TRANSCRIPT: Jack Lew’s testimony on debt ceiling


U.S. Treasury Secretary Jack Lew prepares to testify before the Senate Finance Committee on the up-coming debt limit in the Hart Senate Office Building in Washington, DC, USA, 10 October 2013. (Jim Lo Scalzo/EPA)
October 10, 2013

A transcript of Treasury Secreatry Jack Lew’s testimony at a Senate Finance Committee hearing on the debt ceiling.

Mr. Secretary. LEW: Thank you, Mr. Chairman -- Chairman Baucus, Ranking Member Hatch and members of the committee. I appreciate the opportunity to appear here today, and I appreciate the invitation to discuss the potential impacts of a failure by Congress to increase the debt limit.

Congress has an important choice to make for the American people, and Congress alone has the power to act to make sure that the full faith and credit of the United States is never called into question. No Congress in 224 years of American history has allowed our country to default, and it’s my sincere hope that this Congress will not be the first.

Among the risks that we control, the biggest threat to sustained growth in our economy is a recurrence of manufactured crises in Washington and self-inflicted wounds.

Unfortunately, today we face a manufactured political crisis that is beginning to deliver an unnecessary blow to our economy right at a time when the United States’ economy -- the American people have painstakingly fought back from the worst recession since the Great Depression.

In addition to the economic costs of the shutdown, the uncertainty around raising the debt limit is beginning to stress financial markets. At our auction of four-week Treasury bills on Tuesday, the interest rate nearly tripled relative to the prior week’s auction, and it reached the highest level since October 2008.

In measures of expected volatility in the stock market have risen to the highest levels of the year. The only way to avoid inflicting further damage to our economy is for Congress to act.

I know from my conversations with a wide range of business leaders, representing industries from retail to manufacturing and banking, that this is of paramount concern for them. That’s why it’s important for Congress to reopen the government, to raise the debt ceiling and then to work with the president to address our fiscal challenges in a balanced fashion.

Republican and Democratic presidents and Treasury secretaries alike have universally understood the importance of protecting one of our most precious assets, the full faith and credit of the United States.

President Reagan wrote to Congress in 1983, and I quote, “This country now possesses the strongest credit in the world. The full consequences of a default, or even the serious prospect of default by the United States, are impossible to predict and awesome to contemplate. Denigration of the full faith and credit of the United States would have substantial effects on the domestic financial markets and on the value of the dollar in exchange markets,” closed quote.

If Congress fails to meet its responsibility, it could deeply damage financial markets, the ongoing economic recovery, and the jobs and savings of millions of Americans. I have a responsibility to be transparent with Congress and the American people about these risks. And I think it would be a grave mistake to discount or dismiss them. For these reasons, I have repeatedly urged Congress to take action immediately, so we can honor all of our country’s past commitments.

The Treasury Department has regularly updated Congress over the course of the last five months as new information has become available about when we would exhaust our extraordinary measures. In addition, Treasury has provided information about what our cash balances will be when we exhaust our extraordinary measures.

As our forecasts have changed, I’ve consistently provided updates in order to give Congress the best information about the urgency with which they should act. And last month, I met with the full membership of this committee to discuss these issues.

Treasury continues to project that the extraordinary measures will be exhausted no later than October 17, 2013, at which point the federal government will have run out of borrowing authority. At that point, we will be left to meet our country’s commitments with only the cash on hand and any incoming revenues, placing our economy in a dangerous position.

If we have insufficient cash on hand, it would be impossible for the United States of America to meet all of its obligations, including Social Security and Medicare benefits, payments to our military and veterans and contracts with private suppliers for the first time in our history.

At the same time, we’re relying on investors from all over the world to continue to U.S. hold bonds. Every week we roll over approximately $100 billion in U.S. bills. If U.S. bond-holders decided that they wanted to be repaid rather than continuing to roll over their investments, we could unexpectedly dissipate our entire cash balance.

Let me be clear: trying to time a debt limit increase to the last minute could be very dangerous. If Congress does not act and the United States suddenly cannot pay its bills, the repercussions would be serious.

Raising the debt limit is Congress’ responsibility because Congress, and Congress alone, is empowered to set the maximum amount the government can borrow to meet its financial obligations. Some in Congress have suggested that raising the debt limit should be paired with accompanying spending cuts and reforms.

I have repeatedly noted that the debt limit has nothing to do with new spending. It has to do with spending that Congress has already proves and bills that have already been incurred.

Failing to raise the debt limit would not make these bills disappear. The president remains willing to negotiate over the future direction of fiscal policy but he will not negotiate over whether the United States should pay its bills.

Certain members of the House and Senate also believe that it’s possible to protect our economy by simply paying only the interest on our debts while stopping or delaying payments on a number of our other legal commitments. How can the United States choose whether to send Social Security checks to seniors or pay benefits to Veterans? How can the United States choose whether to provide children with food assistance or meet our obligations to Medicare providers?

The United States should not be put in a position of making such perilous choices for our economy and our citizens. There is no way of knowing the irrevocable damage such an approach would have on our economy and financial markets.

Leaders have a responsibility to make our economy stronger, not to create manufactured crises and inflict damage.

In 1987, President Reagan addressing a debt limit impasse delivered a message that is applicable to us today. This brinksmanship threatens the holders of government bonds and those who rely on Social Security and Veterans benefits. Interest rates would skyrocket, instability would occur and financial markets and the federal deficit would soar. The United States has a special responsibility to itself and the world to meet its obligations.

The very last thing the U.S. economy needs now is a fight over whether we raise the debt ceiling, not when we face serious challenges both domestically and internationally that require our full attention and not when we know the kind of damage a financial and economic crisis can cause.

Thank you and I look forward to answering your questions.

BAUCUS: Thank you, Secretary.

I’d like to focus a little bit on the concept that some suggest is a way out of this problem and which some suggest is feasible and I disagree with, it’s called prioritization. You touched on it. Could you just briefly tell us what decisions you would have to make as Treasury Secretary, assuming interest was paid on the -- on the debt and you then had to choose which other obligations had to be paid? I -- I know you can’t tell us which ones, nor should you tell us Social Security, Medicare, military, farm program, what not, but if you can just go through the process and describe to what -- what the actual legal and administrative problems and consequences would be and include what -- how much toll that would be. It’s my understanding it’s about 70 to 80 percent of -- of the -- those programs could be paid if they’re all paid and also what effect it would have on the Gross Domestic Product, that kind of a cut. But just put -- walk us through prioritization difficulties please.

LEW: Mr. Chairman, let me start by saying what I think should be obvious that if we don’t have enough cash to pay all our bills, we will be failing to meet our obligations and under any scenario, we will be defaulting on obligations.

There is no plan other than raising the debt limit that permits us to meet all of our obligations.

When questions are raised about prioritization, the first question is interest and principle on the debt and then, as you said, Mr. Chairman, what else?

The legal issues even regarding interest and principle on the debt are complicated. Let me remind everyone, principle on the debt is not something we pay out of our cash flow of revenues. Principle on the debt is something that is a function of the market’s rolling over. So there’s a question of what we can do as a government and how the markets function when the government is failing to pay all of its bills. We’ve never been there and I think anyone who suggests they know exactly what that means would be projecting after 224 years of the history of paying all of our bills, what happens if we stop paying all of our bills.

Mr. -- Mr. Chairman, I don’t know how it -- you could possibly choose between Social Security and Veterans benefits, between Medicare and -- and -- and food assistance. These -- these are obligations we’ve made. You know, we wouldn’t have the money to necessarily pay our troops in full. We wouldn’t have the money to pay our Veterans the benefits in full.

Our systems were not designed to not pay our bills. Our systems were all designed to pay our bills.

The legal issues are many, I do not know how you could make the decisions, I do not think the legal authorities are clear at all and I do not think the administrative process would permit the system to work.

We write roughly 80 million checks a month. The systems are automated to pay because for 224 years, the policy of Congress and every president has been we pay our bills. You cannot go into those systems and easily make them pay some things and not other things. They weren’t designed that way because it was never the policy of this government to be in the position that we would have to be in if we couldn’t pay all our bills.

BAUCUS: Now if you were to prioritize, it’s my understanding as well that you know to some degree what you’re obligations are. For example, it’s a big Social Security payment due October 23, interest on the debt that defers to the end of the month, this month a major Medicare -- other bills due. But on the other hand, knowing the revenues a little bit sketchy, it’s lumpy, it comes in it -- it -- it -- in unanticipated amounts. Could you go over that a little bit please?

