sit and where i mentioned in my opening statement is we're approximately 50% ready across the total force for full spectrum conflict. >> does your 2017 budget request, does that reflect maintaining the necessary effort
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and core functions going forward? and secondly, does 2017 budget, does that help you in setting the conditions for restoring readiness? and if not where are the shortfalls or the things that we need to consider as we develop the policy to lay the framework for appropriations? >> thank you, sir. so when we submitted this budget, we worked to get the best balance we could given the top line we received between capability, capacity, and readiness. and so what you'll see in readiness accounts is that we actually funded our readiness accounts to the capacity that we can generate. and so that with the addition of oco funding on tom ing oing on top, we're actually able to fly to the capacity that we can generate. you'd asked before about the core functions or about where we're taking the greatest risk. the two core functions of our five where i believe we have the greatest risk are in air and
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space superior and global strike. and the reason for that is that is where we have to train to the high-end fight against a peer adversary and that's where we're just not getting the down time to be able to train to that level. so, when we talk about the combat air forces and we talk about gaining and maintaining air superiority, that requires training at a very high level against sophisticated adversaries and their capabilities and that's where we're struggling to be able to find the time to do that. >> very good. thank you. thank you, general. we'll go now to ms. bordalla. >> thank you, mr. chairman. general, the air force is facing a modernization bubble with several major projects competing for budget space as evidenced by the f-35 procurement decrease this year and over the coming years. what is the one thing that congress can do to improve air force readiness while addressing the modernization changes? >> yes, ma'am.
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so, first, let me tell you that you'll hear a consistent answer from me in terms of what congress can do and that is repeal bca. because when we go back to take a look at what happened to your united states air force in 2013 when we were sequestered, it devastated our readiness and quite frankly we're still recovering. so, now when you take a look at the budget that we've submitted we did have to make some strategic trades when modernization and readiness. like i said first of all we funded to our capacity our current capacity in the readiness accounts but to do that we had to take some risk in modernization that we did not want to do. deferring f-35 procurement deferring c-130 procurement pushing to the right, you know modernization of our fourth generation aircraft, all required for that high-end fight are all risk trades that we had to make to be able to keep our readiness accounts at capacity. >> thank you. another question i have the air force has been a leader in
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advocating the total force concept integrating the active and the reserve components. what -- general what opportunities do you see in this and future years for leveraging the cost-saving nature of the national guard to contribute to increased readiness and where can congress play a role in facilitating these engagements? >> thanks, ma'am, for the opportunity to showcase our guard and reserve. you know, we -- weç ÷ are one force. one air force. and all three components are actively participating. as the former air component commander for central command, i traveled around the region as you might imagine, and it never ceased to amaze me when i we go up in the caulk pit of a c-17 and all the questions i would ask which one of you is active and guard and reserve and i'd often have all three in the same cockpit performing that mission. that just gives you one vignette of just how closely integrated we are across the force. so, where we continue to look
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for opportunity is where we can leverage very often the higher experience level and the stability in the guard force and our reserve force as we look to continue to associate in ways that can bring more and more capability to the fight. the secretary in her testimony previously this week made a comment that one of the activities we're looking at is how do we take the large number of active duty service codes that are out there and start combine them to make it easier for folks to come into the guard, active reserve and to be able to transition between those components so we can actually leverage the most that we can from the individual components. i'll just give you one quick vignette, so our chief master sergeant of the air force came back from a visit to lewis-mcchord up in washington. and he noticed a young senior airman driving to work in a tesla so he pulled the airman
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over aside said, okay, talk to me. how is this? well, sir, i'm actually in the air national guard, but when i'm not in the air national guard i'm the director of security for a fortune 500 silicon valley tech company. but i also want to serve. and so when i'm not working security for this particular company, i'm a senior airman and i'm doing cyber business for the united states air force. we want to make that easier. and so anything that congress can do to help us to be able to make that continuum easier would be extremely helpful and that's what we want to leverage. >> thank you very much. and i have another one final question for you, general. and i will also say that we as members of congress whenever we travel when it's a midair operation, the guard is there for us and doing a great job. the budget request indicates that the air force will continue
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to take risk in facility sustainment, restoration and modernization. what impacts will reduced fsrm spending have on our airmen's day-to-day quality of life and activities? general cooper? >> i'd like to field that. the simple truth is there's not enough money to go around, so we did -- this budget request does take risk in our installations. that's really where we take the risk, at the expense of modernization and readiness. so, what you'll see is you dive into the budget is that we've constructed our installations around military construction and around fsrm facilities, sustainment, restoration and modernization. based on the pause in '13 we have to get at construction. we focused, we put more money into our military construction and we put less money into our restoration, modernization. we kept roughly the same amount in sustainment because we got to
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keep the buildings moving. that does push us into a strategy of worst first. we have a backlog of, like, $12 billion in facility rear stow ation restoration, modernization projects. we're addressing the worst first. worst first focuses around the mission. so, unfortunately quality of life is competing against mission requirements and we are opting for our mission requirements. so internally we are working processes on those core services to make sure our airmen can get the best we can give them, things like child development centers and things like gymnasiums and fitness centers and dining facilities. we're making sure we can expand hours to provide the services so the airmen can conduct the mission. but at the funding level we're at, we have to focus on modernization and readiness. >> thank you, gentlemen, and thank you for your candid answers to our questions.
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and i yield back, mr. chairman. >> thank you. we'll know now go to mr. scott. >> thank you, mr. chairman. gentlemen, thank you for being here and for your service and i just wonder is that plane still flying? what were you years ago? is that one still in the air? >> i've been told it's being used for an unmanned drone. i'm hoping not. >> but it probably still is in the air. >> yeah. >> that's something most people don't recognize is that while we had that many decades edge 25 years ago, the fact that we haven't recapitalized has given our adversaries an opportunity to maybe not catch up but get a lot closer to us. i want to talk to you about the j stars which is an isr platform that flies out of warner rob bins. obvious tli obviously, there's some money in the budget this year for t. there was more money last year. i'm concerned about the
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reduction in that. the recapitalization of the fleet has continued to push a year here, a year there. and when i look at the charts that show what's going to happen with our current planes that are flying when they go in for maintenance, we're going to end up with a capability gap that's going to force us to either keep very, very old planes, much older than the ones you were flying 25 years ago in the air or not be able to provide the moving target indicator and the battlement platform to the forces that need it on the ground. the other aspect is the new system would spend a tremendous amount of money on an annual basis basis. it can gather more data at one time. i just don't understand why a
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program that uses existing mature technology that is relatively inexpensive compared to the other platforms we talk about with regard to the recapization has taken so long to deliver. my question is, what are the plans for the capability gap that's going to exist when the current planes which are many, many decades old, go in for depp depot maintenance if the new planes are not readied to go? what plans would you have for accelerating the time line to make sure we don't have that capability gaps? >> thanks, sir. when we went -- when -- as we have been in discussions about j stars, part of the discussion has been, do we shift to an unmanned versus a manned large aircraft manned platform. we went out to the chief staff
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at the air force went out to every combatant commander to revalidate the requirement for airborne battle management as a critical component of their war plans. and that was validated across all of the combatant commanders. that's important because very often we talk j star that we start talking about the sensor. i would argue that the most important thing that j stars brings is airborne battle management. as the air component commander for central command i will tell you i use that platform in a number of ways in addition to what's traditionally considered airborne battle management. i used it in the maritime domain covering the straits. so first and foremost, we have validated that airborne battle management is a critical requirement for the combatant commanders. we need to move on that. the challenge becomes a technology discussion which is at what point do we transition and can we transition this to an unmanned platform of the future
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versus a manned platform? the reality is that technology that we would need to put on a unmanned platform doesn't exist to get the same capability that we provide to combatant commanders today. it's just not miniaturized enough. it can't give the same level of fidelity of the ground moving target indicator that the j stars does today. the air force's position for two reasons one we don't have the technology to put it it on the platform. airborne battle management is the critical requirement. we need to push forward with a manned airborne platform. we have the funding in this budget to do that. but that dialogue has slowed us down. i will turn to general cooper to talk about covering the gap in the middle. >> yes, sir, the j star, it's an old airplane. 47 years old. we are having structural issues. it keeps them longer to keep
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them going. that's emblem attic of our larger fleets. we have to recapitalize our fleets. we have a number of fleets that are almost as old as j stars. we just have to keep on recapitalizing our fleets. >> thank you for that. the j stars is fleet is a relatively small fleet. the total cost is less than it is for most of these other fleets. it seepms if we could push forward with an aggressive acquisition process that we could get newer planes better technology that are going to save us money on an annual basis. instead of spending so much money on maintenance for planes that we know we're going to pull out as soon as we have the new platform, why not push this thing up? we're talking about -- we talk multi billions for a lot of platforms. hundreds of billions. this is not one that costs
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anywhere close to what most of the platforms cost. usa said, it can't be done with any other platform the battle management aspect. thank you for your service. >> thank you, mr. scott. we will go to mr. courtney. >> thank you to the panel for being here this morning. general, last year's ndaa came up with a pretty good arrangement for the c-130 modernization with the new amp 1 approach that hopefully is going to short-circuit some of the problems that existed before. on page 14 of your testimony you mention the c-130 modernization. i was wondering if you could talk about what's in the budget. it seems like a small number for 2017 and 2020 as you know is coming up fast for the global navigation requirements. i was wondering if you could elaborate. >> yes, sir. thank you. so we have broken up the amp program into as you know two increments. so increment one which actually
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makes us -- makes the c-130 capable of flying in all the international airspace and meets faa requirements, previous budget we had that completing in 2022. we were able to in this budget accelerate that to 2020. which allows us to actually be in line with the expectation for the faa on being amp 1 compliant by the time frame they have given us. so that's the first. we have been able to fully fund increment two, which actually does the physical upgrades to the c-130. and that will now complete in 2028. we feel good about the ampzv>÷ program right now. we have actually -- the chief of staff led an effort through our total force to talk to all of the states that have c-130s, all of the generals are part of the plan. we work through the c-130 issues, we have that dialogue with them to so they are part of the process. right now going into this budget, we feel pretty good about the program.
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>> again, i'm sure later in the process we're going to have more conversations about this with you and your team. it's just -- is there any space or possibility that congress can help in terms of accelerating it more? flexibility in 2017 budget to help again push this along. >> sir, we will take that one to see if there's any kind of help we would require from congress. right now we feel like the program is pretty well funded for what industry can support. i will tell you where we could use your help. that is we had to take some decisions -- make some decisions to delay critical modernization to be able to pay readiness and get the balance in the budget. one of the decisions we made was to defer some c-130j procurement. any help to bring those back would be appreciated. >> thank you very much general. to all the witnesses for your service, i yield back. >> thank you.
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we will go to mr. buliando. >> thank you. thank the panel. and thank you for your service. for general goldfein general, in procurement line 22 of the aircraft procurement account for f-16 radars, the air force requests and states an expedited delivery schedule. it's imperative to operationally field the radar in support of homeland defense against evolving threats. can you police update the subcommittee on how the research, design tests and evaluation as appropriated in omnibus is progressing, what phase you are in and how will this be complete and when do you see an award coming? >> thanks, sir. as you know, the department originally pursued a joint urgent operational need from the
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supported combatant commander to procure the radar for the f-16 to do defense of the national capital region. it speeds up the amcquisition process. that was not supported. where he now in a competition for those radio -- or those radars. the air force fully funded 24 of those sets to be able to take care of those aircraft that are part of the ncr. but now what we will need to do -- the remainder of the fleet will also be able to go into a full and open competition so that we can continue to modernize the remainder of the f-16 fleet with radars. but we do have to get to 24 although we're not able to go soul source. >> you are attempting to expedite? >> but we have to follow the
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acquisition rules for competition. the money has been laid in for the 24. >> i recently received word that the ops 5 and 6 for the air national guard basing criteria has been pushed back to later in the spring of 2016. can you update the subcommittee on how that is progressing? >> yes, sir. as you know we build our basing process so that we can be fully open and transparent with all of congress to ensure that not only do you see the criteria but that you see how each base scores out in the criteria. so what we're looking at right now with the f-35 ops 5 and 6 is what criteria do we need to make sure we have ready to go? as soon as that is ready, we will put that out. then we will start the process that goes through not only setting the criteria, but then actually then scoring a certain
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number of bases again thaftst that criteria sharing how that occur and making the final decision that the secretary makes in terms of the batessing. >> do you have any idea on time line on when we will see that? >> let me see if we have that. do you have any timing? can we take that and get it back to you? >> sure. i obviously have a great interest in that. i'd like to think that i represent if not one of the premiere homeland security bases in the country because of our strategic location to new york and to washington. and we think fair objective and transparent, we would score well in that. >> yes, sir. we will try to get that answer to you even before the hearing ends if we can. >> thank you. i yield back. >> thank you. we will go to mr. peters. >> thank you. thank you, gentlemen, for being here.
