Chairman Durbin, Ranking Member Collins, members of the Subcommittee, I appreciate the opportunity to testify before you for the first time as Treasury Secretary on the President’s Fiscal Year 2010 Budget request for the Department of the Treasury.

While we see some initial signs of economic improvement and the financial system is beginning to heal, our country faces very substantial economic and financial challenges.

President Obama and his Administration are working to meet these challenges by getting Americans back to work and getting our economy to grow again; by restoring fiscal discipline to ensure a sustained recovery, and by making the long-neglected investments in health care, energy and education needed to enhance America’s global competitiveness and produce more balanced, sustainable growth over the long-term.

Treasury’s Key Priorities

To achieve these goals, we are repairing and reforming our financial system so that it works for, not against, a recovery that serves all Americans.

To restore growth and meet our fiscal goals, we are redesigning and bolstering enforcement of our tax code so that it is both fairer and more efficient.

To advance our interests globally, we are working with other nations to promote economic recovery and financial repair, and to ensure more open markets for U.S. business.

And to protect the country, we are deploying all of the tools at our disposal to exclude terrorists, proliferators, and other illicit actors from the international financial stage, and thereby secure our financial system and combat threats to our security.

The Fiscal Year 2010 Budget that you have before you will allow Treasury to pursue these core missions assigned to the Department by the President and the Congress. The $13.4 billion request includes a $676 million, or 5.3 percent, increase over enacted 2009 levels.

Of this increase, $14 million would go to bolstering the staffs of our Domestic Finance and Tax Policy offices, which are at the epicenter of Administration efforts to support rigorous analysis and implementation of revenue policy and to redesign and improve our tax policies and tax code.

Some $137 million would be devoted to more than doubling our Community Development Financial Institutions (CDFI) Fund to ensure that the benefits of our financial repairs reach beyond our major banks and businesses to help economically distressed communities. These communities were underserved by our financial system even before the current crisis, and have been deeply hurt by the job losses and business failures that the crisis has spawned.

A total of $332 million would be devoted to new Internal Revenue Service (IRS) enforcement efforts, including $128.1 million to add nearly 800 new IRS employees to combat offshore tax evasion and improve compliance with U.S. international tax laws by businesses and high-income individuals. Another $130 million would go to bolster the security of the IRS information technology, improve the efficiency of its business systems and upgrade its fraud detection capabilities.

Although not directly under the jurisdiction of this Subcommittee, our Budget also includes funds to meet our international obligations to help us in mounting a global response to the crisis and in creating mutually reinforcing growth around the world.

As we seek these additional funds to respond to our nation’s troubles, we have cut back on some programs that are either ineffective or that we believe can be safely delayed.

For example, while the Earned Income Tax Credit (EITC) continues to be one of the most effective anti-poverty programs that the Federal government administers, the Advanced EITC, a related program which provides benefits in advance of filing a tax return, has been prone to exceptionally high levels of error and low use by those eligible for it. Accordingly, our Budget proposes to end this latter program for savings next fiscal year of $125 million.

Similarly, even as we seek to increase capital investment for the IRS, our Budget would reduce the Department-wide capital investment account by 65 percent for a savings of $17 million.

The Treasury Budget would reduce the number of international economic attachés from 20 to 16, saving $2 million next fiscal year. It would absorb a portion of our non-pay inflation through more efficient use of contracting and other cutbacks, saving $18 million. It would take advantage of the growth of efficient electronic filing of tax returns to reduce the IRS processing budget by $8 million next fiscal year.

Given we have had control over the budget for fewer than five months, the reductions that I have just described represent a first attempt to do more with less. As we begin work on the Budget for Fiscal Year 2011, Treasury has prepared itself for a more rigorous assessment of its spending.

I have already issued guidance to Treasury senior staff that says, in part: “To afford any new investments, we will have to take new approaches to solving old problems. I expect each bureau and policy office to identify opportunities for innovation that will transform how Treasury fulfills its missions in order to both improve performance and reduce cost.”

In addition, the President has announced his intention to nominate Dan Tangherlini to be our Assistant Secretary for Management and Budget. Consistent with the President’s mandate, I will look to Mr. Tangherlini to scour the Treasury’s budget for efficiencies and cost savings. He comes to the job with an impressive track record of working on budget, management and performance issues with District of Columbia Mayor Adrian Fenty, and I am convinced that he will bring the same results-oriented approach to the federal government.