LEW: Well that’s the -- very much the case, Mr. Chairman. We have estimates. If these estimates are wrong then there is the real risk of miscalculation and I would just note, even in the period of time that I have been keeping Congress informed, we’ve seen swings in a normal course of things of, you know, $20 billion in terms of our estimate of what the cash on hand would be. And that’s not because anyone did anything wrong, it’s because quarterly tax receipts were not exactly where they were estimated to be.

I’d also remind everyone that we’re now in an unusual position with the government shutdown, that is having economic consequences that we’re just beginning to understand. All the revenue projections that we have based our analysis on were based on a world where the government was functioning and where all of the services that relate to government activity were happening. So it didn’t take into account any layoffs that might occur, it didn’t account any reduction in payroll or payroll taxes, so I have to assume that the estimates from before a shutdown are likely not to be an accurate predictor of exactly where we are.

BAUCUS: And a computer -- how do you reprogram computers?

LEW: Well, Mr. Chairman, I -- I have to tell you, I don’t believe there is a way to pick and choose on a broad basis. The system was not designed to be turned off selectively. So anyone who thinks that it can be done just doesn’t know the architecture of our multiple payment systems that are very complex. They were designed properly to pay our bills, they were not designed to not pay our bills.

BAUCUS: And so our prioritization just doesn’t work.

LEW: I -- you know, I think prioritization is just default by another name. It’s just saying that we will default on some subset of our obligations. But it -- we are still -- we are, by definition, if we don’t have enough money to pay all of our bills, we will be in default on our obligations.

BAUCUS: Thank you.

Senator Hatch?

HATCH: Well thank you, Mr. Chairman.

Secretary Lew, I want to be clear about the administration’s position on the debt limit. As I understand it, the position is that the president will only accept a so-called clean debt limit hike with no other accompanying policy or fiscal considerations attached to it. I’ve asked you repeatedly how much of a debt limit increase you would like and for how long? And you have responded that it’s up to Congress.

Now I believe that the administration’s position is unfortunate because it is clear that we have a debt problem and that the fundamental driver of our debt is unreasonable, unsustainable spending in our entitlement programs. I believe we can and should use this as an opportunity to address these problems and I have personally, as I’ve mentioned offered five modest bipartisan proposals on entitlement reform to the president earlier this year, and you’ve received copies, unfortunately, I’ve heard no responses to that and I sincerely did that. Nevertheless, the administration’s entitled to its opinions and positions so I just want to be clear concerning the debt limit.

As long as there is nothing attached to a debt limit increase, the administration will say nothing more about it, including its preferred outcomes in terms of how much of an increase and for how long, is my understanding correct or do you wish to give me your preferences about how big of a debt limit increase you would like to have and for how long you would like -- you would like it so that at least we can begin discussions and negotiations on -- on this particular issue.

LEW: Senator, you and I have discussed this a number of times and we’ve corresponded a number of times.

I wrote to you just last week, a few days ago, stating what our view is. Our view is that this economy would benefit for more certainty and less brinksmanship. So the longer the period of time is, the better for the economy. It’s really Congress’s decision how often it wants to vote on the debt limit. I -- I believe that more certainty is better. I think the Senate leader and the chairman have put forward a proposal...

HATCH: Mr. Secretary, all I’m asking is how -- how much do you want and how long? I mean, those -- those are two simple questions. How much do you want us to raise and how long?

LEW: Senator, the -- the -- the question of how long is one I -- I think I’m answering as clearly as I can. The longest the Congress is prepared to -- to, you know, extend it for is -- is -- is the best. I think -- I think -- you know, the president tried to be clear in his statements in recent days that if Congress passes something shorter, he was open to -- he -- he is not looking for there to be a crisis here. But Congress will be right back dealing with it, so the better solution is to go longer. So we’ve tried to be very clear. And everyone knows the numbers that are associated with different periods of time.

HATCH: Well, it’s not clear to me.

Secretary Lew, the recent long-term outlook from the nonpartisan Congressional Budget Office makes a number of things abundantly clear.

First, between 2009 and 2012, the federal government recorded the largest deficit since 1946, causing federal debt to soar for (ph) the share of our economy to an amount higher than at any point in U.S. history except a brief period during World War II. (inaudible) now stands at 107 percent of our GDP.

Second, our debt path is unsustainable, threatening to bring us to this fiscal crisis.

Third, the root of our spending problem is that -- is the government’s major health care programs. That includes not just Obamacare, but Medicaid and Medicare as well.

Fourth -- and others. Fourth, trust funds and Social Security and our health entitlement programs face exhaustion. Yet when it comes to negotiating solutions to our entitlement spending problems, all I hear from the administration is that negotiations can only proceed if, first, the president is guaranteed yet another tax hike, or if the only spending restraint we’ve enacted thus far is turned off.

When it comes to so much as even discussing solutions to our entitlement spending program -- or problem, all I hear is that negotiations can only proceed if, first we pass a clean continuing resolution and a clean debt limit increase.

What -- what does it take beyond a guarantee to the president and congressional Democrats that they first get yet another tax hike or that the sequester be undone to get the administration to the table to talk about entitlement reforms such as the ones I’ve proposed, and which, to date, have been met with total silence from the administration.

And furthermore, is it reasonable to say that there can be no negotiations unless there’s another tax hike when we know, this very day, that disabled American workers face a benefit cut of 20 percent or more under current law when the disability trust fund is exhausted in 2016 or earlier?

LEW: Senator, I think the record is clear that the president has negotiated, has wanted to negotiate and remains anxious to negotiate on a bipartisan basis to have a fair and balanced approach to dealing with our fiscal problem.

HATCH: It’s not clear to me.

LEW: He has been on the verge of agreements twice until, frankly, it was not acceptable to Republicans in Congress. He was prepared to do very hard things. He was ready to have an agreement twice in 2011 at the end of last year.

He put in his budget very tough policies, policies that many of the Democrats on this committee find very challenging because he wanted to make clear he was looking for a balanced approach to entitlement reform and tax reform to settle our fiscal matters in a sensible way for the medium and long term. So I think the president’s record on being willing to negotiate is clear. I would just make one comment on...

BAUCUS (?): Briefly.

LEW: Very briefly on -- on the -- the -- the trajectory of our deficit. I would just note when the president took office in January 2009, we were in the middle of the worst recession since the Great Depression. We were in the middle of two wars, and we had a deficit that was 9 percent of our economy. We’ve cut that in half.

We’re making progress. We have more to do, but I don’t think it’s fair to say that we are in the same place we were. We’ve made tremendous progress.

BAUCUS: Senator Wyden.

WYDEN: Thank you, Mr. Chairman.

Mr. Lew, it seems to me in the event of a default or near default, the dominoes are going to fall fast and hard. And those hit early on will be older people who depend on their own retirement savings to get by. These are the older people who saw much of their life savings evaporate during the recession, and they’re struggling just to get those private savings, in effect, back to the water line, back to where they are.

Be as specific as you can with respect to what default or near default would mean for those seniors who depend on their private savings.

LEW: Senator Wyden, I -- I can only begin to imagine what it would mean to a retired American who relies on Social Security as their major or sole source of income if we had to tell them their check was going to be late.

You know, I remember my late mother lived on her Social Security check. Many of us have relatives who lived on their Social Security check. If the check didn’t come, if they didn’t have the ability to call someone who could help them out, they were in trouble. So anyone who think that’s anything short of default has never experienced what it means to live on Social Security.

Turn to Medicare...

WYDEN: And private savings especially, Mr. Secretary.

LEW: OK, I’m...

WYDEN: I share your view about those others, but I think the public has heard -- and you’ve given some comments with respect to mortgages. But I’m concerned about those retirees and their private savings as well.

LEW: Retirees saw their private -- well, let’s talk not just about retirees, because workers have their savings at stake. The effect is the same. It’s just more immediate for retirees. Retirees have no time to catch up.

We saw during the financial crisis people’s retirement assets fell quite dramatically in value. It reduced what retirees had to live on. It caused anxiety amongst working people of how were they going to catch up for the ground that they lost.

We’re now in a place where, because of the resilience of the American people, the recovery in the American economy, the good policy decisions made by Congress and the Federal Reserve Board, we are in a better place. We have a lot of work to do, but I think you can see from the economy that people are beginning to feel that the economy’s moving in the right direction.

Now if you create a crisis that causes assets to shrink in value, for retirees, they don’t have a lot of time to catch up. You know, so even if it all rights itself over a period of time, for those retirees, you know, they -- they’re in a pretty bad spot.

So I think it’s very unfair to have manufactured crises that have a real-life impact on working Americans and retirees who ought to be able to worry about market risks, not government policy risks.

WYDEN: Let me ask you about the effect of default on the deficit. Now we know that budget sequestration has not exactly been an ideal instrument, not exactly perfectly targeted for driving down the budget deficit.