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i wanted you to expand on training. one is, i would like to you explain why it is that a delay in the annual budget for -- did i palestiniandiminishment for training lasts beyond the year. people don't understand there's a permanent affect to underfunding training. i want you to address your sense of how -- what any additional challenges for the training budget are posed by the additional new air frames like the f-35. >> thanks, sir. first on the delay and the lag affect that goes into training. the way we do our program is we budget in two-year cycles as you know, sir. so we project in the future how much we think we're going to fly in contingency flying. given the capacity of any weapon system, will take the f-16 as an example. it's designed for compression of
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enemy air defenses. very high end fight center focused community. so we look at all of the capabilities in that way to -- and the weapon system to produce flying hours. that's a fixed capacity. and then we project how much of that we think in that weapon system will be flown down range. that becomes part of the oco. and so what -- you can't go up because that's the fixed capacity of the weapon system. the only thing that can happen is that you project what you project doesn't pan out and the assumptions change. what we found year after year is that we actually fly more down range activity than we have left for home station training. so what that means in the block 50 f-16 for instance is that air crew that are supposedly -- that are trained and designed to do high-end peer to peer conflict in a contested environment are actually focusing more and more of their training on the lower end close air support, violent
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extremeist fight. so they lose their skills over time. you can't build those back immediately. you've got to build them back so they can be in that community. they have to be wing men. we have to be flight leads. instructors. they have to be certified for all of those. the less amount you have to train to the high end fight the less readiness that you have. so it actually takes you more and more time to actually build that back. when it comes to bringing the f-35 and other weapon systems, the challenge for us in both -- the challenge and the asymmetric opportunity is that we approach joint warfare from a networked perspective. the vignette i would share with you, i flew the f-117 as the last pilot. when i took off and flew the f-117 first generation it was a very closed system approach to using lo. i actually had a switch that would turn everything off, all
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of the sensors would would stow and i would lower my seat and go to work. in the f-35 when you power up the aircraft it starts doing machine to machine collaboration and discussion on the initial powerup. it starts comparing amongst it in the network. it's talking to airspace, cyber. it's doing the full spectrum look and it's doing a human machine collaboration that actually places symbolic on the visor of the aircraft. so it's a very network approach. when we bring the f-35, the f-22 on, it's about the network approach to warfare and that makes it in its own training challenge, because we have to be able to simulate that network and go to training as opposed to a single aircraft going out. >> just sort of -- i know quantitatively -- how short are we given that we have been lagging already? >> as i testified earlier, we're
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at 50% or less in overall full spectrum readiness across the air force. that vignette i shared with you in terms of the fact that we're not training at this level, that's what that means. we're not able to train to the suppression of enemy air defenses mission because we are using that weapon so much in the fight against isil. so at 50% readiness, the challenge is if you look at the -- what our secretary of defense is laid out as the major strategic challenges we face and a condition of violent extremism that we will likely have to deal with, that covers the spukectrum of the potential conflict we may face. if we are 50% ready we are 50% ready against the higher end threats. >> i want you to know, that's something that's been on my mind since i've been on this subcommittee. it's something that's not easily observe. so i wanted to take a little time to draw it out. i appreciate the emphasis on it.
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hope we can be responsive. thank you for your testimony and your service. i yield back. >> thank you mr. peters. we will go to mr. bishop. >> thank you. general, i appreciate the opportunity of you being here. i appreciate you having a hearing at 8:00 in the morning. you think there are no other issues that conflict with that. there is one. it's called my mattress. i wish you would get one that's comfortable for you so we wouldn't be doing this. general, can i also just -- before i ask a question, just say one thing. your complaints are accurate. but it's too narrow. there were four other cuts in addition to that as well as the 25 years of constant combat flight u.s. hads you had to do. when you have the criticisms, don't narrow it. there are other things that have screwed you up in addition to that. it's much broader than that. can i ask you a question? you did mention the written
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testimony about things that are important to me. i have some concern over the transition that's going forward, especially as we look in what's going in the future. is there any concern because the 380 say 00 is a combined unit. are they going to be tasked more or less in the future? >> thanks for the question. the reserve component at hill like all of our reserve components are critical to our force. and great partners. we do have a transition plan. those f-16s will be transition transitioning in the '18 time frame. what we have done to fund that transition is to put some funding in to make sure the aircraft can be flown while we're waiting for the transition. >> but the maintainers are still a problem. it has to be dealt with. >> i can field that. main teartainers are a problem in the air force. we have taken steps to make sure
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we will transition well to ioc for f-35. i am concerned on any f-35 bed downs. we are 4,000 maintainers short. we are focusing on hill to make sure we can get the maintainers for ioc. right now at hill specific, we moved as you know the fourth fighter squadron came back. we moved the maintainers over to begin training for f-35. we received -- we have six airplanes there. will be out there making sure we get ioc right. the reserves are taking care of the f-16s. when the 421st comes back, the maintainers will move over. then the reserves will manage the f-16s. >> that seems to indicate there's a greater emphasis put on the reserves taking more capacity. >> yes the reserves will -- we will let the reserves work on the -- use those aircraft at hill air force base until
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transitions in the following years. >> can i transition slightly and see if you can do this? i do have a concern about hiring practices. i wonder if the air force is going into that. some of them are taking up to 160 days to hire people. is the air force looking at trying to devolve some of the authority? once again, i think opms's goal is 80 days, which seems to be an outrageous goal. if you cannot hire those people -- i understand you have to augment them with contractors which may not necessarily be a cheaper way of doing it. is the air force moving in something to try and deal with civilian hiring practices? >> yes, sir. our secretary of the air force is leading that. she tasked our director of personnel to look at all of our policies across the air force relative to civilian personnel to see how we can speed up the process of hiring when we need to hire, especially for critical skill sets. she's also having us take a look
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at the continuum of service between the)áthree components and allowing civil yaps toians to come into the air force, especially when we need critical skills. the challenge we have as you know, is that most of the rules associated with civilians don't reside within the service. most of those are above the service. so while we're looking at everything we can and why we're brushing our individual policies, it's above us. that's where we could use your help. >> thank you. we will try and do that as best we can to help out. i appreciate your comments about forth generation modification that have been delayed. you are clear on the readiness capabilities are being lost. i have a -- it's not a question. i'm saying, i also have concern of how it's affecting contracts depot workloads everything else. have i you don't need to respond. thank you for your presence. in an hour i will be awake so i can understand what you said.
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>> thank you, mr. bishop. we will make sure that when we have an opportunity we convene at a later time. >> then we will talk indian bills after that. >> yes, we will. now i go to mr. o'rourke. >> thank you. i wanted to ask general about the nuclear cruise missile part of this budget. i will tell you my limited understanding and some of my concerns, which should take no more than a minute. then offer you the remainder to answer. my understanding is that this is a $30 billion price tag for a weapon that will be carried on the aging b-52 platform. i want to know what would happen should we not pursue this strategy. what is the risk to the united states? two, what are your thoughts on
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the british decision a few years back not to pursue this as a strategy because of their concern that it would produce miscalculation and unintended consequences? it kind of departs from traditional nuclear deterrents where each side has a good understanding of the other's capabilities. and their conditions for using them. so if you would take the remain remaining four minutes to answer those questions and tell us what would happen if we didn't do this and where we could apply the $30 billion if we didn't. >> thanks sir. just to talk about just the funding part of it right now, just for -- the long range standoff weapon that will replace our air launch cruise missile is currently scheduled to be int 'njed not only on the b-52 but on the b-2. so for us the way we look at
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this is it has to do with 21st century strategic deterrents. and what the nuclear aspect of that is. and we as and air force we like to joke that we're responsible for three of the four legs. because if you add nuclear command and control, which we're responsible for, it's actually almost a leg in and of itself to assure we have assured communications. so for us, it's about how do we ensure that we have a reliable, assured, secure nuclear deterrent to be able to hold targets at risk so that we can show that we have that capacity and capability? and so there's a number of ways you do that. you do that through the bomber force. you do that through the -- of course the ground based force our minuteman 3. then transition into ground -- the gbsd. we also do that with the navy with the submarine force. so for us when you take a look at the long range standoff missile, it's about being able to have the right standoff to be able to actually go into be able
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to service targets that the commander and chief may ask us to service. so when we look at it we need to have both that capability, which is standoff, plus we need gravity capability plus penetrating capability with gravity which is why we are putting money into the b-61 as well. and we have to modernize the nuclear missile fields. so that's why you see an increase of $4.3 billion in this budget to be able to modernize the nuclear. what we would tell you is we believe that's a critical component of the three legs of the tryiad. in terms of the risk that we would have in terms of employment, modernization of a particular weapon system does not actually indicate that you would have -- you would be more susceptible to use. that's purely a commander in chief decision. so we would say as the employers of the nuclear enterprise, that
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we don't think it increases risk. so one of the areas that we're going to need help from congress on is that if you take a look at the nuclear enterprise most of it was built in the '40s and '50s. it's aging significantly. and we have some bills that are going to come due after this fight in the 2022 time frame that are significant. so we're working within the department to look at augustll aspects to ensure we are putting the best dollar forward to ensure we have a safe, secure, reliable nuclear deterrent for the 21st century that has all three legs plus command and control intact. >> do you not share the british concern or the concern of former defense secretary perry about the risk of miscalculation or unintended consequences? you think this is the wisest use of the $30 billion? >> i do. >> for whatever reason congress
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were not to support that request and still allow for that $30 billion to be used within the air force where would that money go? >> sir, you know, to be honest with you we would take a look first at our stewardship of the nuclear enterprise. the first place we would look is, where do we need to place that within the nuclear enterprise as our number one priority for our service. after that, we would look at it like we look at everything else, which is look at a planning choice. we would look at the trades that we have to make between capability and capacity and readiness. i can assure you the first place we would look would be within the nuclear enterprise. >> thank you. >> thank you, mr. o'rourke. we will now go to mr. gibson. >> thanks, mr. chairman. i appreciate the panelists. i thank you for your service and your sacrifices and those of your family. my question has to do with joint in inopener ability training and readiness. with regard to the budget, if
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you could lay out where the commitments are in terms of joint forcible entry exercise, how many commitments, how many rotations do you see this budget year. and then also, commitments to the national training center and the scope of that. and any other modelling and simulation for the year, if you can lay out where the budget is. >> thanks, sir. 15 years of continuous combat has actually produced the most joint force in our history. and i can say that also personally having been the combined forces air component commander deployed for two of those years. so what we have found is that our forces who are down range are not only training but executing jointly every day. when we come back at all of our major training venues, if you go out and take a look at red flag,
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green flag cyber flag, ntc rotations, air warrior rotations, you will have a joint element of every one of our exercises. the service chiefs and the threes, the directors of operation work that hard every day. you know, we are very proud of the fact that when it comes to training of the united states army and the joint force entry capability when it comes to especially airborne, that we provide lift that they we quire to do that mission. so working with general abrams in forces command and not only our army but marine corps and special forces, what we ensure is that we understand the requirement for the number of jumps that we have to support. then we look across our enterprise at the goebllobal mobility to ensure we have what is required to support the jumps. >> appreciate that. as you know, and i thank you so
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much for an incredible career you have had, the whole piece comes together with electronic par fair, with fighters bombers command and control. so specifically the question is how much joint forcible entry exercises are in the budget for this year? >> we have really focused on putting resources to the training effort. in this program that -- budget that was just submitted, we have over $398 million going to training, the exercises you talked about. we have invested over $235 million into our training ranges to make sure the ranges are high-end capability fifth generation capable to get the most out of the training events. we spent $345 million on live virtual and constructive training, looking at how do you do that better in the simulator to maximize those training events.
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>> thank you. it may very well be my failings in not framing the question right. will lay out a few points. over the years as we -- we're working together sustain the joint peace of this, the forcible entry piece of this. we can have anywhere from eight in some years ten joint forcible entry exercises. last i looked at it think we were down to about four a year. understand the war has played a big role on that in terms of where the resources need to go understandably. but you know, this is among the reasons why, gentlemen i would say i'm concerned about the decision the air force has take within regard to the 440th. and the reason is we're all managing risk. up here we're managing risk. air force is managing risk. all the joint forces are managing risk. among the things that the 440th could do is really allow for smaller units in the 18th airborne corps to sustain as was
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mentioned. you take -- you are proud of the fact that you help joint forces maintain their readiness. but it's especially difficult today at the company and battalion level to keep up on the eaches when it comes to their requirement knowing that the four major packages that we have, the joint forcible entry exercises, is important for exercising higher level staff for integration, but it's getting tougher to the one offs, the people go to school and come back. that was managed by the 440th actually being at ft. bragg. >> very quickly. our objective -- we're working with the command of general townsend. we met with him regularly. our objective is that when a soldier walks out to the flight line to get on a c-130 for a jump, he doesn't know the 4040 is gone. what we have done is we put an aircraft there and he gets the training he needs. that's the objective.
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so we do that for a number of bases around the world that do airborne and do training and so we do that in italy. we do that across -- we think we have a good template for that. the army leadership agrees. so if we get this right, it will be transparent to your soldiers. >> my time has expired. >> thank you. we will now go to ms. gabbard. >> thank you. good morning. you spoke a little bit earlier in your commands scommends of the necessity of increasing cyber capabilities. i'm wondering if you can talk in more detail about two things, recruiting and retention. we look at the talent that exists and the innovation and how quickly evolving this world is in the private sector. what kind of creative efforts are you taking to be able to bring those folks in to be able to work with us as well as to retain them once they are there? >> yes, ma'am, thank you.
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so we're working quite frankly very hard with effort that the secretary of defense is leading called force of the future. one of the elements of that is permiability to come into the military when we need it and vice versa. sharing what talent and exper advertise and capability we have with the private sector. we continue to look at those capabilities. right now as an air force our contribution to the cyber force is 39 teams, represents about 30% as you might imagine, it's about right for our contribution, 39 teams. cyber com has three missions. defend the nation, defend the network, support the combatant commanders. we have 13 teams that we're building to support each of those requirements and each of
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those mission areas. so 13 times three equals 39. right now we have 26 teams. we're on track to complete our build of 39 by 2018. we feel pretty good about where we are where we're going. i will tell you that you can never stop looking at managing this talent. because we have got to have the incentives in place for not only them to want to join us out of more than just patriotism but because we are a good place for them to reside. because of how we take care of them and the value of their service. so those total force continuum that we are working on are incredibly important. >> if i could add, we have done a review of the retention across the cyber force. we're not seeing retention issues with the cyber force. the retention levels mirror the receipt of the air force. they are about equal.
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as general goldfein mentioned with the vignette of the airman driving the tesla. people join because they want to serve their country and protect the country. >> somewhat connected with that but really on the overall broader scale is as you talk about the total force and integrating the guard and reserves, how are you integrating those elements in your deployment to dwell ratio in a way that's sustainable for the future? >> thank you for the question. we are a completely integrated force. as general goldfein mentioned earlier, you look in the cockpit and you won't be able to tell the difference. there will be guard reserve and active duty together. that is that way across our service. when you look at the readiness levels across service we mirror each other. because we operate together. if you look at the deployed the same concerns are there with
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total force as it is with the active duty force. we mirror each other in readiness levels. we watch that very closely. we are the most integrated service with our guard and reserve and they are critical partners to us. >> what is the ratio now? >> across the board for on average it's about one to 2.5. >> can i offer that you do get a capacity stop? regardless of how integrated we are, we still only have 55 squadrons to do the nation's work. so at that point, you actually can't get any more out of what you have already got. so that's why i go back to the point that we're too small and you are seeing us trying to bill up the force size and our capacity to do what we believe the nation needs. >> thank you. >> thank you. general goldfein, in your testimony when you spoke about the shortage on maintainers, i
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would like to get your perspective in a little more of a drill down as to the nature of that. you talk about needing to use contract maintainers for your a-10s, f-16s, c-130s in order to get people transferred over to spin up to maintain the f-35. there seems to be another aspect to it though when you look at the nature of the shortage. and that is some of the shortages are occurring with your senior ncos that are indeed your trainers for airmen coming in. tell me, how do you address that? that's a long-term issue. the short-term issue is contract maintainers. but the long-term issue is as you bring new air force personnel in how do you get them to stay in the air force so they can become that senior nco that's a master maintainer, but also the trainer for the new airmen that are coming in the air force? tell me how aweyou address that. that wasn't related in your testimony.