Repairing and Reforming the Financial System

The President has assigned the Treasury to repair key sectors of our economy so that they help revive growth and produce broadly shared prosperity.

The Treasury has been working to repair and reform every major element of our financial system, and to fill gaps in the system so that it benefits all Americans.

Last month, federal banking supervisors announced results of the stress tests that we asked them to conduct on our 19 largest financial institutions. The aim of these assessments was to ensure that these institutions have sufficient capital buffers to absorb the losses that they could suffer under worse-than-expected economic conditions and continue to make the loans necessary to sustain recovery.

The clarity and transparency provided by the tests has helped improve market confidence in the banks, making it possible for them to collectively raise nearly $90 billion through private equity offerings, bond issuances without government guarantees and sales of business units.

On housing, Treasury is working with HUD to bolster our housing markets by helping to drive down mortgage interest rates and by assisting responsible homeowners to refinance into more affordable mortgages or modify their at-risk loans to avoid preventable foreclosures.

In terms of the non-bank financial sector, Treasury is working to revive critically important securitization markets for both new and old asset-backed securities.

We have begun to boost new consumer and business lending by re-starting the markets for asset-backed securities that financed almost half of all lending in this country before the crisis. There were more securities of this type issued the four months after we launched our effort than in the preceding nine.

Additionally, Treasury is about to join with private investors in seeking to restart the markets for legacy mortgage loans and securities that are now stuck on bank balance sheets, keeping these institutions from making new loans to families and businesses.

As we have made repairs to the financial system, we have understood that repair alone is not enough. We must also reform the system so that it is less prone to crises of the dimensions that we now face.

In the next few weeks, we will outline a comprehensive plan of reform that will include systemic risk regulations to ensure that no large and interconnected firm or market can take on so much risk that its failure could destabilize the entire financial system. The plan calls for bolstering consumer and investor protections. And it will streamline our out-of-date regulatory structure so that our regulatory system matches the size, shape and speed of our modern financial system. Together, these changes will help prevent another crisis of the magnitude that we have just lived through, and give the government new tools to better cope with similar problems should they occur in the future.

In addition to the financial system, Treasury is helping to ensure that the nation has a viable auto industry in the future. We are working with General Motors and Chrysler to make sure these companies make the changes necessary to again prosper. As President Obama has said “we cannot…must not…and will not let our auto industry simply vanish.”

The resources for administering key elements of both our financial and auto repair efforts were authorized by the Emergency Economic Stabilization Act.

These activities are being handled by our Office of Financial Stability (OFS), which is focused on ensuring that TARP funds serve the public purpose of economic and financial stabilization; that they are fulfilling this purpose in ways that protect taxpayers; and that we can provide a clear account to the Congress and the American people about the effectiveness of the funds’ use.

In order to administer TARP and ensure compliance by TARP recipients, OFS has had to quickly assemble a substantial staff. OFS staffing levels, which were at 88 when I arrived in office, had risen to approximately 165 by the end of last month and are expected to rise to 225 by next fiscal year. The office’s budget for next fiscal year will total $262 million, a 6 percent decline from the current fiscal year’s $279 million. The change is largely due to a decline in estimated spending on contracts as part of the program’s initial start-up.

While TARP is proving effective at improving the immediate stability of the financial system, the scope of the issues that this Administration and this Department face extend beyond TARP to include striking the delicate balance between intervention and allowing market participants latitude to operate; devising a new financial regulatory structure for the future; and working through the tough problems of what form our government-sponsored enterprises, Fannie Mae and Freddie Mac, should take as we emerge from this difficult period.

All of these issues fall to Treasury’s Office of Domestic Finance, which, together with OFS, is having to operate on new policy terrain, tackling problems that the country has not faced in generations and for which we have few guideposts in our immediate past.

That is why the workload of the Office Domestic Finance has already expanded greatly, and is all but certain to expand still further. And it is why we are seeking to modestly increase its size and bolster its expertise in several critical areas.

Our Budget requests an additional $8.7 million for the office to add 26 full-time equivalent (FTE) positions to the staff. This represents a 26 percent increase from the office’s current fiscal year staffing of 101.

The additional funds will be used to create two new Deputy Assistant Secretary positions, one for housing finance, small business and consumer issues, and a second for capital markets. These two new officials will lead teams that will perform the economic and institutional research necessary to ensure that we understand all of the policy options in each of these areas and choose the most effective ones for solving our problems.

As we seek additional funds for Treasury, we must also seek them for the front-line institutions that will sustain our economic recovery and ensure that its benefits are broadly shared.