But it has produced budget savings that actually accrue to the benefit of the American taxpayer. In the event of a default or near default, is it fair to say that some of those budget savings would be eaten up to pay higher interest costs, substantial amount of which would go to foreign governments and to other foreign creditors?

LEW: Well, Senator, we’ve seen just this week that the -- for the bills that mature at the end of October, the rates have almost tripled, you know, over the -- over the last week.

You know, we still have access to the credit markets, but it’s more expensive -- and for no reason. It could be resolved by just settling this issue and making it clear that the debt limit will not be breached, and we won’t have any problems.

LEW: What’s troubling to me is, after the American taxpayer has gone through something of a painful process, and you see these savings, in effect, the results of a default which produce higher interest payments and, in effect, transfer American wealth from our taxpayers -- some of that would go to foreign creditors.

LEW: Yeah, and, Senator, I would just add that higher interest rates also flow through the economy in terms of higher mortgage rates and higher student loan interest rates. So the costs are -- have multiple levels of impact on real people.

WYDEN: Thank you, Mr. Chairman.

BAUCUS: Thank you, Senator.

Senator Grassley.

GRASSLEY: Secretary Lew, Majority Leader Reid -- clean debt limit increase into the beginning of 2015 would likely be an increase of around one and three-tenths trillion.

But my understanding of the administration’s position is is that it is leaving the debt limit increase entirely up to Congress, that you won’t negotiate, require a clean debt limit increase, and will say nothing about its negotiating preferences regarding how long or how much the debt limit increase is desired.

With that being the case, if Majority Leader Reid’s clean debt limit bill were amended to raise limit for one month and the amended bill were passed through Congress, then the president will sign it, I assume. Is that correct?

LEW: Well, Senator, I -- I’d have to, obviously, see a bill. And the president would have to look at it to say what he wouldn’t sign. But the president made clear that he thinks dealing with this for a longer period of time would be good for the economy, but he did not rule out doing something shorter if that’s what Congress does. I think we’ve been very clear about what we think the right thing to do is.

GRASSLEY: Yeah, both -- both you and President Obama have repeated the talking point that negotiating deficit reduction policies on the debt ceiling increase is unprecedented.

The debt limit has been used in the past as a means to enact deficit reduction policies. I quote Congressional Research Service: Since 1978, Congress has voted to raise the debt ceiling 53 times; 27 of those, or 51 percent, the debt limit increase was tied to other reforms.”

GRASSLEY: I assume you’re aware that more often than not, the debt ceiling is raised with other policy or reforms. If you’re so aware of that history, why do you and President Obama continue to use the talking point that negotiating on a debt limit bill is unprecedented when the facts demonstrate otherwise?

LEW: Well, Senator, I don’t think that is an accurate version of history, and certainly not what I recall, having lived through many of the budget debates over the last 35 years.

If you look at the last nine budget agreements, only three of them have involved the debt limit. So it’s not the case that most budget agreements involve the debt limit. If look at the budget agreements that did involve the debt limit, in several of them, the debt limit was just added onto a bill, it was not driving the debate.

What I think changed in 2011 was the affirmative case was made in 2011 that if a certain faction, and I’m not saying it’s the people in this room, but if a certain faction in the House did not get its way, they would prefer default over a compromise that they found unsatisfactory.

That is different. It is just different. We cannot have the debt limit be something that’s a threat to the economy unless policy concessions are made. That’s not how our democratic system works. A minority can’t do that.

GRASSLEY: Secretary Lew, well, before going to my next question, at least you can’t say that it’s unprecedented to have negotiations and reforms tied to a debt increase.

LEW: I have never said it’s unprecedented for a debt increases to be tied to action. The debt increase has always been a hard vote. Since 1917 this country has been working to try and turn it into a more ministerial vote.

Congress used to have to vote on every bond issue. The debt limit was put in place to reduce the number of times Congress had to vote on debt. In the 1980s, when I was -- 1970s when I was working for the house speaker, we tried to turn it into an automatic vote so there wouldn’t have to be a vote on the debt limit.

Just two years ago Senator McConnell put in a mechanism to try to make it easier to vote on the debt limit. It has always been a hard vote. The question is, is it going to be used as a threat to the economy? And that can’t be. GRASSLEY: Secretary Lew, the president has made clear that if we pass a clean CR and a clean debt limit extension he is ready to negotiate. Where we need to negotiate is obvious. If you look at long-term projections, spending on our health care, entitlements, demands our attention.

In the next 25 years, spending on Medicare and Medicaid as a percentage of GDP is projected to double nearly. Now, if I ask -- now if I ask you if the president is willing to negotiate on health care entitlements, I think you’ve already said what the president put in his budget, you are probably going to cite the president’s budget. You’ve already done that.

I don’t consider that negotiation. I consider it a restatement of your position. Negotiation means you’re willing to give serious consideration to the other side’s ideas. Senator Hatch has made numerous serious proposals on health care entitlements.

I’m told that the message of the 2012 election was that Democrats no longer have to negotiate on health issues. Can you convince me that that is wrong?

BAUCUS: Senator Schumer. Senator Schumer. I’m sorry, Senator.

GRASSLEY: Can he answer this question?

BAUCUS: In about 10 seconds.

LEW: Senator, I think the president’s budget does reflect his openness to serious entitlement reform. And he has been willing to work on a bipartisan basis to do things that are unpopular on the Democratic side. And he is just looking for a partner to work with who is willing to have some give and take, not just one way.

BAUCUS: Senator Schumer.

SCHUMER: Thank you, Mr. Chairman.

And thank you for coming, Secretary Lew. This hearing is much- needed. I think if it has a purpose, it’s to deal with the debt ceiling deniers. The debt ceiling deniers try to claim that default won’t be a big deal. Middle class families won’t be hurt. We can just pick and choose which bills to pay, “prioritization” they call it.

Well, the debt ceiling deniers need a dose of debt ceiling reality. And you’ve given them that today. Basically you’ve said -- or I think in just about these words, you’ve said prioritization is default by another name.

And prioritization is extremely difficult, as you’ve said. Do we pay foreign debts or veterans’ benefits? Do we make sure Social Security benefits go out or pay Medicare? Do we pay for education? Do we pay for our troops?

American people don’t want that. They would certainly want us to just pass a clean debt ceiling bill and avoid those awful choices.

But I would like to talk about the other -- and by the way, one of these debt ceiling deniers I read in The New York Times, a congressman named Broun, he also said that much of what he learned in medical school were lies. They came from, in his words, the pits of hell. If we are letting people like this lead us, God save America.

Now, I’d like to deal with the second issue, which is the timing. In my view, we are like a blindfolded man walking towards a cliff. And if we keep walking in that direction, very soon we will fall off. We may fall off on October 16th. We may fall off on October 17th. We may fall off on October 25th or November 1st. But we will fall off.

And the most interesting part, the most important point about this is we don’t know which day we will fall off. The markets are somewhat mystical. They could even a day or two before October 17th come to the view the U.S. is going to default, anticipate that, Treasuries go down in value, interest rates go up, much of our financial system freezes, and we’re back where we were in 2008 when AIG failed.

So I just want to ask you this question. To be clear, isn’t there a risk almost every single day, starting around October 17th, even perhaps a day or two earlier, and getting worse, we can’t tell exactly when each day after that we won’t have enough money to pay our bills and default could occur even if you laid out the most meticulous plan in the world?

LEW: Senator Schumer, I have been trying to be as transparent as possible for several months, because I very much fear that a miscalculation is something that could lead to an unintended but very severe consequence.

Since August I have been very clear. We are already in overtime. We hit the debt limit in May. We’ve been using extraordinary measures. You know, we call them extraordinarily measures, but everyone now assumes that they are infinite.

They are not infinite. I warned in August that we were going to run out of extraordinary measures some time in the middle of October. And I even went the step further which mostly has never been done and said we are going to have roughly $50 billion in cash.

A month later, based on the year-end tax receipts and expenditures, I updated it and I said no later than October 17th we would run out of borrowing capacity, and instead of $50 billion we would have roughly $30 billion.

Now I think that should indicate that what I said in each of these correspondences is true. It is impossible to predict with accuracy. We are talking about enormous variations in day-to-day expenses, and in economic activity, which generates tax revenues.

So it is impossible to predict with accuracy. And it’s typical to keep roughly, you know, $50 billion in reserve at all times just as a cushion against the unknown. So when you talk about having less than $50 billion and drawing it down, it’s a dangerous place to be. That’s why Congress needs to act to raise the debt limit sooner rather than later.

SCHUMER: The way to avoid a potential cataclysm is to pass a clean debt ceiling now, not delay, and say, well, we can wait until the eve of the 17th or the 19th, or October 31st, is that right?