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>> i would like to answer that. we are 4,000 maintainers short across the air force. the issue is we're bringing two f-35s in a month and they require 20 maintainers. we add to that that deficit every single month. as we go forward. next year it will be three f-35s. we're addressing it on how can we grow our fleet? what we have done to date is we have balanced as much as we can safely do with our legacy fleets, even with our large airplanes, moving to fighters. it's most acute in the fighting air force. in our fighters. so we have moved like crew chiefs from c-130s to f-35. congress authorized us to transfer 36 -- up to 36 a-10s to bai status. we used 18 because we needed the fighting force as well as the
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maintainers. we split the difference. we have done as best we can there. we have offered numerous retention incentives to our older maintainers, our tech sergeants and master sergeants so they will stay in and retain the training expertise. we have seen growth there up to 1,000 maintainers have taken retention bonus and have stayed in, which is good. but we're digging a hole as we go forward, because we have the structure we're not able to divest and we're growing f-35s. internal internally, since '13 we under assessed. our new airmen coming in it was a challenge. we had an $8 billion challenge after sequestration going '14 into '15 how to close that gap. the first place that we went to the easiest place to go to get dollars that quick that soon, is the personnel count. we under assessed into maintenance. we are reversing that trend. we did it in 2015.
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at the exception of other critical afscs and career fieldsed in the air force. we're doing it in '16 up to 1,000. at the expense of critical career fields not maintenance in the air force. this budget asks for a growth of maintainers in the '17 budget. part of the -- a large part of that is maintenance. the initiative we just started was looking at the contract maintenance in areas across the air force where there are not combat coded units. they are mostly training units. they don't have a deployment requirement. we feel we can contract in those locations, take them and move them to f-35. but that's a challenge. that's just a short-term challenge. we need to continue to grow and really that only gets us two years and we will have the same problem in two years.
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>> just seems like a cascading affect especially as kro thecross the mos at ever level of experience. >> it s. weis. we are challenged especially in the fighter fleet. we have six career fields below one to to two dwell, meaning they are slightly at home slightly longer than they are deployed. >> i would add that when we look at readiness and the impact of that, we have a critical skills availability is a key piece of that. it's not just the numbers of people but it's the right level of people as you mentioned, mr. chairman. that's why it takes time to grow that readiness. we have made that initial investment. we bring new airmen in. but it will take five years or so to grow those to a level where we have the senior leadership that we need to build that readiness back up. >> i just want to make sure that we reflect the proper policy so you can continue to grow both at capacity and the capability it has to be grown on both levels.
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let me ask about a comment you made concerning infrastructure. and capacity. and excess capacity. as you know, we look at that. there's a requirement from last year's ndaa for each of the service branchs to provide a report back to congress concerning capacity issues, overcapacity, excess inventory, those things as well as what we had hearings on earlier. what are we doing to support the existing critical infrastructure and facility support? which is one of the elements of what we used to generate readiness. one of the concerns i have going forward is to make sure that we don't get too short sighted. everything we have done recently has been very short sighted. what do we do to make it to the nest budge next budget, to move money around? i understand the need to generate dollars and the dollars that come out for older facilities. i think there's a logical way and risk way to do that. my concern is this.
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on other side too, the air force with its assets is going to continue to grow. we're going to have new fighter aircraft coming on board and new long-range strategic bomber, a new tanker fleet that lift capacity that's there, even a few more c-17s modernized c-130s. there's a need for infrastructure to support that. my concern going forward is saying, well let's reduce base structure or that infrastructure. we know we need that. i want to make sure those two curves don't cross and we say guess what, now we have more aircraft than we have facilities necessary to keep the aircraft and maintain them. in my idea, how do you fine the right balance in saying we need a brakc in light of we need to build more aircraft in. >> thanks. i will start and turn over to general cooper to give you more detail with where we are with
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our infrastructure. a couple key points. first, no surprise to you that as airmen, we project air power from our bases. so they are part of our fighting platform. when we actually talk about infrastructure, we're talking about part of how we fight. so it shouldn't be surprising that we're going to put significant amount of resources against our infrastructure. in this budget, we made a strategic trade and a decision to emphasize combatant requirements and new miss bed down. as you stated, usaas you bring on new weapon systems, there are capabilities you have to build to bed those down. so you will see those two priorities. as we testified previously, you have seen we have taken risk in our facility restoration modernization accounts to do that. as i transition to general cooper, what i will tell you is that we have about 30% -- we are
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about 30% over in terms of the infrastructure versus our capacity. so right now today we would tell you that we are keeping a number of facilities on these large bases up and running because we're not going to tear them down. and we don't have the forstructure to require us to use them. we could use at least a reorganization to be able to get more right sized. but we also look at it through the lens of where we're going to be in the future when we get the new missions on. so when you look at the tanker trade, usa trade, as you will see, we will build up before we come back down and keep it balanced. we think that 30% over capacity we have now will actually continue to exist as we make the trades of the future. let me turn it over to general cooper. >> thank you. too much, too old, too expensive. so i'm on the business side of the air force. i'm responsible for trying to --
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and the readiness side. we're trying to make sure we have the appropriate readiness to give general raymond and the operations the most to give america. our infrastructure is too big. we know that. so i can -- i have a litany of people -- we get rid of the water off the flight line that can't handle large rain. three times a year it floods. we can't conduct pilot training. last year we lost 370 sorties because it rained. that facility project is still competing for funds. there's other more critical facility projects. we have -- we avoid $2.9 billion in expenses because of previous
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bracs every year. >> thank you. >> thank you very much mr. chairman. i have a couple of questions i would like to ask. the first is to what extent are weapon shortages affecting prepositioned munition inventory and consequently readiness to address conflicts around the globe? >> in this budget, what you will see is we have funding munition to the capacity the industry can produce. the challenge we face is that while we have the munitions we require for the current fight it takes us upwards of four years to actually replenish ammunition that we drop just based on how we do a budget cycle and the time frame it takes. as we drop more and more munitions, what happens is -- by the way, as we have more and more allies and partners that join who are looking at the same
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preferred munitions primarily mall diametere diameter what we do is we do take the others around the globe down to a certain extent. we have a plan to continue to replenish them. but there's a lag factor because of the four-year period. so part of that readiness for con continuetin so part of that readiness for con continuetingencyies -- if you were to have the commander here, they would probably both tell you that they are not satisfied with the current stock levels that we have had to deplete and to have what we need for current fight. in addition, when our allies and partners come to us and say listen we are part of this coalition and we need your support with munitions and by way, here is what we would like to have, that further exacerbates the challenge we have. so what we're working to do is
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to be able to work to project future expenditures based on historical averages. we have been in this for 15 years. we think we can probably project about what we're going to drop two to three years from now and be able to shorten the cycle time to be able to replenish the munitions to keep our stocks high. >> thank you. thank you very much general. i guess now is the $64,000 question. if the current operational temple were to increase, say budget constraints sequestration, whatever else, what would be the real affect on the total air force and of course readiness is most importantly? can you -- i'm talking, like, 2020 or whatever the case might be. if could you answeryou could answer that? >> yes, ma'am. it will as i said before -- the one element that we can't control is demand. demand of the things that we
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look at to generate and sustain readiness levers if you will. it's the demand signal keeping us from doing high-end training. if that demand goes up with the capacity that we have, if we don't get bigger if we don't bring these maintainers on if we don't bring our capacity up, we will be less and less ready over time for the high-end fight. so it goes to the -- if i can fly this many sorties and that's all that i can generate and i need this many sorties here to be able to generate full spectrum readiness and reality is the nation calls on me to do this, i'm going to have less to do high-end training and be less ready. >> thank you very much. thank you mr. chairman. i yield back. >> thank you. i go to mr. scott. >> thank you, mr. chairman. will be brief about this. i want to go back to one of the last points. munitions and -- that's hard for us georgia boys to say.
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we call it ammo. doesn't matter what size it is. it's ammo. our private sector partners that provide a lot of those things for us when we're not able to give them consistency in their production, that creates tremendous turmoil on them and in many cases we have lost our partners in the private sector and have moved -- ended up with sole source or in some cases having to go to other countries that quite honestly aren't friendly with us to do certain things. but i do want to encourage you to do one thing. the people on the committee, the armed services committee i think will support you regardless of what party they are in. we have historically been able to work together on these issues. but i would ask that you expand and meet with members that are not on the armed services committee. this patch, if you will that is
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going to testimonymporarily stop the reduction in readiness from 50% on down this is a patch. and that's all it s. andis. and i think that members who are not on the armed services committee or on the appropriations probably don't understand the current situation. some of them are very anxious to cut spending no matter where the cuts come from. my concern is not with any of the members here or of this committee. my concern is with members who have not had the opportunity to listen to people who we respect as much as we respect the three of you. so i would encourage to you speak with all of the members as well. take somebody from their state. >> yes, sir. >> very good. thank you, mr. scott. i think that completes our questioning. thafrpz thanks for joining us. i want to thank not only you but
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all your colleagues there, our airmen that have joined us today. great opportunity to see how the process works. we appreciate your perspective. it's important as we develop the policy to make sure we get it right. restore as much readiness as we can within this particular window. thanks again for your service. we appreciate the sacrifice of your families. our subcommittee is now hereby adjourned.
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tonight on american history tv lectures in history. beginning at 8:00 eastern, the presidency of ulysses s. grant. at 9:30 battling nature in the korean and vietnam wars. from lisa brady of boise state university. after that, brook simpson lectures on presidents and war powers. then at midnight a look at citizenship during reconstruction presented by suzanna lee of north carolina state university. all that coming up tonight on american history tv on c-span3. this weekend the c-span cities tour hosted by our cable
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partners takes you to greenville, south carolina, to explore the city's history and literary culture. on book tv -- >> in 1939, in september of 1939, when europe went to war, our allies, primarily england and france looked to washington, d.c. for goods and materials that they needed. so washington, d.c. looked down to the textile capital of the world and all of a sudden government contracts came funneling into this area asking the mills here to begin producing for the war effort initially for our allies and then of course, for the united states as well. >> on american history tv -- >> we're standing right here at the falls. this was a pretty nasty spot. it's hard to believe now looking at it one of the best parks in the country. but this really was a very depressed, nasty place. and it's a great story of how a
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community can get behind a park and start to appreciate and cherish its river and its waterfall again. >> watch the c-span cities tour saturday at noon eastern on book tv. sunday afternoon at 2:00 on american history tv on c-span3, the vcities tour working with our cable affiliates and visiting cities across the country. federal reserve chair janet yellen said the economy and the labor market continue to grow despite a recent slowdown. she testified last week before the house financial services committee delivering the federal reserve's report to congress on the state of the economy.
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>> the committee will come to order. without objection, the chair is authorized to declare a recess of the committee at any time. this hearing is for the purpose of receiving the semiannual testimony of the chair of the board of governors of the federal reserve system. the conduct of monetary policy and the state of economy. i now recognize myself for three minutes for an opening statement. last month we all heard president obama attempt to take an economic victory lap in his state of the union speech. the american people are having none of it. they are tired of hearing from oust out of touch ruling class in washington how good things are when their realities are vastly different. so chair yellen, notwithstanding the fact that you are a presidential appointee i hope you do not follow suit this morning. the reality is since the president was elected and the fed embarked upon its quantitative easing in zero real
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interest rate policies working families paychecks have declined. their net worth declined. the real unemployment rate hofers around 10%. approximately one in six is on approximately one in six is on food stamps and almost 15% live in poverty. there hasn't been a single year when economic growth has reached 3%. as one published report noted there's no parallel for this since the end of world war ii maybe not since the beginning of the republic, unquote. last year's less than 1% gdp growth just punctuates the matter for struggling working families. i will not use this hearing to either praise or condemn the fed's decision to raise by 25 basis points interest rates in december, nor do i think it appropriate to advise the fomc on how to vote during its next meeting. but given that article one, section eight of the constitution gives congress the power to coin money and regulate the value thereof, i do feel
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compelled to demand that the fed predict a monetary course that's predictable, transparent and sustainable and barring terribly exigent circumstances to stick with it. this is part of the rationale underlying the house-passed fed oversight reform and modernization act. to use austrian economist's phrase it is fatal conceit to believe the fed is capable of micromanaging our economy to some state of economic nirvana. we now have at least eight years of recent history to prove otherwise. most importantly no amount of monetary policy can substitute for sound fiscal policy. unless and until the crushing regulatory onslaught of obamacare, dodd/frank and the epa is replaced with greater opportunity, competition and innovation, the fed cannot substantially help our economy, it can only hurt it. it can hurt it by continuing to serve as the financier and
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filteracility facilitator of our federal debt. just last month the congressional budget office yet again warned of your unsustainable debt which references the debt 199 times. the fed can hurt our economy by continuing to force investors to chase yield, thus inflating dangerous asset bubbles the deflating of which we are likely seeing in our turbulent equity markets today. the fed can continue to hurt our economy by failing to unwind its unprecedented balance sheet. by growing at almost 500 percent the fed itself has become one of our largest sources of systemic risk. finally, separate and apart from monetary policy alarmingly the fed under dodd/frank can now functionally control virtually every major corner of the financial services sector of our economy. it does so without almost no accountability and transparency. not only does it harm economic growth it is an affront to due
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processes, checks and balances and the rule of law. the american people should, again, be duly alarmed that they may wake up one day to discover that our central bankers have become our central planners. the chair now recognizes the ranking member for three minutes for an opening statement. >> thank you mr. chairman, for this meeting here today. but i'd really like to thank chair yellen to discuss the state of the economy and our role in ensuring that a full recovery is achieved for all. as a result of your herculean efforts, the efforts of democrats in congress and the obama administration we've truly made tremendous progress since the darkest days of the financial crisis. over the past 71 consecutive months our economy has added more than 14 million private sector jobs and the unemployment rate has fallen by more than half. but despite this commendable progress significant work
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remains. wages have yet to see real gains. 7.8 million workers remain jobless, 6 million workers are not volunteerary working part-time jobs. with inflation consistently running below target, i wonder whether the expected path for further raising rates over the course of 2016 may overemphasize concerns about inflation. and underestimate the weakness in our labor market and i look forward to your comments on this issue. absent a full recovery i feel that further raising rates may be a step that takes us further away from what is needed to ensure that the needs of vulnerable populations are met. at today's hearing i also hope we can explore the ramifications of an exit strategy that relies heavily on paying private sector
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banks not to lend the funds they hold in reserve and discuss reasonable alternatives that may exist that do not involve a massive transfer of wealth from the federal reserve to private sector banks. i just wonder if it is possible for these funds to be used for workers who are really worried about whether or not they going to have a pension or if there can be some social responsibility investment with these funds to help our workers and vulnerable populations. finally, many of us have been very patient about the implementation of the living wills. and, you know, this is a requirement in the dodd/frank act and it's designed to end too big to fail. and i know that you have to give careful consideration to all of this, but after one, not two, but five submissions the federal reserve has yet to impose consequences for living wills
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that are not credible. what can we do about this? it's time that we understand that we have given a lot of opportunities to the banks to get it right and they haven't done that. chair yellen i look forward to hearing your views on the economy, and i welcome the opportunity to discuss how to be more effectively -- we can more effectively elevate the needs of the most vulnerable populations and promote a safe and sound financial system and i want you to know that our audience today is made up of workers who really want to hear you talk about this. so, i would welcome opportunities to address some of their concerns. i yield back the balance of my time. >> the chair now recognizes the gentleman from south carolina, mr. mulvaney for two minutes. the vice chair of our monetary policy and trade subcommittee. >> when i sat down to get ready for this it occurred me that i could ask you about a bunch of
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things. i could ask you about your plans on interest rates and how you arrived at the decisions you're going to make what you used to arrive at those decisions. i could ask you about your role in the fed in regulating financial institutions dodd/frank, for example, has given you regulatory powers over banks, nonbanks clearinghouses and thrift holding companies. it also struck me i could ask you about the role of the fed and more specifically the new york branch and the possibly misleading statements secretary lew made to two congressional committees regarding the fed and the treasury's role in intentionally withholding information from congress about plans to prioritize debt payments during the last government shutdown and then i realized that's too much. that's too much not to just ask you in the few minutes we have today it's just too much for you to be doing. the fed has like so many other parts of our government grown way beyond its original intended scope. when congress chartered the bank in 1913 we asked it to do one
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thing, keep the financial system and primarily currency stable. today the fed is involved in everything from how much purchasing power these people have to where they can bank, how they can invest and save and to believe some whether or not they even have a job. maybe you shouldn't be involved in trying to get us to full employment, something that your own economics orthodoxy teaches you don't have the ability to do but only fiscal policy should do. maybe you shouldn't be involved with regulating mortgages and credit cards and you certainly shouldn't be involved in political decisions to intentionally keep congress in the dark about how this country's going to pay back its principal and its interest on the debt so i hope today we get a chance to talk about a lot of things sound money dual man date, full employment, regulations, community banks the impact of zero rates on retirees, asset bubbles in hopes at the end we discover that perhaps the time has come to get back to basics and one and one
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thing only, and that is long-term price stability. >> time of the gentleman has expired. the chair now recognizes the gentle lady from wisconsin, ms. moore, for two minutes ranking member of the monetary policy trade and subcommittee. >> thank you so much, mr. chairman. welcome back, chair yellen. well as you can tell from the opening statements there's plenty to discuss since your last appearance before this committee. i supported your rate increase in december. i still do. and i think you're providing a lot of credibility to markets with your leadership. however, these seem to be economic times that are destined to be interesting. since december we've witnessed a lot of global economic turmoil and now it's turning up in the u.s. as reflected in our stock market. foreign central banks are moving to ease rates even as we're moving to try to tighten them. and i'm not saying that we need to harmonize our monetary policy but i'm very interested in
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hearing how you and the fed are working with foreign central banks to get in front of these ominous trends. as you've stated so many times before monetary policy is a limited tool. but if we're going to grow our economy and keep it on track and as i look at the folk in green in the audience, it causes me to realize that members of congress have to do their part, too, and not just throw it all in the lap of the fed. we've got to embrace proven growth strategies like tackling poverty especially among women by providing vocational training so they can qualify and compete for sustainable jobs with living wages. and that i would yield back the balance of my time. >> gentle lady yields back. today we welcome the testimony of the honorable janet yellen, chair yellen has previously testified before this committee,
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so i believe she needs no further introduction. without objection chair yellen, your written statement will be made part of the record. you're now recognized for five minutes to give an oral presentation of your testimony, thank you. >> thank you. chairman hensarling, ranking member waters, and other members of the committee, i'm pleased to present the federal reserve's semiannual monetary policy report to the congress. in my remarks today i will discuss the current economic situation and outlook before turning to monetary policy. since my appearance before this committee last july, the economy has made further progress toward the federal reserve's objective of maximum employment. and while inflation is expected to remain low in the near term in part because of further declines in energy prices the federal open market committee
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expects that inflation will rise to its 2% objective over the medium term. in the labor market, the number of payroll jobs rose 2.7 million in 2015 and posted a further gain of 150,000 in january of this year. the cumulative increase in employment since its trough in early 2010 is now more than 13 million jobs. meanwhile the unemployment rate fell to 4.9% in january. below its level a year ago and in line with the median of fomc participants' most recent estimates of its longer-run normal level. other measures of labor market conditions have also shown solid improvement, with noticeable declines over the past year in the number of individuals who want and are available to work
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but have not actively searched recently and in the number of people who are working part time but would rather work full time. however, these measures remain above the levels seen prior to the recession suggesting that some slack in the labor markets remains. thus while labor market conditions have improved substantially, there's still room for further sustainable improvement. the strong gains in the job market last year were accompanied by a continued, moderate expansion in economic activity. u.s. real gross domestic product is estimated to have increased about 1.75% in 2015. over the course of the year, subdued foreign growth and the appreciation of the dollar restrained net exports. in the fourth quarter of last year, growth in the gross
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domestic product is reported to have slowed more sharply to an annual rate of just 0.75 percent. again, growth was held back by weak net exports as well as by a negative contribution from inventory investment. all private domestic final demand appears to have slowed somewhat in the fourth quarter, it has continued to advance. household spending has been supported by steady job gains and solid growth in real disposal income aided in part by the declines in oil prices. one area of particular strength has been purchases of cars and light trucks. sales of these vehicles in 2015 reached their highest level ever. in the drilling and mining sector lower oil prices have caused companies to slash jobs and sharply cut capital outlays but in most other sectors
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business investment rose over the second half of last year and home building activity has continued to move up on balance, although the level of new construction remains well below the longer-run levels implied by demographic trends. financial conditions in the united states have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers and a further appreciation of the dollar. these developments, if they prove persistent, could weigh on the outlook for economic activity in the labor market. although declines in longer-term interest rates and oil prices provide some offset. still ongoing employment gains and faster wage growth should support the growth of real incomes and, therefore, consumer
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spending. and global economic growth should pick up over time supported by highly accommodate accommodative monetary policies abroad. against this backdrop the committee expects with the adjustments in the stance of monetary pol-vy?÷ economic activity will expand at a moderate pace in coming years and that labor market indicators will continue to strengthen. as is always the case the economic outlook is uncertain. foreign economic developments in particular pose risks to u.s. economic growth. most notably although recent economic indicators do not suggest a sharp slowdown in chinese growth, declines in the foreign exchange value have intensified uncertainty about china's exchange rate policy and the prospects for its economy. this uncertainty led to
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increased volatility in global financial markets and against the backdrop of persistent weaknessweak ness abroad exacerbated concerns about the outlook for global growth. these growth concerns, along with strong supply conditions and high inventories, contributed to the recent fall in the prices of oil and other commodities. in turn low commodity prices could trigger financial stresses in commodity exporting economies particularly in vulnerable emerging market economies and for commodity producing firms in many countries. should any of these downside risks materialize foreign activity and demand for u.s. exports could weaken and financial market conditions could tighten further. of course, economic growth could also exceed our projections for a number of reasons, including
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the possibility that low oil prices will boost u.s. economic growth more than we expect. at present the committee is closely monitoring global economic and financial developments as well as assessing their implications for the labor market and inflation and the balance of risk to the outlook. as i noted earlier, inflation continues to run below the committee's 2% objective. overall consumer prices as measured by the price index for personal consumption expenditures increased just a half percent over the 12 months of 2015. to a large extent, the low average pace of inflation last year can be traced to the earlier steep declines in oil prices and in the prices of other imported goods. and given the recent further declines in the prices of oil and other commodities as well
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as the further appreciation of the dollar, the committee expects inflation to remain low in the near term. however, once oil and import prices stop falling the downward pressure on domestic inflation from those sources should wane. and as the labor market strengthens further, inflation is expected to rise gradually to 2% over the medium term. in light of the current shortfall of inflation from 2%, the committee is carefully monitoring actual and expected progress toward its inflation goal. of course, inflation expectations play an important role in the inflation process and the committee's confidence in the inflation outlook depends importantly on the degree to which longer-run inflation expectations remain anchored. it is worth noting in this regard that market-based
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measures of inflation compensation have moved down to historically low levels. our analysis suggests that changes in risk and liquidity premiums over the past year and a half contributed significantly to these declines. some survey measures of longer-run inflation expectationationexpectation expectations are also at the low end of their recent ranges. overall, however they have been reasonably stable. turning to monetary policy, the fomc conducts policy as required by our statutory mandate from the congress. last march the committee stated that it would be appropriate to raise the target range for the federal funds rate when it had seen further improvement in the labor market and was reasonably confident that inflation would move back to its 2% objective over the medium term.
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in december the committee judged that these two criteria had been satisfied and decided to raise the target range for the federal funds rate one quarter percentage point to between 0.25 and 0.50 percent. this increase marked the end of a seven-year period during which the federal funds rate was held near zero. the committee did not adjust the target range in january. the decision in december to raise the federal funds rate reflected the committee's assessment that even after a modest reduction in policy accommodation, economic activity would continue to expand at a moderate pace and labor market indicators would continue to strengthen. though inflation was running below the committee's longer-run objective, the fomc judged that most of the softness in inflation was attributable to transitory factors that are
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likely to abate overtime and the diminishing slack in labor and product markets would help move inflation towards 2%. in addition the committee recognized that it takes time for monetary policy actions to affect economic conditions. if the fomc delayed the start of policy normalization for too long, it might have to tighten policy relatively abruptly in the future to keep the economy from overheating and inflation from significantly overshooting its objective. such an abrupt tightening could increase the risk of pushing the economy into recession. it's important to note that even after this increase the stance of monetary policy remains ss accommodative. the fomc predicts economic policies will only warrant gradual funds rate increase.
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in addition the committee expects that the federal funds rate is likely to remain for some time below the levels that are expected to prevail in the longer run. this expectation is consistent with the view that the neutral nominal federal funds rate defined as the value of the federal funds rate that would be neither expansionary nor contraction contractionary is currently low by historical standards and only likely to rise gradually over time. the low level of the neutral federal funds rate may be partly attribute to a range of persistent economic headwinds such as limited access to credit for some borrowers, weak growth abroad and a significant appreciation of the dollar that have weighed on aggregate demand. of course, monetary policy is by no means on a preset course.
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the actual path of the federal funds rate will depend on what incoming data tell us about the economic outlook and we will regularly reassess what level of the federal funds rate is consistent with achieving and maintaining maximum employment and 2% inflation. in doing so we will take into account a wide range of information. including measures of labor market conditions, indicators of inflation pressures, and inflation expectations and readings on financial and international developments. in particular, stronger growth or a more rapid increase in inflation than the committee currently anticipates would suggest that the neutral federals rate was rising more quickly than expected making it appropriate to raise the federal funds rate more quickly as well. conversely, if the economy were to disappoint, a lower path of
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the federal funds rate would be appropriate. we are committed to our dual objectives and we will adjust policy as appropriate to foster financial conditions consistent with their attainment over time. consistent with its previous communications, the federal reserve used interest on excess reserves and overnight reverse repurchase operations to move the federal funds rate into the new target range. the adjustment to the ioer rate has been particularly important in raising the federal funds rate and short-term interest rates more generally in an environment of abundant bank reserves. meanwhile, overnight rrp operations complement the ioer rate by establishing a soft floor on money market interest rates. the ioer rate and the overnight rrp operations allow the fomc to
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control the federal funds rate effectively without having to first shrink its balance sheet by selling a large part of its holdings of longer-term securities. the committee judged that removing monetary policy accommodation by the traditional approach of raising short-term interest rates is preferable to selling longer-term assets because such sales could be difficult to calibrate and could generate unexpected financial market reactions. the committee is continuing its policy of reinvesting proceeds for maturing treasury securities and principal payments from agency debt and mortgage-backed securities. as highlighted in the december statement the fomc anticipates continuing this policy until normalization of the level of the federal funds rate is well under way.