LEW: Well, I must say, there’s a parlor sport in Washington of “when is the last minute.” You can’t do that with the debt limit. With the debt limit, if you look for the last minute, and you make a mistake, you have done serious damage to the U.S. economy, to the world economy. It’s just not responsible. It’s reckless.

SCHUMER: So would you agree with my analogy, a blindfolded man walking towards a cliff, and we don’t know exactly what date will fall off, but if we keep walking we will, is pretty accurate?

LEW: I’ve tried to describe it in my own words.

SCHUMER: Thank you, Mr. Chairman.

BAUCUS: Thank you, Senator.

Senator Crapo.

CRAPO: Thank you.

Secretary Lew, you indicated in your beginning remarks that we face a terrible threat to the economy from a manufactured crisis. And I understand the fact that the issue of whether the federal government’s borrowing limit should be raised is problematic and faces -- and creates serious concerns with regard to our economy.

But the fact is that we do face a debt crisis, not a -- well, I guess it is manufactured over decades now, but we face a real debt crisis. And as we hear the discussion about whether the United States is going to lose its good faith and credit ultimately or go into default, I think the real crisis is that default, the one that we are screaming toward because of our refusal to engage as a country.

Congress and the president, with regard to reforming our failed entitlement system, reforming our failed tax policy in this country, and dealing with the real debt crisis that we face.

CRAPO: I think that Senator Schumer’s comment about the blind man walking toward the cliff is even more appropriate with regard to the debt crisis that we face with a 16, almost now $17 trillion debt.

And so, my question to you is, don’t you believe that the long- term trajectory of our debt gives our economy a greater threat and gives investors even more concern, in terms of their confidence about the ability of the United States to avoid default?

LEW: Senator, we clearly have long-term challenges, but I think the financial markets and when you talk to financial lead policy makers around the world, they actually see that we’ve made a lot of progress in the last few years.

We have more to do, in terms of entitlement reform and tax reform, but we’ve taken a deficit that was 9 percent of GDP; we brought it in half to 4 percent of GDP.

If anything, we’re getting criticized around the world for having done too much deficit reduction too fast because they want more growth.

CRAPO: But Secretary, (inaudible)...

LEW: I very much agree that we should be dealing on a bipartisan basis with -- and you and I have talked about this -- sensible, balanced approaches for medium and long-term reforms, and I would love to be engaged in that conversation...

(CROSSTALK)

CRAPO: But the very progress (ph)...

LEW: It -- it is not the crisis that we’re talking about that counts (ph)...

CRAPO: It’s (ph) the very progress you’re talking about occurred as a result of significant tax increases and a debt ceiling compromise that was reached with the Budget Control Act.

I mean, the fact is that we have not dealt in -- and in that compromise, we dealt with discretionary spending almost entirely. We have not dealt with entitlements, which the administration seems to say are off the table, and now we’ve got yet even more demands for greater tax hikes.

And that’s what the negotiations that we want to engage in are about.

LEW: Senator, the president has engaged on multiple occasions. I’ve been part of those negotiations. We very much believe that a balanced approach where you do entitlement reform and tax reform would be good for the country.

We tried in 2011, we tried in 2012; we’re ready to try again. The president said when we take away the threat of economic disaster, he’s ready to engage. If I heard him correctly in his press conference the other day, he said he’d pay for dinner.

You know, so, if -- if -- he’s willing to talk, wants to talk, but it can’t be that it’s with the U.S. economy being threatened if one small part of Congress doesn’t get its way.

CRAPO: So, we need another trillion dollars or more of debt authorized before we can even discuss whether to start reforming entitlements, whether to start reforming the tax code?

LEW: We -- I -- Senator, what we believe is the government needs to open; Congress needs to open the government and Congress needs to make it possible to pay our bills and we need to engage. And we’re ready to do that.

CRAPO: Well, just to conclude my questioning, then, back to the issue of our long-term debt and the threat that it poses to our economy. Are you telling me that those fears have now been allayed?

LEW: No, what I -- Senator, what I tried to say in a -- I tried -- I hope I wasn’t confusing. There’s a challenge to deal with in the medium and the long-term. It is not the same as a crisis, which is what happens if you fail to act on the debt limit in the next short period of time.

I would very much like to do it sooner rather than later. I think it’s better for the country. It would’ve been better for the country if we’d been able to complete the negotiation, where the president and the speaker were very close, until House Republicans said they wouldn’t vote for it.

And we would love to be in a place where we’re talking about a sensible alternative to these mindless across-the-board cuts. The -- we’ve been very clear about that.

But it can’t be with a threat to the government -- it’s shut down and we’re going to default on our bills. That is not the way to engage in the kind of bipartisan negotiations that need to happen.

BAUCUS: Senator Cantwell?

CANTWELL: Thank you.

Secretary Lew, thank you for your testimony about how you think that this serious prospects and uncertainty in the market are right now, and I guess that’s my question to you. Because everybody’s talking about default as if that’s the triggering point, and I think your testimony lays out that this moment could happen at any time.

And I guess the reason I brought this chart is because everybody thinks treasuries maybe, you know, if you’re not involved in the financial markets, haven’t been in the business community, it’s some mysterious thing.

But this chart shows that treasuries are hold -- held, not only in the U.S. by businesses but in Europe and China and they’re significant -- it’s a network. It’s as complicated and complex as just about anything that’s around when it comes to all the individuals that are involved.

It’s not, as one of our colleagues said, picking up the phone and calling Wall Street and telling them to settle down.

So, my question is, well, I just went on the Web and said, “OK, what about treasuries?”

Practically every -- just Google “treasuries” and all of the sudden comes up the most important market indicator -- way more important than the DOW and the S&P -- how important it is in a number in the economy because of the interest rate being pegged off of its interest rate.

And so, here we are, now basically almost talking the interest rate up with the talk in D.C. And in the last 48 hours, I wish I could print out this chart, because we have seen a spike -- a dramatic spike from 0.03 percent to 0.297 percent. That’s almost a -- more than a doubling in 48 hours.

So, my question is, if the interest rate on treasuries doubles in the next 48 hours again, aren’t we already to that tipping point?

LEW: Well, Senator, you know, I have been trying to be very careful and just report what’s happened. I’m not going to predict what markets will do.

I do think that if you look from last week to this week, a tripling of interest rates on short-term bills is -- is not a good thing.

You know, we’ve seen stability in the long-term bond markets, but, you know, these -- markets are delicate things, and I don’t know how markets will translate one day’s news, one day’s action into -- into discomfort.

What I do know is that every week, we roll over a hundred billion dollars of treasury bills, and that relies on the market being open and willing to function.

And I -- I -- I just think everyone has to remember that it’s not just the interest. It is also the principal. The markets have to keep working. CANTWELL: Well, I -- I think -- I mean, something that people are missing here in D.C. is that everybody is at risk in the U.S. economy. It’s not just what you just explained, but everybody at home.

Last time we had this discussion about whether we were going to default or not, the stock market dropped 20 percent.

So, we could have this same discussion and then, by Friday or Monday, you could see -- in fact, one of my constituents who’s an analyst said you could see as much as a 25 percent drop in the stock market.

LEW: It (ph)...

CANTWELL: This triggered off of treasury. So, we don’t have to go to default. Just to talk of default is causing the level of uncertainty that we’re all trying to avoid.

LEW: Well, Senator, that’s we saw in 2011. In 2011, we had an 11th hour agreement and we avoided seeing what happens when you cross the line.

But we had the damage. We had the drop in the market, we had the higher interest rate cost (ph). We also saw, for the first time, a downgrade in the U.S. credit rating.

So, that’s what happened when we didn’t cross the line. I don’t think anyone should test what happens when we cross the line.

You know, we’re seeing, with the government shutdown, that, you know, every day, new things are coming out that are really bad. People who thought it was OK to shut down the government are now rushing to open up one piece or another at a time.

It would be reckless to see what happens when you cross the line and don’t pay America’s bills.

CANTWELL: Well, I -- I think what we’re doing right now is reckless. So I hope our colleagues -- I hope we’ll come together. Thank you.

Thank you, Mr. Chairman.

BAUCUS: Thank you, Senator.

Senator Roberts?

ROBERTS: Thank you. Pardon me -- thank you, Mr. Chairman.

I don’t think we have a blindfold on and walking toward a cliff -- I think we’re walking toward a cliff with our eyes wide open, and that’s the problem.

All this talk about self-inflicted wounds -- it was not a self- inflicted wound when we raised the debt limit and we also achieved the Gramm-Rudman-Hollings Act, the social security amendments, the Balanced Budget Act, the Budget Control Act -- I could go on and on with the fact sheet here that’s been referred to by other senators.

I think it gets down to a willingness to really negotiate.