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maintaining our sizable holdings of longer-term securities should help maintain accommodative ponle conditions and reduce the risk that we might need to return the federal funds rate target to the effective lower bound in response to future adverse shocks. thank you. i will be pleased to take your questions. >> chair now recognizes himself for five minutes for questions. chair yellen, i know you are familiar with the federal oversight reform and modernization act known as the f.o.r.m. act which was passed by the house in november is designed to bring about greater transparency and accountability at the fed. respect the fed's independence, but to ensure that the fed lets the rest of us know the variables that are used in monetary policy and their reaction function so that working families can plan out their family economies. i know that you are not a fan of the f.o.r.m. act because i have a letter dated november 16th
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that you sent to the speaker. in that letter you call the act a grave mistake. i have another letter that describes it as an important reform. your letter mentions or complains that monetary policy would be forced to be strictly adhered to by the prescriptions of a simple rule. my letter says the legislation does not chain the fed to any rule and certainly not a mechanical rule. your letter says that the act would undermine the independence of the fed. my letter says in no way would the legislation compromise the fed's independence. on the contrary publicly reporting a strategy helps prevent policymakers from bending under pressure and sacrificing independence. your letter states that the f.o.r.m. act would, quote
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severely damage the u.s. economy were it to become law. my letter says the new legislation would improve economic performance. by definition, your letter is signed by you. my letter is signed by dr. lars hanson of the university of chicago nobel laureate in economics, also signed by robert lucas university of chicago noble laureate in economics. edward prescott, arizona state university noble laureate in economics. george shultz former secretary of the treasury, robert heller former federal reserve governor jerry jordan former president of the cleveland federal reserve bank william poole former president of the st. louis federal reserve bank, former member of the council of economic advisers. michael boskin stanford
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university former chairman of the president's council of economic vadadvisers. marvin goodfriend, carnegie melon former research director for the federal reserve board of richmond. allen metzer carnegie mellon and former undersecretary of the treasury member of the council economic advisers and there's about 15 others, signatories to the letter. so chair yellen we have three nobel prizewinners in economics, a host of former federal reserve officials, some of the most renowned and respected economists in the country, pretty much disagree with everything that you asserted in your three-page missive against the f.o.r.m. act. i know you're not a fan but i
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would just caution you, chair that when you use such apock ka lip apock a pokpocalyptic language whether it undercuts your fed chair. i have one question in characterizing the fed strategy to increase policy rates you testified, quote, removing monetary policy -- policy accommodation by the traditional approach is preferable to shrinking the fed's balance sheet which now holds almost as much in treasuries as china and japan do combined. i'm trying to figure out what precisely is traditional about this current approach where the fed and the ranking member i think brought this up in her opening statement subsidizes deposit rates for some of the biggest banks in our country which can distort as you know
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real asset allocation and constrain economic opportunity. and last i look as we speak the fed's fund rate is just about -- just above 30 basis points. you're paying banks 50 basis points for excess reserves which would seem to be above the market rate. you have previously testified that this does not involve a subsidy to the banks. it appears to be a subsidy. and it appears to distort real asset allocation. so, what is traditional about this approach? >> the tool that we have used to raise our target for short-term interest rates, namely our key tool being interest on excess reserves, is widely used by central banks as a key tool of monetary policy. and it is the critical tool that we need to rely on in order to adjust the level of short-term rates to what we regard as the
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appropriate stance to achieve congressionally mandated goals. i would point out that although we are paying interest to banks on reserves, those reserves are financing our holdings, a large portfolio of holdings of longer-term treasury securities, and mortgage-backed securities on which we earn substantially greater interest. and because of that large balance sheet, this past year the fed transferred back to the treasury and to the american taxpayers $100 billion -- >> but it is true chair yellen, is it not that you're paying 50 basis points when the fed fund rate is 30 basis points? >> it's necessary for us to raise benchmark rates in order for a whole host of short-term
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interest -- >> my time has long since expired, the chair now recognizes the ranking member for five minutes. >> chair yellen continuing on the discussion that was just initiated by the chairman as you continue to embark on the path of raising rates, i want to explore the alternative approaches that may exist for the federal reserve to do so in a manner that does not rely so heavily on paying massive sums to private sector banks to hold on to the reserves they maintain at the fed. while the fed pay close to $7 billion on reserves in 2015 as the economy strengthens and rates are further increased the amounts paid could increase dramatically into the tens of billions of dollars. can you expand on why you believe that paying interest on excess reserves is particularly important for raising rates in
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the current environment and discuss possible alternative approaches that may exist. and if you talk about what you believe is to be the mandate of congress and how you don't have the authority for alternatives. i want to hear more about that and what you do have the authority to do. >> well, prior to the financial crisis, the fed adjusted the level of short-term interest rates through small vairriations in the supply of reserves to the banking system. following the financial crisis, as our balance sheet expanded, reserves became abundant and the traditional old-fashioned approach was no longer feasible. congress had debated the wisdom of giving us the tool of paying interest on reserves for many
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years and decided to do so in 2006 and then speeded up implementation in 2008. the knowledge that we had that tool and would be able to use it when we deemed it appropriate to begin to raise the short-term level of interest rates, as we did in december, the knowledge that that tool was available, as i just mentioned a tool that is critical to our control of short-term rates and widely used globally, that was an important fact when we considered all the actions that we took, the unconventional actions, that we took to produce the decline in the unemployment rate and improvement in the labor market that we'vej so, if we were denied that tool at the present time we would not be able to easily raise the level of short-term rates --
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>> however, if i may interrupt you for a moment, are you saying that you are limited only to that action or do you have the authority to make some other decisions relative to what the interest rate you are paying to these big banks? you have some flexibility here? >> so, we would likely to regain effective control of short-term interest rates need to shrink our portfolio from its current large level back to the kinds of levels we had before the crisis. and we have set out over several years a plan for how we would normalize policy that relies not on selling long-term assets but on adjusting short-term interest rates. i believe that if we were to follow the plan of selling off
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long-term assets, it could prove very disruptive to the expansion. it's a strategy that i think could harm the economic recovery, and it certainly is not what we have set out to the public. we said we would shrink our balance sheet in a gradual and predictable way would not be disruptive -- >> may i interrupt you again. you are saying it was congress starting in 2006 who helped to design this approach and congress could if they decided to take it away as an approach that you would use, even though you do not think it would be helpful. >> i think it would be very disruptive to the economy. and i really -- i want to point out several things about this. first of all, although the banks are earning this interest on the excess -- on the reserves that they hold as the level of short-term rates rises, first of
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all, on their wholesale funding that many of these banks rely on they're also paying more to gain that funding. eventually this will be the mechanism that would lead as well to higher deposit rates to reward savers. and finally, i really want to emphasize that from the taxpayer's point of view the federal reserve has transferred since 2008 through 2015 roughly $600 billion back to congress to the taxpayers, to the treasury funds that have contributed importantly to financing the government. and that has only been possible because we have a larger stock of reserves on our -- in the banking system and core
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correspondingly hold a far larger stock of interest-bearing assets that pay a larger amount. prior to the crisis, a typical -- a typical level of transfers from the fed to the treasury was in the order of $20 billion. for the past two years we've transferred $100 billion a year. >> thank you very much. we need to talk about this some more. i yield back the balance of my time. >> the chair now recognizes the gentleman from south carolina, mr. mulvaney vice chair of the monetary and policy trade subcommittee. >> i thank the chairman. a quick follow-up on the chairmen's question. you mentioned that using the ioer and the rrp were traditional tools and other central banks had used them. have you ever used them? >> no. >> has the federal funds rate ever been -- ever -- below the ioer which is now set at 50
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basis points? >> has it is ever been below? >> yes, ma'am. >> it's -- since we set the -- when we were first given the power to pay interest on reserves, we set it at 25 basis points and the fed funds rate traded below it. and when we raised it to 50 the fed funds rate moved up by roughly 25 basis points. the amount of the increase in ioer but continues to trade below it. >> all right so your testimony is that those are traditional tools. so let's move, then, to a different discussion with that as a background. you have in the past been a proponent, though a reserved opponent proponent of a rules-based system. back in 2012 you gave a speech that you said, quote, why shouldn't the fomc adopt such a rule as a guidepost. the answer is that times are by no means normal now and the simple rules that perform well
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under ordinary circumstances just won't perform well. two years ago to this committee you said something similar. you said in response to a question about rules, you said the conditions facing the economy are extremely unusual. i've tried to argue and believe strongly while a taylor rule is or something like it provides a sensible approach in more normal times like the moderations under current situations it's not appropriate. so, that's your testimony at 2014. you gave a speech in 2012. here we are in 2016. you, by your own testimony, are using traditional tools of monetary policy. your written testimony begins by saying that the economy's made further progress towards a federal reserve's objective of maximum employment. you go on to say inflation is low in the near term but it will rise to its 2% objective over the medium term. are we in normal times? >> the economy is in many ways
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close to normal in the sense that the unemployment rate has declined to levels that most of my colleagues believe are consistent with full employment in the longer run. and inflation, while it's below 2% i do think there's a good reason to think it will move up over time. and in that sense things are normal. but what is not normal is that the so-called neutral level of the federal funds rate that i referred to in my testimony and we discuss in the report is by no means normal. in other words we have needed for seven years to hold the federal funds rate both in nominal and inflation or real terms inflation adjusted or real terms at exceptionally low levels to achieve growth
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averaging 2% or a little bit above. >> i'm sorry to interrupt but i do want -- >> in that sense it's not normal. the economy is being held back by headwinds. i would point out that a tenet of the taylor rule is that it takes -- it assumes and embodies in it an assumption that the equilibrium level of the feds fund rate with a 2% objective is 4% or that the real equilibrium fed funds rate is 2% and that simply isn't the case. >> madam chair, i'm surprisingly not pushing the taylor rule. i'm simply asking about a general rule-based system because you have shown some support for it in the past. and i guess my question is this -- what does the world have to look like? because i think admittedly employment is better. inflation it seems to be under control. yes, you say that the fed funds rate is extraordinarily low, which it is, but that's
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something under your control. what does the world have to look like in order for the federal reserve to start considering transitioning to a rule-based system? >> well, i think the benefit of a rules-based system is its systematic and understandable. and the federal reserve has attempted to engage in a system attic policy that takes a different form. >> i get that. what does the world look like? when you come back next year what does the world have to look like to say do you know what we're considering a rules-based system? what does it have to look like? >> guidelines as rules for useful benchmarks as it considers the appropriate stance of policy. but i believe, and i think most of my colleagues would agree, that we shouldn't mechanically follow that rule or any other rule, but that we need to take into account a large -- a large set of indicators of how the economy is performing.
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>> time of the gentleman has expired. the chair now recognizes the gentle lady from wisconsin, ms. moore, ranking member of the monetary policy and trade subcommittee. >> thank you so much, mr. chairman. and, again, chair yellen. i want to take us in a little different direction. many of us here on both sides of the aisle are really concerned about what's happening with our smaller banks. and we understand that because of basel 3, we had a lot of concerns, we debated dodd/frank and including provisions like volcker and fsoc, they were driven by concerns of the large banks in active capital markets and i know that you're not the only -- the fed is not the only regulator overseeing implementation of dodd/frank. but i'd like your thoughts on how the rules may have been tailored or should have been
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tailored for small and community banks. you know, the stress test, the capital standards are killing our small banks. compliance. officers that where they don't have the additional staff. just your thoughts on what should have been done or how has it been tailored. >> well, let me say that i think community banks and their vitality is exceptionally important. they provide enormous benefits to the country and to the economy. i recognize that the burden on community banks is intense. >> they're shutting down. >> the regulatory burden. for our part we're focused on doing everything that we conceivably can to min mooimize the burden on these banking organizations. we've been conducting a review
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to identify potential burdens that our regulations impose on these banks. and we will do everything that we can to respond to the concerns that are identified there to reduce burden. we're looking for many ways. first of all, we have tried to tailor our regulations to the size and complexity of institutions. the smaller community banks are not subject to stress testing requirements. many aspects of basel 3, capital requirements and liquidity rules do not apply to those banks organizations. we've tried to simplify those requirements. we're in addition to that trying to reduce the duration of the time that we spend reviewing banks during exams.
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we're trying to simplify and be more targeted in our requests for documentation. we try to identify for community bankers what is relevant to them and what they can safely ignore. and we're looking for ways to conduct exams that are more focused on the actual risks that are relevant to a particular organization. so, i recognize that the burdens on those banks have been very intense and pledge that we are doing and will continue to do all we can to reduce burdens on them. >> thank you, madam chair. you know, on this committee we spend a lot of time talking about moral hazard. and so i guess i would like your view on whether or not you think there's any moral hazard on not a single person involved in the 2008 crash having gone to jail.
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they get fines. they get sort of compliance letters where they can clean up their act and avoid prosecution. and i'm wondering if you think that it's important for us to seek -- you know, so what? you pay a fine, that does not -- that doesn't stop anyone from doing the next crime unlike other of our criminal laws. >> well i agree with you. i todo not think that individuals who are guilty of wrongdoing should escape paying appropriate penalties. for our own part, we not allowed obviously to put in place criminal penalties. that's a matter for the department of justice. for our part, we can when we find individuals to be
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responsible for wrongdoing make sure that they are not allowed to work at the banking organizations where committed misdeeds. and in many cases we can make sure that they're banned from the business of banking. and when we've been able to identify individuals who are responsible, we have put in place those sanctions and will continue to do so. and we always cooperate with the department of justice in their investigations. >> time of the gentle lady has expired. the chair now recognizes the gentleman from north carolina, mr. mchenry, vice chair of the full committee. >> thank you, chair yellen. so, does the federal reserve have the legal authority to implement negative rates? >> i'm sorry, do we have the legal authority to? >> implement negative rates.
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>> so, this is a matter that the federal open market committee considered around 2010. and we didn't fully -- as we were exploring our options to provide accommodation we decided not to lower interest rates either ioer to zero or into negative territory. and we didn't fully look at the legal issues around that. i would say that remains a question that we still would need tovkc thoroughly. >> in one of our document requests the 2010 memo that i assume is connected to that policy discussion. >> that's right, that's right. >> raised significant doubts about the fed's authority that they currently have, to charge -- to pay interest on
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excessive -- on excess reserves. and whether or not that same authority would allow you to demand payment for that. >> so congressman i don't know of any restriction that would prevent us from doing that. that memo indicated -- was intended to indicate that the legal issues had not been seriously considered. >> have they been seriously -- have they been seriously considered since 2010? >> well, in the spirit of prudent planning we always try to look at what options we would have available to us either if we need to siten en tighten policy more rapidly than we expect or the opposite to loosen policy. so, we would take a look at it. but the legal issues, i'm not prepared to tell you have been thoroughly examined at this point. >> so at this point it's
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unclear whether or not the fed does have the legal authority to implement negative rates. >> i am not aware of any -- anything that would prevent us from doing it, but i'm saying that we have not fully investigated the legal issues that would -- that still needs to be done. >> so, let's move to regulation. right? significant part -- you run the largest regulatory organization in the united states of america perhaps in the globe, likely in the globe. and as such, you know, i believe in the independence of the fed to make monetary policy, but as a regulator congress should have significant oversight of your regulatory actions should they not? >> yes. >> okay. and as such, as a matter of regulation the chairman raised this question with you the last time you were here about federal reserve regulators bank
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examiners, demanding to be a part of board of director meetings at member banks. and you've exchanged multiple letters on this matter. we still hear that this is, in fact taking place. would you pledge to this committee that you would direct your bank examiners and regional bank examiners to stop this practice? >> well, i will -- i will look in to -- >> well, you've already looked into it and you exchanged letters. and you gave the chairman assurance last time that you're not aware of it. i assume you are now aware of whether or not this is taking place, are you not? >> i think there are occasional situations in which that occurs. >> do you believe that's appropriate? >> i'm not -- i'm not certain that it is inappropriate. i want to get back to you on that. >> okay. well, this was raised about six months ago by the chairman. >> i remember that. >> you've exchanged multiple
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letters. i'd like to have greater assurance. this is not meant to be a gotcha. this is a well-worn question. and we're hearing -- and, in fact, there's a press report that the fed directed one of your member banks to incorporate two additional members of their board of directors. and the fed directing a private enterprise to change their board of directors seems somewhat perplexing. do you believe that's appropriate authority for the fed? >> well i think it is appropriate as a matter of supervision to -- >> to direct -- >> -- to ensure that a board of directors of a financial company that we supervise is appropriately constituted and fulfilling its corporate governance functions. that is a part of supervision. >> my time has expired. >> time of the gentleman has expired. the chair now recognizes the gentle lady from new york ms. maloney, ranking member of your
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capital markets subcommittee. >> chairman yellen, you raised interest rates in december and said any future interest rate increases if they happened would be gradual. i'd like to ask you about the recent turmoil in global markets. as you know, equity markets around the world led by china, have plunged since the beginning of the year as global economic growth has weakened. and the u.s. has not been immune. u.s. stock markets have fallen over 9% since the beginning of the year. and treasury yields have plunged 25 -- 23%. so, my question is, has the turmoil in global markets changed your view about the appropriate pace of interest rate increases and hikes or will you wait to see how global market turmoil affects the u.s.
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economy before raising rates again? >> we are watching very carefully what's happening in global financial markets. it would appear that the stresses that we've seen since the turn of the year relate to uncertainties regarding chinese exchange rate policy. there is uncertainties around the price of oil. we have not seen shifts in -- that seem significant enough to have driven the sharp moves we've seen in markets. there would seem to be increased fears of recession risk that is resulting in rises in risk
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premia. we've not yet seen a sharp drop-off in growth either globally or the united states. but we certainly recognize that global market developments bear close watching. as i mentioned that financial conditions have become less supportive to growth, and we recognize that these developments may have implications for the outlook, which we are in the process of assessing. and i want to make clear that monetary policy is not on a preset course. and so our evaluation of the likely impact of those developments on the economic outlook and our ability to meet both our employment and inflation objectives those are the factors that will govern the future stance of monetary policy. it's not on a preset course.
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>> and given the turmoil in global markets, and the slowing u.s. economy some analysts are now talking about economy, some analysts are now talking about the u.s. possibly falling into a recession this year. what would it take for you to consider cutting interest rates again? a severe downturn in the economy or stubbornly low inflation. >> our commitment is to achieve our congressionally mandated goals of maximum employment and price stability. i do not expect that the fomc is going to be soon in this situation where it's necessary to cut rates. let's remember that the labor market is continuing to perform well, to improve.
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i continue to think that many of the factors holding down inflation are transitory. so while there is always some risk of recession and i recognize and have just stated that global financial developments could produce a slowing in the economy. think we want to be careful not to jump to a premature conclusion about what is in store for the u.s. economy. so i don't think it's going to be necessary to cut rates. but that said, monetary policy as i said, is not on a preset course. and if it turned out that that would be necessary, obviously the fomc would do what is needed to achieve our goals that congress has assigned to us. >> you said in december you were surprised how far oil prices had
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fallen and you expected inflation to increase once oil prices stabilized. since the fed's december meeting, oil prices have fallen even further. they're down about 25% since the december meeting. and they've fallen 7% since friday. at the same time we've also seen inflation expectations fall since the december meeting to the lowest levels in quite some time. has this caused you to rethink your inflation projections at all? >> we indicated in our statement in january that these developments led us to conclude that inflation will stay low for a while longer, as these developments work through. clearly, we are watching inflation expectations and as i mentioned, market-based measures of inflation, compensation, have moved down now. to historically low levels. and that is something we're
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evaluating carefully. in december, when we raised rates we indicated that with inflation so far below our objective, we would carefully watch incoming data and revise our expectations. so i don't want to jump to a premature conclusion, my colleagues and i will issue in dógcñ march updated projections for inflation taking all the evidence we have at hand into account. but the time -- >> the time of the gentlelady has expired. the chair recognizes the gentleman from new jersey, mr. garrett, chairman of the capital markets subcommittee. >> i thank the chair. i would like to talk on emergency lending under 13.3. it was about a year and a half ago, senator elizabeth warren
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and myself and mr. capuano joined together and senator vitter as well, sent you a letter expressing our deep concern with what you were doing with regard to implementing the limiting language on dodd-frank at that time. you've come out now with a rule despite our admonition in questions in that letter, a rule that would basically allow the fed to drive a mack truck through the various loopholes in it. and also once again, as is typical with the fed, lacking in clarity and transparency. that being said, the fed is not always clear in what they want to do and neither are the regulators. for example, came up with the volcker rule and in the voeckler rule, the fed was not shy about elaborating on concepts in that statute. it went so far to adoesn't prohibitions and trading assets that were never intended by the statute and the fed and other
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regulators came one this part of the voeckler rule, came dealing with defining what the words proprietary trading is. 800 pages for definitional clarity. compare that to what you did with under the limitations, that should be in place under dodd-frank of 13.3. 47 pages of definition and lack of clarity throughout it. >> so the first question is why in one area can you exact and precise and in precision when you're trying to limit what the private market is doing. but when congress tells you to put limitations on yourself, you lack the clarity and give it a broad brush?
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>> well i think we tried in the rule to be as clear as we possibly could. >> well let's take a look at that then. >> now let me give you an example. >> the fed claims that it establishes a penalty rate under 13.3. you fail to provide any specifics what so much what that rate would be. claire that to what congress did. this committee passed a bill. would establish a penalty rate that would be commensurate with quote a distressed borrower. so why wouldn't the fed be clear on this? what is you know what are the rates going to be? >> because what a penalty rate is depends on the specifics of a particular situation. a penalty rate is a rate that when conditions normalize -- >> we know what a distressed borrower in the markets are. that's clear. why didn't you define it that way? compare it to the regular markets, so that a distressed borrower in the markets would be charged the same if they're borrowing from the fed?
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-- or related to it? >> well in the type of situation that we found ourselves in, during the financial crisis, market rates had shot up to extraordinary levels, because liquidity had dried up in the financial -- >> i understand what the history of the market was at that time. but you could have provided clarity here. so basically you're telling us that the fed is going to be in the position of picking winners and losers. by your prior answer it seems like you could charge borrower a one rate and borrower b a different rate under similar circumstances, is that not correct? >> you i think what is an appropriate rate depends on the circumstances.ou i think what is an appropriate rate depends on the circumstances.u i think what is an appropriate rate depends on the circumstances. i think what is an appropriate rate depends on the circumstances.i think what is an appropriate rate depends on the circumstances. financial crises when we would be using this authority to set up a broad-based program are always very unique. and -- >> i think that's basically what you're telling us is that nothing really has changed despite the admonition and the law in dodd-frank to put a limitation and it's not just me saying that, by the way. it's interesting while you're
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here testifying today, governor fisher is also making public statements as you speak. and we discussed part of his statement. he seems to be saying exactly what you are, that you have not limited 13.3. he said put in simple language, strengthening fire regulation does not imply that the fire brigade should be disbanded. he goes on to say we're not seeing the limitations that you're going to be able to do the similar things you did back in, or that before you were here, that the fed did the last time around. >> i want to make clear that i think our 13.3 powers and alkts to lend, to keep credit flowing in the economy during a financial crisis, is a critical power. >> played a critical role during the financial crisis. >> is he wrong when he says that nothing really, my interpretation, he says that nothing has really change, your
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powers are the same? >> no, a lot has changed. congress put a in place a series of restrictions -- >> but your rule does not implement that, does it? >> yes, it does. our rule does implement those restrictions, we cannot lend to an insolvent borrower. we cannot lend to help one or more failing firms. we can only put in place broad-based programs and we have defined pretty clearly in that rule what constitutes a broad-based program so congress clearly changed what the fed can do. it also gave -- >> governor fisher is saying we have likely reduced the probability that of lender of last resort. but we have not reduced that probability to zero. it appears that in his opinion. some of those problems remain. >> the time of the gentleman has expired. the chair recognizes the gentlelady from new york, ms. velasquez. >> thank you, mr. chairman. chairman yellen. the unemployment rate is down to under 5% for the first time in eight years.
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however, i remain concerned that unemployment rates remain elevated. in the hispanic and african-american communities. does the fed specifically take unemployment within this groups into consideration when making policy decisions surrounding the fed fund rate? >> so we track very carefully, the unemployment rates and experiences of different demographic groups. and we make a very careful assessment about whether or not the economy is meeting the objective of maximum sustainable employment or not. which involves taking account of factors like our particular groups being discouraged from even participating in the labor force because of conditions. but it's important to recognize that our powers, which involve setting interest rates,
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affecting financial conditions, are not targeted and can't be targeted at the experience of particular groups. i think it always has been true and continues to be true that when the labor market improves, the experience of all groups does improve. i mean roughly now, the unemployment rate in the united states is close to where it was in the fourth quarter of 2007. now african-americans and hispanics at that time, back in 2007, had higher unemployment rates than the population as a whole. you know, regrettably because of the disadvantages that these groups face in the labor market, they have historically tended to have higher unemployment rates.
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but as the economy has improved and unemployment has come down, the unemployment rates for those groups for hispanics and african-americans has come down. they have fallen to roughly the same levels that they were in at the end of 2007. while again, remaining higher. >> we do look at that. but we don't have tools to target -- >> i understand that. >> you consider 8.8% unemployment rate among african-americans, today, too high? >> i do consider it too high. i think there are any number of reasons for that. and i think that the reasons for it are ones that congress should be considering. broadly in designing a wide range of policies. it's, it is something that we want to see a strong labor
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market. we want to see continued progress. and we will put in place policy that achieve that. we cannot target the unemployment rate for a particular group. >> i heard you. as you know, chair, u.s. employers have created 14 million jobs during president obama's tenure. however, the labor force participation rate remains low, and discouraged people that want to work has stopped looking. how much of the decline in the rate can be explained by the trend of flat or declining wages for many american workers? >> so for the country as a whole, an important reason that labor force participation has fallen and will continue to fall is because of the aging of the population.
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so that's not going to change. and the trend is downward. but it is also true that for certain subgroups in the population for example, prime age but less educated men, the trend downward has been particularly steep. and you know, there's a lot of economic research that tries to understand why men have their labor force participation is declined. and it wouldn't surprise me if wage trends are part of the reason for that. >> so my guess is they have, they have played a role in discouraging labor force participation. >> as wages begin to increase, do you anticipate the participation rate to increase as well? >> yes, i i anticipate that wage growth will move up somewhat. and i do think that labor force
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participation is what depressed relative to where it will be in a really full employment economy. that's why i say i think there does remain some slack in the labor market, even though the aggregate unemployment rate is at 4.9%. so i -- >> the time of the gentlelady has expired. the chair recognizes the gentleman from texas, mr. nogabower, chairman of our financial institutions subcommittee. >> thank you chair yellen for being here. part of your remarks were about the state of the economy and i think you're trying to paint a little bit rosier picture. and maybe there's a little bit of a rosier picture, but it's not a good picture. i'm looking at stats here, 16 million american citizens that
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are unemployed. the fact that the number of long-term unemployed americans is 761,000 higher than it was at the start of the recession. we've got 94 million americans over the age of 17 that have abandoned the job market. real disposable income is paltry annual rate at 1.2%. i mean, the real gdp is growing just under 2.2%. we've got more americans living in poverty than ever before. 46.7 million people. and we've got 45 million people on snap, i could read more and more. i think the issue that i've been thinking about this week is when you look at the original purpose, the fed was falling for and what the fed looks like today. think my good friend mr. mulvaney pointed this out. is that basically we've got a fed that's in charge of monetary policy. some other things have been added to it and then we've got
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the fed, the biggest and largest regulator, regulates more financial institutions than any other in the world it reminds that he while y'all are working on one side of the fed to stabilize employment, keep inflation in check. on the other side of the fed you've got this huge regulatory structure. that has grown substantially. and continue to issue very complicated and some people think that you have become a micromanager of these financial institutions with the regulations. it reminds me of the statement that we have met the enemy and it is us. is it counter productive that you've got the fed working on one side to create jobs and a fed on the other side of the building is doing things that a lot of people think is killing jobs, micromanaging the financial markets. increasing the availability of capital which has stymied the ability of this economy to grow.
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is it self-defeating? >> i well i think we have to remember that financial crises are immensely costly to well being. and it's important to make sure that we do everything almost everything we can to reduce the odds of another devastating financial crisis. so we are working hard. we have worked hard in the aftermath of the crisis. to make sure that we have a financial system that is safer, sounder, has more capital, higher quality capital. more liquidity, is less crisis-prone than the financial system. that we had that caused this financial crisis. >> i want to -- time is short. you mentioned the word liquidity. i think a lot of people think some of the things that the fed
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has done and some of the regulations that have actually reduced liquidity in a number of markets. you and i have had a conversation about the fact that y'all have shown some concern about liquidity. i wanted to see if you knew that the european commission has initiated a review process. five years after instituting these additional regulations and capital requirements and piling on of regulation and i'm not against having adequate capital. but the problem is that we seem to have an add-on game here and the additional capital also comes with the additional regulations. the european commission has initiated review process, said time out here, let's go back and look, we know what we've asked these entities to do. we know what we've impounded them with. the question is how are the markets responding to this and how have basically it's a cost
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benefit analysis. of all of the policies that are in place. has the fed thought about maybe we should stop and analyze what we've done here and see if it's positive. >> we have a few things to put in place the dodd-frank regulations that were called for and we hope to complete that work soon. and it certainly is appropriate to evaluate how the system is working and we do it on an ongoing basis. it's appropriate to see whether or not there are ways in which we can improve or simplify regulations. and we are in the process of doing that in some some very important areas. >> the time of the gentleman has expired. the chair recognizes the gentleman from california, mr. sherman. >> mr. chairman, i feel like i'm at a ballroom dance on the deck of the titanic. the faith of the american people in our government and
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institutions is at an all-time low. i've been sitting in this room of 20 years and the room has the feel that it had 20 years ago. except we don't have alan greenspan in front of us. government institutions work better if they listen to the american people. first because the american people will accept the decisions and second because we get better decisions. yesterday in a small state that is doing better than most of the country, two-thirds of the people went out in a very, i think a record-setting turn-out with inclement weather. to say they're mad as hell, particularly at the financial institutions that this committee deals with. and two-thirds of them voted for the most angry candidate they could find. too big to fail should be too big to exist.