It’s the NSA again, Mr. Chairman (ph)...

(LAUGHTER)

The president has said over and over and over again that he will not negotiate, but I don’t think that’s true. There’s a meeting as we speak with Republican leadership. Yesterday, he met with Democrats.

And my question to you is a -- have you been briefed on the agenda of this meeting with regards to the time that the president would prefer (ph) with regards to an extension of the debt limit and the agenda?

And more especially, I’m talking about sequester flexibility with Appropriations Committee oversight, the repeal of the medical device tax, the restoration of 40 hour work week to the ACA as opposed to the 30 hour work week causing all the problems, and perhaps even a decision, or at least a timeframe on a decision on the Keystone Pipeline?

There’s a long list that all of us have that we’ve been talked about -- or, that we’ve been talking about. More especially, Senator Crapo asking specific questions on entitlement (ph) reform, and that’s the real cliff with our eyes wide open that I think that we’re walking down.

And I would only apply (ph) to you, sir, that the reason why this is so tough -- the American people get this; maybe not on the shutdown, although there’s been a lot of debate back and forth. But they sure get this on the debt limit.

ROBERTS: Fifty-two percent don’t want any increase in the debt limit. They get it. They look at this as their own family budget, and they understand this. Seventy to 80 percent say no increase without any spending reform.

And yet, all we heard was, I will not negotiate.” This reminds me about the debate of the Paris Peace Talks back in the Vietnam era, the size of the table and the height of the chairs.

Maybe this morning when the president meets with Republican leadership, and also the Democrat leadership, previously, we could get the size of the table. You all can have high chairs. We’ll take the low chairs. So, you know, this is silly.

Senator Schumer said that basically we’re walking toward a cliff with a blindfold. I think we have the blindfold off -- no action on entitlement reform -- no action on tax policy.

I’ve --- I’ve been to the dinner, with the help of Senator Isakson, at the White House. It was a privilege. But when we talked about how we achieved the grand bargain on tax reform, the president said he needed $800 billion. Now that price has been raised by the distinguished majority leader to $1 trillion. I don’t think you’re gonna find much support on this side of the aisle for that.

Then when we talked about reform, he said, “Why can’t we just take -- why can’t we take mortgage interest, charitable giving, retirement, just means test those?” And then gave some specific examples. I tried to put in regulatory reform, and I would put that in on the agenda if you would agree to it, or if the president would agree to it.

We’re not gonna do that. We’re not gonna means test all -- everything in the tax code, and we’re not gonna raise taxes $800 billion or $1 trillion. That’s a non starter, so I hope that we could do that.

What is your -- have you been briefed, or what is the up-to-date news that you can give us about the agenda of this meeting as to the time amount and as to what could be on the table?

LEW: Senator, the president’s been very clear. Congress needs to open the government. Congress needs to make it possible for us to pay our bills, and then he’s open to talking about anything. And it’s not a question of the shape of the table or the size of the table. It’s a question of whether there’s give and take. ROBERTS: So you indicate that the president is willing to negotiate, but he’s not willing to tell us what agenda -- or what specific parts of the agenda he might be interested in or not, or the timeframe?

LEW: Senator, he’s made clear. Congress has to open the government. Congress has to make it possible for us to pay our bills, and he’s happy to talk about anything.

He’s made it clear what he would like to get done. We -- we’ve made it clear in our budget. We’ve made it clear in numerous communications. Give and take means everyone coming and doing hard things. He demonstrated his willingness to do hard things. If others are willing to do hard things, maybe we can do something important.

ROBERTS: All right.

(CROSSTALK)

ROBERTS: All right. I’m over 13 seconds. I apologize, Mr. Chairman. I think what you’re saying is that if the government shutdown can be discontinued -- everybody wants that. Nobody wants a government shutdown, and we -- I don’t want to get into that debate again. But he’s willing to negotiate only if we end the shutdown and agree to an extension on the debt limit, then he may negotiate with an agenda that’s just sort of amorphous?

LEW: He’s always been willing to negotiate, just not with the threat of destroying our economy.

BAUCUS: Senator Menendez.

MENENDEZ: Thank -- thank you, Mr. Chairman.

Thank you, Mr. Secretary. You know, my colleagues have already expressed a series of dimensions in which both the shutdown and the threat of default, I think, effect our country domestically, economically.

I want to look at a different dimension that both has domestic and global issues. In the other role as I play as chairman of the Senate Foreign Relations Committee, I worry about the incredibly, extremely negative effects that the government shutdown and the threat of default have on our foreign policy and our national security, both now and in years to come.

You know, the shutdown and the default affected some of America’s near-term foreign policy priorities such as the president not being able to go to the Asian economic summit. And his absence, although certainly appropriate due to the crisis, feeds into existing fears, having traveled to the region, that our rebalance to Asia is more rhetoric than reality. And who showed up and was more than willing to fill the void? China. And in doing so, America’s loss is China’s gain.

And this is an opportunity about opening markets, for U.S. businesses to sell products and services. This is an opportunity to promote economic and security questions. And I think our allies are going to wonder, “Is a United States capable of meeting its promises, whether about economic initiatives or security initiatives?”

And perhaps the most damaging, I think, and difficult thing to reverse is the impact this has on America’s reputation in the world and the economic consequences that flow from that.

LEW (?): Yeah.

MENENDEZ: The entire global financial system depends in large measure on the faith that the United States government can and always will pay its debt. And America enjoys the unique privilege of having its currency act as the world’s reserve currency.

So it seems to me by playing political games we give credence to other emerging powers, like China and Brazil, who want the world to become less reliant on the dollar.

And there are consequences to becoming less reliant on the dollar. Not only does that undermine our standing in the global economic system, it puts our dependability in question with allies.

And I know in your role as Treasury, you fill various international roles within that context. Could you give the committee a sense of the consequences? We’ve talk about those consequences at home, but there are consequences abroad that...

LEW: Yeah.

MENENDEZ: ... affect us here at home.

LEW: Senator, I think it would be impossible to overstate the importance of the U.S. playing the role in the world that we do in terms of the stability we provide. There’s a reason why the dollar is the world’s reserve currency. The world actually counts on us being responsible and making the kinds of decisions that they can continue to look to Washington for that kind of stability.

You know, we have finance ministers from around the world gathering in Washington this week. And yesterday I met with finance ministers from Africa and finance ministers from Latin America. And it’s challenging when they look at you and they ask, “What’s going on in Washington?” It makes them nervous about their economies, and we need them to have growing demand because that’s good for our economy.

We -- and on this question of world reserve currency, it’s no secret that there are discussions around the world where others would like there to be a basket of currencies that might be used as an alternative to the dollar.

So, you know, I have to ask the question. When our role in the world is so important to the United States’ well being, both in terms of security and economic well being, and to the stability in the world, why would this kind of a manufactured crisis be seen as something that is necessary to pursue when it undermines that? So I think the questions you’re asking are -- are quite significant.

MENENDEZ: Let me -- let me ask you. There are those who suggest, “Oh, that’s not a real issue because the rest of the world has no place to go.”

LEW: You know, I’m not going to speculate on whether someone else will emerge as an alternative, but, you know, we are in a place right now where it’s important for the United States in the world for us to maintain our position, and we have the capacity to do that. We had economic ability to do that. It’s only a matter of political will.

MENENDEZ: And -- and -- and there’s no reason to risk that possibility.

LEW: Well...

MENENDEZ: Be continuing to find out whether or not there’s some other universe of currencies for which...

LEW: Yeah.

MENENDEZ: ... people could look to. And there’s no reason to risk having the potential economic impacts we can have globally that provide domestic opportunities for growth and jobs and opportunity.

LEW: Yeah, I -- I certainly think there’s no reason. I would go a little further and say that it is against our interests to invite that kind of discussion.

BAUCUS: Senator Enzi.

MENENDEZ: Thank you.

BAUCUS: Senator Enzi.

ENZI: Thank you, Mr. Chairman.

Mr. Secretary, I think this is the 11th time I’ve been through this discussion about the sky is falling and the earth will erupt.

Wyoming families aren’t buying these argument. They’re saying, “You can’t spend more than you take in. And you can’t -- definitely can’t keep doing it for ever and ever and ever.”

I’ve got a person that interned for me several years ago, who now is the owner of a major company in Wyoming and operates in four states. And he pays his people well, but every once in a while, somebody comes in and says, “I need a pay raise.” And he hands them a copy of Dave Ramsey’s basic book and says, “You don’t have a problem with income. You’ve got a problem with the outgo.”

That’s what the Wyoming people think. We’ve got a problem wit outgo, not income. They’re not interested in having their taxes raised so that we can put more people in the wagon.