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madam chairman, in response to the lady from wisconsin, you said it was basically the department of justice' failure to have a single criminal prosecution of those who had robbed the banks and more importantly robbed the american people. and i wonder whether you can really just put that at the feet of the department of justice? because we've learned institutions can get so big that they are too big to fail. your predecessor was in this room demanding that we bail them out. and god forbid you will be again, if you allow these too big to fail institutions to continue to exist. and as they're too big to jail. as you point out, you may bar somebody from the banking world, gee whiz, in a country with more people incarcerated than any other country in the world, is it really adequate to those who steal hundreds of millions and
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billions to say well, you can't go back into the banking world? so i'll ask you as a member of f-soc, we need moral hazard to make sure that major economic decisions made by the giant banks are made correctly. they don't have a moral hazard in the sense of not being able to get capital. people are flooding them with capital at rates that are said to be up to 80 basis points less than they would pay if there wasn't a belief we would bail them out. so the too big to fail won't be allowed to fail as you point out. the doj won't put anybody in jail. the solution is use your power under f-soc to break them up. are you going to break up the too big to fail institutions? i've asked you that before, i'll ask you it again. i think i know the answer. >> well the answer i'll give you is that we are using our powers to make sure that a systemic
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important institution could fail and it would not be, have systemic consequences for the country. we're doing that in a whole variety of ways, first of all, we've done many things to diminish the odds that they would fail. we're trying to make them, i think i can enumerate all the things -- >> are you willing to call the attorney general and say -- we've got this thing handled so well that you can start criminal prosecutions? because they're not too big to jail any more? >> i said i am in favor of going after individuals who are guilty of wrongdoing. >> with such penalties as barring them from the banking system. i want to move on -- >> i said those are the sanctions that the federal reserve can impose. >> i need to move on to another question. you're a governmental entity in
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some parts of the entity it's one bank, one vote. it's the only part of our constitutional system that puts governmental power in the hands, one bank, one vote. would you, are you going to use your considerable power to oppose legislative efforts to try to make the regional bank governors appointed exclusively by the president and to try to make the regional banks subject to the freedom of information act? >> congressman, i think the current structure of the fed is something that congress decided after a long debate, and weighing of a whole variety of considerations, i would say i think it's worked pretty well but it's certainly something -- >> excuse me, madam chair. are you saying that the fed in the having just lived through 2008, with people not getting raises that this whole system has worked well? >> i'm sorry i thought you were asking about our governance. >> your governance has led to
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the decisions that have nearly brought this country to its knees. i yield back. >> time of the gentleman -- has expired. the chair recognizes the gentleman from missouri, mr. lukameyer, chairman of our housing and insurance subcommittee. >> thank you, mr. chairman and welcome in madam chair. >> it's kind of interesting as discuss all the questions that have been asked you here with regards to your ability to micromanage the economy and as you make the decisions that the federal reserve to try and do something about unemployment. try to do something about the inflation rate. i look at some of the things and i'm just kind of stunned. let's start off first with what happenes if we've got a down term and you've only got $4 billion on your balance sheet. what levers are available to you to do something?
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>> the fed has an away of tools. >> which are? >> most importantly the path of the short-term interest rates. >> madam chair, they're already down to almost nothing. how is lowering the rates going to help when they're almost nothing right now. >> once of the ways that the market works is they form expectations about what the likely path of the fed funds rate will be over time. those expectations influence longer-term rates in the market. when the economy weakens market participants naturally expect the fed in pursuing our mandate to follow a shallower path of interest rate increases. and that shift in expectations moves longer-term rates. i think you can see that just over the last several weeks, as i mentioned longer-term treasury yields have come down as market
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participants have become more fearful about a recession. and -- >> forgive me for intruding, are you saying that this is a good time to reduce your balance sheet? >> we -- >> or interest rates, it would be a nice time to shift that. are you intending to do that? >> we have indicated we want to make sure that normalization is well under way before we begin to shrink our balance sheet. and our decision to do that reflects the fact that we feel that moving short-term rates is a more reliable and understandable and predictable way to manage the economy. and so we're going to wait to shrink our balance sheet until a
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point when short-term interest rates are somewhat higher. >> so we may never get there is what you're saying. there's not much room to go down. >> let's -- >> we'll have to see -- >> let me go into your decision-making process here. we have a labor market that continues to, the labor force participation rate continues to go down. and yet we had according to your report here, is the hourly rate of employees went up there should be more incentive for people to work. yet they're becoming less. and you use the demographics of our country to indicate that. so i'm concerned that if you look at the numbers, there's minimal ability of the way you explain the answer to miss velasquez a while ago of you guys to be able to manipulate
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this. the second thing is, i'm concerned, what other factors do you take into consideration when you look at rates? for instance, do you look at what the congress is proposing? do you look at the court decisions? we had there's been a big discussion about trying to stop the inversion, the ability of our companies to go overseas. and be able to take advantage of those tax rates, the decision is to cut corporate tax rates to bring those dollars home. do you ever think about those sorts of implications about whenever you make decisions on your rates? yesterday we had a dramatic historic decision by the courts with regards to an epa ruling that would have dramatically changed the way that we cost of energy in this country.
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do you take those things into consideration when you make your rates? those will have significant impact on our economy. >> we tried to take into account in making our decisions, any factor that we regard is important -- >> do you have in place right now some modeling with regards to the epa rule? >> not that i know of. >> do you in place any modeling with regards to potential tax cut for bringing dollars home? or for corporations? >> we routinely look at the stance of fiscal polecy -- >> you have a model in place if we cut corporate tax rates that would allow you to make a decision on that issue? >> if you were to decide that, our staff would attempt to evaluate -- >> you don't have one in place right now is what you just said? >> not to the best of my knowledge. >> the time of the gentleman has expired. the chair recognizes the gentleman from new york, mr. meeks. >> thank you, mr. chairman and welcome chairwoman yellen. >> i don't know, some of my colleagues may not have been here nine years ago, eight years ago. i got to tell you i feel better today than when i sat here eight or nine years ago. i feel much better today. i can remember what was taking
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place then and the panic that was going on. and the pressure that this government was under. and though we've not completely done what we need to do because we do need to let wages grow. we do need to make sure we create more jobs. the position that we're in today, would you agree is much stronger than the position we were in in 2007 and 2008? >> i believe it is. and i believe we've made a lot of progress, while recognizing at the same time there are many households that are suffering and that there are a lot of challenges that people face and structural -- >> i think it's important to acknowledge that. how far we've come. and then i would hope we would
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focus on what else needs to be done. we do need to make sure that especially those individuals victimized by the financial crises -- for example, if you look at areas in i think mrs. velasquez talked about it particularly in african-american and latino communities, they lost a great amount of wealth. many of them lost their homes, they lost their jobs, they need something so that they can get back. that's why you see this disparity that is very high right now so what my focus then is -- we had i guess because of what took place in the past, in 1977, we passed the community reinvestment act. the fed is in charge of cra and can enforce it. today, what we find still is that individuals in these, in communities that were deeply affected, there's no investment going in. there's no job creation there. there's no access to credit. they don't have, because of primarily the crisis. i was wondering what can and since the fed overseas can
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enforce cra, what is the fed doing in helping implement cra, compelling some of the large banks to make these investments. in these communities. as well as into cdfis, who are focused on trying to make sure that the kind of investments are there to create jobs, to grow wages in communities that were devastated by the recession. >> i think cra is extremely important in making sure that financial institutions, depository institutions serve the needs of their communities. and particularly underserved communities. we take our enforcement and evaluation with banks cra performance very seriously. we have a whole variety of community development activities and programs that are focused on working using our convening
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power and their cra obligations to try to understand and identify what the needs are in particular communities. and to try to tell banks what works, what kind of programs are worth supporting. that really seem to make a difference in terms of alleviating distress in low and moderate income communities. >> one thing i think is important because i want to know, maybe you have the answers, to show where the banks are making these investments, in compliance with cra. because i have found that those numbers have surely sunk and when i look at access to capital in these communities, you have about 70 million people now who are under-banked or unbanked in these communities so cra could definitely help there. i would love to follow up with you to find out exactly where
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the enforcement, who is, in fact complying and giving. who is not. there's got to be some accountability therein. lastly, in the few seconds i have, the other thing that's important to look at in some of these communities, in the days well access to credit and absolutely key and essential. sometimes people's credits are looked at. there's alternative systems for example, you find people they pay their rent every day on time. not to be considered when reference to credit scoring models. is there other models that you're looking at with reference to how your credit scores are considered? that the fed could advocate. >> i'm not sure about credit scores, we'd be glad to get back to you on that. >> the time of the gentleman has expired. the chair recognizes the gentleman from wisconsin, mr. duffy, chairman of the oversight investigations committee. >> welcome chair yellen. i want to take a trip down memory lane. because i think there was some
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rewriting of what happened in the crisis. there's a lot of people who bought homes and for lower-income folks, that's their investment. and a lot of them lost their investment walking into the crisis. devastating families. and i know we want to look to wall street and there's blame there. but i think there's a little bit of revisionist history, to say that fannie and freddie didn't have anything to do with the crisis. they allowed no doc loans. allowing folks to buy homes they couldn't afford. and in dodd-frank that was passed by my friends across the aisle, fannie and freddie weren't touched at all. fannie and freddie were the ones allowing folks in this room to get homes they couldn't afford and they were hurt. didn't touch them. the regulators had wild authority and power, they failed and instead of taking a look at the regulation and the regulators, we've reempowered regulators.
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so no wonder that big banks after dodd-frank haven't gotten smaller. big banks have gotten bigger. and the small community banks that i'm sure service a lot of the folks in this room and service folks in my community, they're going away. big problem. >> i just had to get it off my chest. a lot of exciting things to chat about with you, chair yellen, as the chair of the oversite committee i have concerns about your willingness to comply with our requests. we sent a letter in the medley investigation and in our oversight of the fed asking you for information regarding communication. no compliance. we sent you a subpoena in may, you did not comply with that. we had partial compliance in, in october. we're now a year after my initial letter. i've asked you for excerpts of the fomc transcripts in regard to the discussion in regard to the internal investigation on medley. you have not provided those to me.
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is it your intent today to promise that i will have those, if not this afternoon tomorrow? >> congressman, i discussed this matter with chairman hinterling and indicated we have some concern. why don't we talk about it right now. >> finding the transcripts? >> finding the transcripts? >> i said with providing transcripts, given their importance in monetary policy. >> and i received a note back from chairman hinterling last night, quite late, indicating your response to that. and we will consider it and get back to you as soon as -- >> i don't want you to consider it. i think the chairman would agree with me, that this is a conversation, not about monetary policy. this is not market-moving stuff. this is about the investigation and the conversation of a leak inside of your organization. >> so this institution is entitled to those documents,
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wouldn't you agree? i will get back to you with the formal answer. i believe we have provided you with the relevant information. >> if i'm not entitled to it, can you give me the privilege that you're going to exert that's going to let me know why i'm not entitled to those documents? >> i said we received well after the close of business yesterday a letter, explaining your reasoning and i -- i will need some time to discuss this matter with my staff. before i give you a final answer. >> i don't want -- listen -- i sent you a letter a year ago on february 5th, i had to send you a subpoena. you knew that i'm looking for these documents. you knew i was going to ask you about this today. so if you're not going to give
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me the documents, exert your privilege, tell me your legal authority, why you're not going to provide this to us. if this is market moving, i would be sensitive to that. this is not monetary policy conversations, this is about the internal working of the fed. i'm not asking for all the transcripts, i'm asking for the excerpts specific to our investigation and oversight of the fed. let me ask you this -- you get to oversee banks. if you make a request to a bank for information a year ago, and they say, let me review with my board. let me talk about it, but they never comply with your request for documents or information, what would the fed do? >> i think we have complied very fully with the requests that you've made. >> i'm asking what would you do if you made that kind of a request to a bank that you oversee? what would you do? >> we work with banks to make sure we have access to the information. >> and if they didn't, i can't imagine what the fed would do if someone didn't comply with your request. and guess what, we're entitled to the documents. we expect to get them unless you exert a privilege and there's no
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privilege that you have. so i expect they'll come over, i yield back. >> time of the gentleman is for what purpose is the ranking member seeking recognition? >> is it appropriate to ask for unanimous consent for clarification on a point of information that was just given by the gentleman? >> does the lady have a parliamentary inquiry? >> the inquiry could be considered parliamentary, i understand the gentleman to say that they subpoenaed the feds and did not, it was ignored. is that what he meant? >> the gentlelady is not stating a parliamentary inquiry and as i think the ranking member knows, the time of the chair is limited, if other members wish to pursue that in their questioning. the chair now recognizes the gentleman from texas, enter hinajosa. >> thank you ranking member waters for holding this hearing today.
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chairwoman yellen i thank you for meeting with our committee today and your steadfast leadership at the federal reserve. america has made great progress since the financial crisis of 2008. our recovery includes 70 consecutive months of job growth, the longest streak in our nation's history. resulting in an astounding 14 million private-sector jobs created. and an unemployment rate now extending below 5%. however, we continue to feel the hangover from the financial crisis started during president george w. bush's second term. today the slower-than-average economic growth rate is fueling anxiety and weakening confidence in our nation's economic growth prospects. additionally, our economy appears to be sailing into
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strong headwinds, caused by slowing growth in the developing world. stagnant growth in europe. the dual effects of plunging oil prices and a strong dollar negatively affecting our manufacturing and export industries. addressing those challenges also requires to answer questions regarding the sustainability of our national debt and of the ability of congress and the federal reserve to act effectively to stimulate the economy. despite the market turmoil and economic uncertainty however, i'll note, i'll note that our nation's confidence in the safety and soundness of our financial system has not been shaken. indeed we can contribute a much stronger and more resilient financial system in large part to the protections and improvements of the market
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oversight under the dodd-frank act. my first question, chairwoman yellen, what else should our nation be doing to help us return to normal growth rates? >> well one of the distressing aspects of the recovery we've seen i agree with you, that we've made good progress in the labor market created a lot of jobs in the unemployment rates low. the growth in the economy that's been consistent with that, has been quite disappointing. so another way of saying what that implies is when output is growing at a very weak pace and you have a lot of job growth, that means that productivity growth has been very disappointing. since the financial crisis and ultimately that determines living standards. >> you think we are dragging down the potential growth rate of our economy and doing a disservice, to our young men and women by saddling them with
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debt, just as they are setting out to become full contributing members of our work force and economic engine? >> i think the debt situation that faces this country over the longer-term is something that congress certainly needs to address. at this point the debt-to-gdp ratio looks like it should be sustainable at present level for a number of years. as the population ages, it will, this is evident from cbo projections, be on an unsustainable upward course. and this is something congress has known about for decades and it's important to address. >> it seems to me that while congress must do its part to raise the minimum wage, expand the social safety net and provide a more progressive
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tax code, what steps are you taking at the federal reserve to address the historic level of inequality in the united states? >> well, congressman, the main contribution that it the fed can make to inequality given that we don't have policies that target particular groups in the labor force, the main contribution we can make is to make sure that the labor market is performing well, that we attain congress' maximum employment objective. i'm pleased with the progress we have made. but there's further to go. and we're committed to making sure that we stay on that course of further improvement in the labor market. and it won't right every -- every disadvantage that workers face, but it has resulted and will continue to result in broad-based gains for all groups
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in the work force. >> my time has run out, and i yield back. >> the time of the gentleman has expired. the chair now recognizes the gentleman from california. >> thank you. good to see you, thank you. the latest stress test scenario that was published by the fed includes this scenario where the rate drops below zero from the second quarter of 2016 through 2019. and i recognize that this in no way predicts any future action here. as a matter of fact, it was announced specifically in the document that this scenario does not represent a forecast for the federal reserve. nonetheless, this timing is interesting, because it comes at a time when the european central bank and the bank of japan have both instituted these negative interest rate policies.
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so the question i was going to ask you -- let me make one other point. it may subject that the federal reserve is not opposed to reducing its target rate below zero should economic conditions warrant, and may be employing the stress test process as a tool to consider its possible impacts. that strikes me as maybe the reason you deployed it in the scenario. you told the committee in november that if the economy were to deteriorate in a significant way, potentially anything, including negative interest rates, would be on the table. and i remember those remarks were echoed in january by new york fed president bill budly -- bill dudly. assuming for a minute that the fed figures out this question about the legal authority, do you still believe that negative rates are a tool in the toolbox?
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and can we assume that the federal reserve would not include this scenario in a stress test if, in fact, it were not a potential future action? >> well, let me say that that was not what motivated the inclusion of this scenario in the stress test. we are in an environment whereas you pointed out where a number european central banks, the bank of japan have gone to negative rates. through much of europe, interest rates and in japan are negative way at the yield curve. we had periods of market stress where we see a flight into u.s. treasuries as a safe haven. and the scenario that we ask banks to look at is one in which treasury bill yields go negative.
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this is something that could potentially happen without the fed actually setting negative interest rates. it is something that could happen. and we have seen it happen for limited periods of time in stressful situations. >> let me ask a clarifying point. because it has been kicked around since 2010 the possibility of the fed maybe setting negative interest rates. so i just -- quick question on looking at the fed authority. you haven't -- you haven't taken a serious look at the fed authority until now while it was kicked around then and you do the scenario in the interim. >> back in 2010 when we were looking to add accommodation to have a tool kit available, it's something we looked at. we got only to the point of thinking that it wasn't a preferred tool.
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we were concerned about the impacts it would have on money markets. we were worried that it wouldn't work in our institutional environment. and we thought that zero was really the effective or very -- >> i got it. >> just very little was -- >> let me ask you then really quickly -- >> in the spirit of prudent planning, it's something that in light of european experience we will look at. we should look at. not because we think there's any reason to use it. but to know what could potentially be available. and it isn't just a question of legal authority. it's also a question of could the plumbing of the payment system in the united states handle it? is our institutional structure of our money markets compatible with it? we have not determined that. >> okay.
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well let me personally just say that i think that the central banks in japan and europe are trying to overcompensate for irresponsible fiscal policy. i think that's what put them in this position. can we avoid the same mistake here in the u.s. if we get our fiscal house in order? in other words, do you agree that if we address the long-term structural problems with soaring mandatory spending, we would decrease the potential need for monetary policy actions that reverse course on interest rates? >> i think it is certainly desirable and important for the long run stability and growth of this country to take the measures that you have suggested and evaluating the stance of fiscal policy, it is something that affects our monetary policy. >> thank you, chair yellen. >> the chair now recognizes the gentleman from georgia. mr. scott. >> thank you for coming. you know i have a lot of respect for you. >> thank you. >> but i very vehemently
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disagree with you when you say that you can't target unemployment. let me just say this. it is very important for everyone to know that you have an equal mission. part of that mission, one half of it, is to curb inflation. but the other half is unemployment. and so just as surely as you go and you target inflation with movement of your interest rates surely you've got to understand that you have the same authority to deal with the unemployment. now let me tell you why this is important, ms. yellen. nobody is suffering from unemployment like the african-american community. and they are suffering from that
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because of the very laissez-faire attitude that the fed historically has dealt with just employment and unemployment all together. yeah, we can claw 4.5 unemployment rate. do you know what the unemployment rate is for african-american men between the ages of 18 and 37? it's 36.5% unemployment. and in some communities like chicago and baltimore, atlanta, houston, any of these big cities, it's hovering at 50%. now, when you have this devastating situation, there is nobody else, there is no other agency that has the mandate to deal with it as the fed. now, in order to deal with it, you've got to look at the economy like it is a wheel. the economy is a wheel.
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why is it that we have this high unemployment rate among african-american young men and african-american women in that same age group is 26%. so why is it that we can't -- a part of that reason is because the fed has historically downplayed unemployment. never in the history of the fed have you even seen fit to have an african-american president of a regional federal bank for the federal reserve. that's a part of the reason. we're not even a part of the conversation. so my whole point is that i want the fed. nobody is better equipped to handle this rigid unemployment facing the african-american community in that most pliable age group. that is the child-producing age group, 18 to 37.
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can you imagine if that was the employment rate of 37.6% of white young men in that age group? all hell would be breaking loose right now to do something about it. we need that same compassion from you. when you look at the energy -- the sectors of the economy that are growing, transportation, energy, agriculture business healthcare, construction, rebuilding the infrastructure, manufacturing, we need an advocacy from you to say automatically there must be on-the-job training programs for african-americans in this group to go into these areas and earn as they learn. in agro-business we have 19 colleges whose authority and mandate due to farm bill is to
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take the money that we give to the farm bill and spend in teaching, research and extension. why not create the other spending category for scholarships and loan forgiveness? students who will go in and take advantage of these job openings in agriculture and business? all i'm saying is, that please, we have got to get the fed to get off the dime and put the issue of african-american unemployment on the front burner. that is the core of all of the domestic issues that we're facing. and that is the child-bearing group. what are these fathers to do? what is there for them? that's why we have so many of the situations in baltimore, in chicago and other places. and it leads to a straight
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pipeline to why we got 1.2 million of them sitting in the prisons. would you help us with that? >> congressman -- >> i would love to work with you on it. >> i want to assure you that we recognize how serious the problems are that you have discussed. and we take our employment mandate extremely seriously. and have been doing everything that we can to promote a stronger labor market that will benefit african-americans. >> would you really consider getting an african-american for the first time in history to be a regional president of a federal reserve bank for the first time in history? >> absolutely. it's our job to make sure that every search for those jobs is assemblies a broad and diverse group of candidates. and i regret that there hasn't been an appointment of an
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african-american. >> the time of the gentleman has expired. the chair now recognizes the gentleman from florida, mr. posey. madam chair, the number one thing i hear from my local community banks and credit unions is the need for regulatory relief. that's not news to you, obviously, either. and these financial institutions provide critical services to our communities. and they are worried that the overregulation is hurting not only their ability to provide those services, but eventually, is clearly leading to increased industry consolidation. i'd like to ask you what you consider to be the negative consequences, if any, that result from consolidation and the effects on the local and national economy. >> well, i think community banks play a vital role in supplying
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credit to groups of borrowers who larger banks often would not be able to serve. and that is a vital role in all communities throughout the country. so we want to see those banks thrive and are very focused on ways that we can reduce burden on those banks. i mentioned earlier some of the things that we have tried to do to reduce burden. and we will continue looking through the agripa process and by the regular meetings and contact that we have with community bankers to address the burdens that they face and look for ways to simplify regulation and reduce burden.
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>> madam chair, do you think that relationship lending is important? >> it's been very important often for community banks in the kind of business that they do. so yes. >> just a quick follow-up. can you identify some areas of priority at the fed for reducing regulatory burdens on community banks? >> yes. so we have been focusing, for example, on the duration of our on-site reviews and looking for ways to have our examiners spend less time on bank premises. we have been looking at ways and have simplified and tried to tailor our preexamination request for documentation. we have been conducting training
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to make sure our guidance is - examination request for documentation. we have been conducting training to make sure our guidance is properly interpreted and applied in ways that with consistent. we have a number of foray in which we try to help community bankers understand what new regulations or proposals are relevant to them and which ones are not intended at all for their organizations. as i mentioned, the agripa process is ongoing and we have been hold ing this around the country to hear the concerns of banks with regulatory burden and we will take all of the steps that we possibly can to address the concerns that surface. we meet regularly with community bankers through an organization called cdac, which is composed of representatives from each of the 12 federal reserve
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districts. they come to the board, and we meet with them twice a year, the full board of governors to discuss their concerns. and we follow up on what we hear. >> thank you. you know, finally, this week the house is considering legislation that would require the administration to put forth a plan to reduce the national debt when the dead limit is increases, a common sense concept, i believe. we also just received the president's budget request which would in the face of a $19 trillion -- we just passed the $19 trillion mark in the debt clock, increase spending by $2.5 trillion. when the president took office, the national debt was roughly $10 trillion. when he leaves office, debt is expected to have doubled to $20 trillion. you have often voiced your concerns about the impact of failing to raise the debt limit
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failing to pay our bills, citing the impact it would have on the economy. i don't disagree. but i'm curious. do you have similar concerns about the impact on the economy of failing to address our national debt? how much debt do you think is too much? >> well, i think if you look at the path that the u.s. debt is on under current policies, it will rise from the present level to levels well above 100% of gdp and continue rising more or less indefinitely. and wherever you draw the line, you've got to conclude that that's an unsustainable economic situation. so i think it's essential that congress address this budget deficit issue. >> time of the gentleman has expired. the chair now recognizes the gentleman from texas, mr. green, ranking member of the oversight investigation subcommittee. >> thank you, mr. chairman. i thank ms. yellen for appearing
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today, as well. and mr. chairman and ms. yellen, and of course, ranking member, i want you to know that there has not been some sort of conspiracy among congressional black caucus members to bring up this issue of black unemployment. although, i think we do talk about it among ourselves quite regularly. but i do believe that a basic premise that may be of help to us is the notion that in the beginning was the word. and not enough talk takes place among those who have the power to influence public policy with reference to african-american unemployment. to this end, i am concerned and would ask if you have in your statement given a specific reference to african-american unemployment and the statement that you made today? i apologize if i missed it.
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but was there a specific reference to african-american unemployment? >> i referenced in answer to a previous question, the very high rates of unemployment of african-americans that persist even with current -- >> if i may, let me share this thought with you. if it is and i believe you are in agreement that it is a serious problem. not just a problem but a serious problem. >> i certainly agree with that. >> if it is a serious problem i would ask that you make it a part of your actual statement that you present and that you publish it and that you continue to say to those of us who can make a difference and we should be able to make the difference here in congress. we have responsibilities here to focus as well. but if you would make it a part of your statement, and if you would publish this, i think it can have a meaningful impact on
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policymakers up and down the line. so just a small request, but i think it can make a really big difference. i'm going to ask that do you this. >> i'm certainly open to doing so. i will certainly take that seriously. >> thank you. let's move to the taylor rule for a moment. you have indicated that the taylor rule would be a grave mistake and that it would be detrimental to the economy and the american people. could you in about one minute give some examples or an example of how it would be detrimental to the economy? that's sort of a nebraska lus term and i think you should provide some clarity. >> well, sometimes it provides recommendations for what monetary policy should be that clearly overlook important circumstances. >> if i may, madam chair, would you kindly explain the impact that it will have on the economy? what would the impact be if it causes us to do something inappropriate?
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i will let you decide what's inappropriate. >> well, either it would have us set a monetary policy that would result in much higher unemployment than would be desirable or, alternatively, there could be circumstances in which it would recommend and accommodative policy that would result in extremely high inflation. now, i would say right now is an example. the taylor rule would recommend an overnight, short-term interest rate that would be close to 2.5%. and i think in light of the slow growth in the u.s. economy and the fact that we have needed to hold the federal funds rate for almost seven years at zero to achieve the progress that we
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have made that setting it at the level that it would now recommend would be highly damaging to the economic situation. and we have tried to provide some analysis in the monetary policy report we submitted about why that is, and in particular, this idea that the neutral fed funds rate, because of the damage from the financial crisis -- >> i regret i must reclaim my time. because i have one additional thing that i must say. i appreciate your commentary. i think that a good many people have the point. but i want to say this. we have some people who are visiting today. i don't want any response from them. but i want to acknowledge their presence because they're concerned about these wages. they are concerned about wages across the board, especially as they impact working people. people who are on salaries. people who make minimum wage. it's our desire to see policies


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