ENZI: I used an example on the floor the other day about how the private sector, the people working in the private sector, are getting a little upset because government keeps growing and growing and growing. And when it grows, that means there are more people in the wagon and less people pulling the wagon. And they’re getting tired of it.

In fact, it’s getting pretty hard to pull and we’re not doing anything about it. That’s their -- that’s their impression. They can’t increase their income, why should we be able to increase our income? How do we solve this problem of outgo?

We keep asking for this debt limit increase and it’s always asked for as though sometime down the road we’re going to negotiate and figure out a way to solve the problem.

You mentioned that you rather we didn’t have these manufactured crises. America would prefer we don’t have these manufactured crises. I think this is a manufactured crisis again because we didn’t work on it yesterday. The shutdown with government, we haven’t done the budgets the way we’re supposed to. We’re supposed to start on those on April 15th, do one a week and not get to this Continuing Resolution situation on October 1st and everybody will know exactly how much they can spend. It doesn’t compress the sequester like it did last year.

These -- these discussions -- and I was invited to Blair House when we doing Obamacare and I spent a day of the president chopping down every suggestion that Republicans made. It was a waste of a day and so when -- when we hear this thing about willing to negotiate and if you have any ideas, get them to me, it’s wearing just about as thin as the sky is falling.

So why -- why do you and the president feel we should not be discussing right now this dire financial situation and coming up with a solution that will put a little bit of room in there for something to be done right now. If these people are -- are running up their credit card debt and they need to raise their limit, they’re expected to say what they will do in order to be able to take care of their debt. Although they’re not real interested because the interest rate goes up, which is the same thing we’re facing here.

You’ve already said that it’s tripled in the last week, so we’re running at that same problem. Why shouldn’t we present some kind of a solution? It could be a long-term solution. It doesn’t have to be just a one week solution. But we’re not even providing a long-term solution. I’ve put out a penny plan that would -- along with the sequester would take care of the debt in two years. Not the -- not the debt, it would take care of the deficit in two years and result in a balanced budget. Some variation on that might be helpful.

But why -- why do you think the president shouldn’t discuss right now and come up with solutions right now in conjunction with the extensions of the -- of the debt limit?

LEW: Senator, those Wyoming families know that after they have run up their credit card, they don’t get to ignore it, they have to pay the bill. The debt limit is just paying our bills.

You -- you and I have talked you -- you know that I would very much like to be in a conversation about long-term sensible entitlement and tax reform to give the kind of stability going forward that this country needs. That can’t be done by saying we won’t pay our bills next week. It just can’t -- that -- that’s what’s wrong with engaging right now.

The president wants to negotiate.

ENZI: We -- we keep saying that -- that this terrible thing is going to happen and that this is just paying our bills. How many times can we say this is just paying our bills?

LEW: Well the -- the...

ENZI: The American public doesn’t get that same option.

LEW: ... the time...

ENZI: I don’t -- we ought to have it as an option.

LEW: ... the time to reduce what we need to borrow is when we make the decisions on what we’re spending, not after and, you know, if we -- if Congress appropriates money, if Congress puts laws in place where people are entitled to benefits, if Congress commits military resources, once those commitments are made, you can’t tell a contractor who is doing work I’m not going to pay you because we changed our mind.

ENZI: Which takes me back to my comment that we should have been doing the budgets...

LEW: I’m not --

ENZI: ... one at a time.

LEW: I’m not disagreeing with you on that.

ENZI: ... piecemeal fashion that we’re...

BAUCUS: Mr. Secretary, it’s...

Senator Enzi’s time has expired, it’s getting close to 9:35 there. Many Senators here have questions to ask, the Senators have been very good about sticking within the limits, I’m hoping you can stay a little bit longer so we can enable Senators to ask their questions. They’ll -- they’ll probably shorten their questions so that you can stay.

LEW: All right. It -- it’s going to be very difficult to go more than five minutes over.

BAUCUS: Well, let’s see what we can do. OK.

Senator Carper?

CARPER: Thanks, Mr. Chairman.

Mr. Secretary, thanks for joining us.

I want to say to my -- my colleagues, I just stepped out of the room for a few minutes, I was watching the hearing on television in a -- in an adjoining room. And I must say people watching this on TV must be frustrated, disappointed with -- with us. Some of the finest people who serve in the Senate serve on this committee. That’s why I want to be on this committee. Thoughtful Democrats, Republicans, people willing to be pragmatic, find the middle, find reasonable principle compromises. And the problem here is pretty simple, Democrats need to support entitlement reform that saves money, saves these programs for the long haul and is consistent with our obligation to look out for the least of these. That’s what we need to do.

Republicans need to embrace tax reform that provides some certainty and predictability for businesses and for investors in this country, but at the same time generate some revenues.

We go back to those four years at the end of the Clinton Administration, we had four balanced budgets in a row, revenues as a percentage of Gross Domestic Product, right around 20 percent all four years. Those four years, spending as a percentage of Gross Domestic Product was right around 20 percent.

Our deficit is down from -- it peaked out about four years ago at $1.4 trillion, last year, the year that just ended about ten days, the deficit was about $700 billion, we cut it in half. Is that enough? No it’s not enough. We need to do -- we need to do more.

But we can’t do more unless we do entitlement reform. Over half our spending is entitlement spending and we can’t do more unless we generate some revenues.

The problem here is the -- what was the -- the old -- the old line in the Paul Newman movie? What we have here is a failure to communicate. That’s part of our problem. We’re really talking past each other. I talk to people all the time, people who have a lot of money and I tell them we’re going to have to pay some more taxes and they say, I don’t mind paying more taxes, I don’t want you to waste my money. That’s what they say, I don’t want you to waste my money. I don’t want to waste their money either. I don’t think any of us do. Tom Coburn that used to serve on this committee and I have introduced legislations called the PRIME Act -- P-R-I-M-E -- and we go at entitlement programs, not to savage old people or poor people, not to hurt the least of these, to actually save money and preserve these programs for the long haul.

Every one of you on this committee’s gotten a letter from Tom Coburn and me asking to join us as a co-sponsor. I hope you’ll read the letter. I hope you’ll join us.

Tom Coburn, I held, along with Carl Levin, a hearing on Monday of this week, Social Security Disability. Nobody wants to harm people who are disabled and unable to work but in Huntington, West Virginia, my -- my native state, by the way, Huntington, West Virginia, one judge approved 99.7 percent of the people who applied for Social Security Disability, 99.7 percent and that kind of thing is the exception. I mean it’s like -- that’s the outlier, but there are people that apply and get approved who frankly can work and don’t deserve to be on disability. The idea that we can’t somehow meet our moral imperative and also meet a fiscal imperative, that’s a fiction, we can do both.

And I would say we would really, not just boost our approval rating, but we’d really instill a lot of confidence in the American people if we would stop talking past each other and actually work together.

Mr. Secretary, we’re going to meet with the president today, Democrats, I presume the Republicans are going to meet with him today, what -- somehow the president has to make it crystal clear that he’s willing to negotiate and I think he’s said -- I’ve heard him say it on the entitlement stuff, and the -- the -- the -- our Republican friends, they’ve got to indicate a willingness to negotiate on tax reform that generates some revenues. I mean, there’s a matter of trust here. I don’t know how to break through it. I really don’t know how to break through it. Any ideas?

LEW: I think that the kinds of conversations that he’s having are meant to try to rebuild some of the trust to make it clear that once we get beyond where we are right now, once Congress reopens the government and takes away the threat of default, he has been and remains open to honorable compromise which means give and take, but it has to be a two-way street and that’s always been the case with any negotiation.

CARPER: All right.

Thanks, Mr. Chairman. Thanks (inaudible).

BAUCUS: Thank you, Senator.

Senator Isakson?

We’ll go to Senator Brown.

BROWN: Thank you, Mr. Chairman. I’ll be brief with my questions. Mr. Secretary, thank you for joining us.

I’ve heard a lot from the debt limit deniers about how October 17 is not really the day we default. We hear from the debt limit deniers that they are sure that even if we get there nothing will happen since we can pay China and Wall Street first. But the fact of the matter is on that day, October 17, as you know well, the day we run out of borrowing capacity is a Thursday which happens to be the day the Treasury holds its weekly auction to rollover $100 billion in debt. Comment for us, if you would, what could happen at that auction if we not raise the debt limit, what could happen if our borrowing costs -- would they substantially increase? What would happen if they did increase on Thursday? What would happen if we were unable to rollover the $100 billion in debt?

LEW: Senator, I -- I -- I’m not going to comment on what markets might do. I think the history is clear that anxiety leading up to 2011 caused a bad market reaction. We’ve seen in the last few days unease, certainly with maturities in the period between October 17 and the period immediately after that.

LEW: I can’t say what the likelihood is of there being a problem, I can say the consequences of any inability for us to rollover would be quite serious. I mean in terms of a household budget, it’s like instead of having to pay your monthly payment on a mortgage, having to pay the mortgage and that -- that would be a problem.

BROWN: Second question -- and I’ll be brief, Mr. Chairman.

Over the last couple of weeks I’ve spent a lot of time just calling people in Ohio, community bankers, business executives, entrepreneurs, people running research institutions, hospital executives, small manufacturers.

Regardless of their party, and I assume -- I don’t know their party in most cases, I assume most of them are Republicans because they’re in lines of work that might suggest that.

But over and over they say the same thing. Why is this happening? We can’t risk a default. They don’t understand why the government shut down. They increasingly understand that it’s one faction of one party in one house in one branch of government that has brought much of this to a halt.

The National Association of Manufacturers, the largest manufacturing association in the country, wrote on Monday: “The failure of policymakers to address the debt limit is injecting uncertainty in U.S. economy, hampering the ability of manufacturers and the broader business community to compete, and invest, and create new jobs.”

For the last several years, since the health care act, since Dodd-Frank, the criticism I hear more than anything from business in my state is uncertainty, uncertainty, when are the Dodd-Frank rules going to be finished? What’s going to happen with implementation of Obamacare? All of these.

The uncertainty, that pall that they claim hangs over our country, our economy, I hear, and especially from politicians who are critical of many of these programs.

So my question is, if we agree to a short-term clean debt limit increase, does that provide the certainty that we would need to compete?

LEW: Senator, I’ve tried to be clear that I think longer certainty would be very good for the economy, and the shorter the period, the less stability it provides. You know, when you talk about shifting debates to different time periods, retailers are very worried about what happens in November and December if we are going through what we’re going through now.

So I think longer is better but avoiding a crisis is better than having a crisis. And in no case is the president going to end up in a position where the threat of destroying the American economy is the basis for compromise.

He wants that negotiation to be with the basis of the kind of give-and-take that honorable compromises come from.

BROWN: This is -- thank you, Mr. Chairman.

This is the worst uncertainty and the most precarious uncertainty I’ve ever seen in our economy in my time in public office. And what’s tragic about it is how self-inflicted it is.

Thank you, Mr. Chairman.

BAUCUS: Thank you, Senator.

Senator Portman.

PORTMAN: Thank you, Mr. Chairman.

Secretary Lew, you’ve said again today the president won’t negotiate on the debt limit. And the president, as was noted earlier, has asserted that there haven’t been additional items added to debt limits in the past.

And, as you and I have talked about, and as you know, when you look back at the last 30 years of the history of debt limits, it’s the only thing that has worked. In fact, every significant deficit- reduction package that has passed this Congress in the last 30 years has come in the context of a debt limit.

I found one that didn’t. It was in 2005 for about $40 million, a relatively small deal. That’s the way it has worked. And it’s Gramm- Rudman, it’s the 1990 balanced budget agreement or the Andrews Air Force Base Agreement. It’s the 1997 balanced budget agreement. It’s pay-go rules that many in this committee on the other side of the aisle talk about favorably.

Of course, it’s the 19 -- it’s the most recent Budget Control Act, just a couple of years ago. All in the context of the debt limit.

So my view is kind of strange the president would, one, not want to negotiate, but, two, say we haven’t added stuff. It’s all that has worked to deal with this. And you indicated this earlier, it only makes common sense because it’s a tough vote, as you said.

Why? Because our constituents don’t get it. You know, why would you extend the credit card again, go over the limit again without dealing with the underlying problem?

And that’s why, you know, the polling shows that by over two to one the American people say, yes, we should extend the debt limit but only if we deal with the underlying problem. And that’s all we’re asking for.

I’m speaking for myself. I will say we need to avoid a debt limit crisis. But we also need to avoid a debt crisis. So avoiding a debt limit crisis today and avoiding a debt crisis tomorrow should be our objective.

The president himself said back in 2006, when the debt was half as big as it is today, $8 trillion, and this was a floor speech, America has a debt problem, and a failure of leadership.

He said, I’m therefore going to oppose the increase in the debt limit. He opposed it when it was half as big as it was today. He said we needed to deal with the underlying problem.

And in response to Senator Hatch’s question earlier about why the president refuses to deal with the underlying problem, which we all know is that two-thirds of spending and the biggest part of the spending and the fastest-growing part of the spending that is on autopilot that we don’t appropriate every year, which is the mandatory side, in response to that question you said, and I quote: “He put in his budget significant entitlement spending reforms, he wants to do this.”

And, in fact, you’re right. The president’s proposal includes a pretty long list of entitlement savings, mandatory savings, adds up to about $730 billion over 10 years. A step in the right direction.

During that time, by the way, we’re likely to add another $8 trillion to the debt based on CBO, Congressional Budget Office. But he has got $730 billion over 10 years.

Now not all of those choices reflect my top priorities, or others on this committee probably, but in a negotiation you don’t get everything you want. So my question to you today is really very simple.

By adding some of those proposals, maybe not all 730 billion, maybe it’s 500 billion, maybe it’s 400, but by adding some of the president’s own proposals to an extension of the debt limit, consistent with what has been done historically, and consistent with what the American people are asking for, couldn’t we move forward and isn’t that what we ought to be doing?

Dealing, yes, with the debt limit, but also with the underlying problem. And taking the president’s own proposals to do it.

LEW: Senator, on the history of the debt limit, you and I have been back and forth many times. I think it makes a big difference if you tack a debt limit increase on to something that has already been agreed to. In 1997, the balanced budget agreement was all signed and sealed and then the debt limit increase was put into it. It didn’t drive it. Nobody threatened default. So I think we’re in a given situation since 2011. And that has changed...

PORTMAN: Well, nobody threaten default because you’ve never had a president saying he wouldn’t negotiate.

LEW: And the president has said and has just repeated this week he wants to and is prepared to negotiate. I think it’s important not to just go through a president’s budget and cherry-pick the things that are hard for him to do.

You have to look at the things are hard for others to do, because a negotiation is give-and-take. If everything is on the table, if we’re looking at entitlement reform and tax reform in a way that join together to solve the problem, there could be a serious conversation.

But I just would caution to just not take one side of the ledger.

PORTMAN: Well, let me focus on that, because the president also says in that budget that he believes we ought to have tax reform. And specifically with regard to corporate tax reform, for the first time in your budget you indicated to be revenue neutral, and I applaud you for that, as you know.

I think that’s important. I think it’s an urgency right now that if we don’t deal with it, we’re going to continue to lose more jobs in this country.

My question to you would be, the president’s own proposals on entitlements, I agree there should be a give-and-take, but I’m willing to just say, let’s look at the president’s own proposals, putting those into this debt limit increase plus directions to the Congress on tax reform, as you all have suggested.

Would you all be willing to move that forward?

LEW: Well, just to be clear, the president’s view on the debt limit, he has stated as clearly as he can, he’s not negotiating over the debt limit. The debt limit -- Congress has to make it possible to pay our bills. He looks forward to negotiating.

BAUCUS: Senator Bennet? Senator Bennet, you’re next. Senator Bennet.

LEW: Senator, I hate to call attention to the time, but I’m going to be late for another commitment if I...

BAUCUS: Do you have just one more?

(CROSSTALK)

BAUCUS: How about two more? Two more.

LEW: I think if we do two more... BAUCUS: OK, Senator Bennet.

HATCH: Jack, this is important, I mean...

LEW: No, this is very important, Senator.

HATCH: Nothing more important than this. And I want to make sure everybody on our side at least has a chance.

BENNET: Thank you, Mr. Chairman.

Thank you, Mr. Secretary, for your indulgence. I’ll just take a few minutes.

In your view, would failing to raise the debt ceiling make our debt and deficit situation better or worse?

LEW: Well, it doesn’t do anything good. I mean, if the cost of borrowing goes up, it raises our expenditures, it doesn’t reduce them.

BENNET: And if the cost of borrowing went up just 1 percent or 2 percent, we’re at historically low interest rates, what would that cost us?

LEW: You know, I would have to go back and do the numbers exactly to give you an answer. But, you know, these are -- we’re talking billions of dollars, we are not talking about small numbers.

BENNET: So I think it’s -- I mean, it’s very clear, and Ronald Reagan shared this view. You quoted him earlier that this would just make matters worse.

LEW: Yes, it -- unless we were to do something unthinkable and say, we’ll never pay those bills. You’ve got to pay the bills or then you’re going to be borrowing money at a higher interest rate, so it only costs.

BENNET: Which means that our interest costs are just going to continue to go up and our ability to do things like respond to the floods in Colorado or be able educate our kids will be diminished.

I’m going to let you go because I know you have to go, but I’ve heard a lot of people on both sides of the aisle today talk about their willingness and their desire to try to meet in the middle, and I think that’s important.

And I think we need to do that because I can tell you this, people in Colorado, they are sick and tired of a lot of things about Washington, but what they are mostly sick and tired of is our managing by crisis, and, therefore, our inability to manage the affairs of this country in the way, in this case, that threatens the full faith and credit of the United States and our ability to have the reserve currency for the world be the American dollar.

Thank you, Mr. Secretary.

BAUCUS: Thank you, Senator.

Senator Toomey.

TOOMEY: Thank you, Mr. Chairman.

Secretary Lew, you’ve said a couple of times in reference to previous discussions over the debt limit that it’s different now.

It’s true it is different now. I would argue now it’s much more urgent that we deal with the underlying fiscal problem. Now, unlike in past years, we’re spending $3.6 trillion. We’ve run up a string up unprecedented deficits. The modest improvement you alluded to, you know that’s temporary. And it’s scheduled, if there’s no structural changes, for those deficits to get much worse not terribly far from -- from today.

We now have a total debt that’s over 100 percent of our total economic output, I believe already limiting economic growth and prosperity. We have trillions of dollars of guarantees that we didn’t used to have. We have tens of trillions of dollars in unfunded liabilities. We have large entitlement programs, the largest of which are all growing faster than our economy and, therefore, are on a completely unsustainable path. So what’s different, it seems to me, is our situation is much more dire now than it was in previous discussions.

Nevertheless, the president is saying, “You give me everything I want, and then we could have a conversation about these things that are important to you.” I still find that shocking.

But here’s -- here’s the bottom line, it seems to me. If the president refuses to agree to include even a modest reform that begins to take us in the direction of a more sustainable path in the context of a debt ceiling increase, there appears to be a real chance that this Congress will not pass a debt ceiling increase before October 17th.

Now, I hope that we do pass a debt ceiling increase with appropriate reforms because there’s no question in my mind at some point, if we don’t raise the debt ceiling, it will become disruptive. As you know, ongoing tax revenue’s only about 85 percent of all the money this government intends to spend in the coming fiscal year.

So if we only get 85 percent of everything we intend to spend in tax revenue, the 15 percent shortfall would have to be covered by borrowing, or else we wouldn’t be able to pay everything in full and on time. And that would be disrupted.

But the greatest disruption by far would occur if you were to choose to not pay interest on our debt. Senator Cantwell made a very compelling argument about the unique role that U.S. Treasury securities play in the world, and for the United States.

So my question for you, Mr. Secretary, as the secretary of the the Treasury, are you prepared to assure us, but more importantly, the millions of Americans who are investors in U.S. Treasury securities and the entire American economy, that under no circumstances will you permit a missed payment on a U.S. Treasury security obligation?

LEW: Senator, the only way to make sure we can pay all of our obligations is for Congress to act and raise the debt limit. No president has ever had to decide whether to pay some bills and not others.

TOOMEY: I understand. That’s a different question, though.

LEW: The law is complicated, and I am not the one who makes that decision, as you know.

TOOMEY: No, I think (ph) you would make it.

LEW: If you look -- no, no, it’s actually not my decision. It is something that the president would have to decide. And I’m telling you that it would be -- put us into default if it went to a place where we could pay one bill and not others. What would you say to people on Social Security...

(CROSSTALK)

TOOMEY: I have acknowledged that is very disruptive, and that is not where I hope to go, but I only control one vote in the Senate, and the administration controls zero. And they control zero votes in the House. And so it would seem to me the only appropriate thing to do is plan for contingencies. So are you telling me that the president would decide to ensure that we would not miss a payment on Treasury securities?

LEW: Senator, what I’m telling you is there’s no good solution if Congress fails to raise the debt limit. And that’s why the president’s called on Congress to raise the debt limit.

You know, you -- you used the number 80-85 percent coverage in terms of revenue. That’s an annual average.

TOOMEY: I understand.

LEW: Some months...

TOOMEY: It’s uneven.

LEW: ... it’s 50 percent.

TOOMEY: That’s right. (CROSSTALK)

LEW: So the amount that we fall behind in payments is just unthinkable. Congress has to do its job and act.

TOOMEY: And I certainly hope that the president will work with us so that we can avoid this. But, I’m -- I’m -- frankly, I’m shocked that the secretary of the Treasury will not assure the financial markets, American investors and savers, and the millions of people who hold treasuries that they don’t have to worry about the security of their treasuries. I’m extremely disappointed.

LEW: I -- I would refer you back to statements by President Reagan and Secretary Jim Baker, who made the same warnings that I’m making. Because only Congress can act to raise the debt limit. No president has ever been put in a position of having to figure out what bad options...

TOOMEY: OK, I understand. I’m almost out of time.

LEW: ... (inaudible) if Congress doesn’t act.

TOOMEY: On Tuesday, the president said, and I quote, “We plan for every contingency. so, obviously, you know, worst-case scenario, there are things we will try to do,” end quote. Could you tell us about these contingencies?

LEW: Well, you know, Senator, the -- the options are all bad.

TOOMEY: I agree.

LEW: You know, I tried to earlier describe how complicated the federal payment system is. There is no way to make our federal payment system work well to pick and choose what we pay. So we’re gonna be in a place which is uncharted territory. And anyone thinks it works smoothly has...

(CROSSTALK)

LEW: It would not work smoothly. It would be chaos.

TOOMEY: The question is whether the Treasury is prepared to try to minimize disruption.

LEW: Well, obviously, we -- we have looked at many options. There has been, you know, reports indicating things that have been looked at over the years. Nobody’s ever had to put any of these into effect. They’re not tested.

BAUCUS: OK, Senator.

(CROSSTALK)

BAUCUS: Your time has has expired. I’d say -- senators (ph) are very patient. I also note there are four senators left who don’t (ph) ask questions. And if I might ask them, Mr. Secretary, if they can state their questions in 10 seconds each. And don’t -- you won’t have to respond to them.

LEW: I’m happy to...

(CROSSTALK)

BAUCUS: OK, right. So -- just for their questions because we don’t have time, would be Senator Casey.

CASEY: Mr. Secretary, thanks very much for your testimony.

My question relates to social security and Medicare and veterans’ benefits.

Just going to read two lines from a letter that I got from a constituent, talking about her parents: she said, “At 85 and 83, they should not have this uncertainty” -- the uncertainty about the impasse -- “these should be their golden years. It breaks my heart to see my mother saying she cannot sleep and has a stomach ache from the worry about where our country is headed.”

Tell us about the -- the impact of the -- the default when it comes to social security, Medicare and veteran’s benefits.

BAUCUS: Senator, I -- I told the senator -- if I could have (ph) to answer questions because so many senators have to ask.

So, and I appreciate the question.

LEW: I’m happy to follow up at some (ph)...

BAUCUS: OK. Next, Senator Stabenow.

STABENOW: Well, thank you, Mr. Chairman and Mr. Secretary.

I’d just like to ask that we put in the record the complete letter from the National Association of Manufacturers and I would read one sentence: “A default would put upward pressure on interest rates, raising both short and long-term costs of capital and discouraging business investment and job creation in America.”

BAUCUS: Thank you, Senator.

Senator Nelson?

NELSON: 10 seconds. Mr. Secretary...

BAUCUS: (inaudible) NELSON: I’m concerned that you have indicated that we might agree to a short-term extension on the debt ceiling and I think that would be counterproductive; we’d be back in this soup right at -- at the end of that short-term extension.

I commend the president for standing firm. We can’t negotiate over the debt ceiling. National security is another consideration. I’ll put that in the record.

Thank you Mr. Chairman.

BAUCUS: Thank -- thank you, Senator.

Senator Cardin?

CARDIN: Mr. Chairman, thank you.

Secretary Lew, thank you for being here and thank you for giving us -- it’s our responsibility to pass the extension of the debt limit. It’s Congress’ responsibility to do this.

Uncertainty is really hurting this country and we can’t govern from crisis to crisis. So, I strongly support your view that the longer term is what we need here.

My question would be what legal authority do you have to pick and choose? It seems to me that any analogy we use to a company or business that cannot pay its bills, there’s a limit as to the discretion as to how you can make those judgments.

I’d be interested as to the legal authority you have on prioritization.

BAUCUS: Thank you, Senator.

Other senators are not here, obviously, be able to submit...

LEW: I’d be happy to...

BAUCUS: Questions to the secretary...

LEW: (inaudible)

BAUCUS: Secretary, you’ve been very generous with your time. We deeply appreciate it. Thank you very much.

LEW: Thank you, Mr. Chairman.

BAUCUS: Hearing’s adjourned.

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