Our Budget would more than double the resources of the Community Development Financial Institutions (CDFI) Fund to $243.6 million. The fund’s mandate is to help low-income, economically distressed communities that were poorly served by our financial system even in economic good times, and – although they had nothing to do with causing current conditions –have been significantly hurt by the economic and financial fallout of the crisis that we now face.

The $136.6 million, or 128 percent increase in funding, would allow this program to support financial institutions in making job-creating investments and in providing access to capital in communities that are often considered too risky for mainstream financial institutions to serve. By targeting lenders and borrowers in these communities, the Fund would help some of our most vulnerable populations weather the crisis and benefit once recovery is underway.

The aim of the fund is to make sure that we provide distressed communities with more than simply government grants and aid.  We must also build the capacity of their local financial institutions to ensure that capital is flowing to homebuyers and businesses so that they can finance their own economic futures. Since its inception in 1994, the fund has directed nearly $1 billion to distressed communities, and allocated $19.5 billion in tax credits through its New Markets Tax Credit program.

Financial institutions funded through the CDFI program make loans to small businesses and micro-enterprises and take equity positions in them.  They provide mortgages to low-income homebuyers, and finance developers of low-income housing and community facilities, such as charter schools, health clinics and child care centers.

One example can be seen right here in the Anacostia neighborhood of Washington, DC. City First Bank – a local CDFI – and Charter Schools Development Corporation partnered to provide a $13.3 million New Markets Tax Credit for the Thurgood Marshall Academy, the city’s first charter school focused on law, serving 360 students in grades nine through twelve and achieving a 100 percent college acceptance rate for its first three graduating classes.

Historically, the CDFI program has been heavily oversubscribed and has had to turn away qualified applicants. For example, in the current fiscal year, the program for CDFI financial and technical assistance awards is budgeted at $55 million, but it expects to receive applications for more than $500 million in funding.

Redesigning the Tax System for Fairness and Efficiency

The President has asked Treasury to redesign and bolster enforcement of our tax code so that it supports growth, sets the stage for our return to a sustainable fiscal path, and accomplishes these goals in a manner that is fair, efficient and supportive of our society’s broadest goals.

To make good on the President’s assignment, our Budget requests a modest increase in funding for Treasury’s Office of Tax Policy and more substantial increases to expand IRS enforcement activities and to improve its information technology.

Treasury has moved quickly in implementing the more than 30 tax provisions of the President’s economic recovery plan. Treasury also has played an integral role in designing the tax provisions of the President’s Fiscal 2010 Budget, and it will play a similar role in implementing these.

The President has made clear that he will not seek any major revenue increases until 2011 when the recovery should be firmly in place. He has, however, been equally clear that once recovery is underway, we must get our fiscal house in order or risk having government borrowing crowd out productive private investment. Treasury and the White House will work with Congress to make the tax changes that are necessary to reduce deficits and to do so in a manner that is fair to all Americans.

As part of our efforts to make sure that the tax system is working for recovery and is operating fairly, we have designed new policies to curb the use of off-shore tax havens, close the international tax gap, remove tax incentives for companies to shift jobs overseas, and replace these incentives with ones that encourage creation of jobs at home.

Our tax work on the recovery plan, the Fiscal Year 2010 Budget, and these international tax issues are just the beginning of an ambitious agenda for this Administration.

On health care, the President has made clear that the road to fiscal discipline and to solvency for Medicare and Social Security runs through overall health care reform. Although much of the cost of the President’s reform plan will be covered by savings from the system, we will need to design programs to cover some of the costs in ways that are fair to all Americans and do not harm the economy. Treasury is deeply involved in this effort and in the related work to expand coverage and improve our health care system in other important ways.

On retirement and economic security, Treasury and, in particular, the Office of Tax Policy, is taking the lead in developing and actively working with Congress to flesh out the initiatives proposed in the President’s budget to help enhance retirement security and savings for the half of working Americans who have no retirement provisions beyond Social Security. These proposals would make it easier for people to save for their own retirement, either through their workplaces or on their own, and would move us toward universal retirement savings coverage.

On climate change, Treasury is already working closely with Congress to design the auction mechanisms that will be needed to implement the Administration’s greenhouse gas cap-and-trade program.

Our Office of Tax Policy has been deeply involved in all of these issues from the outset of the Administration. Like our Office of Domestic Finance, its workload already has substantially increased and is certain to grow as the health reform, retirement security and climate change debates get underway in earnest.

At the moment, the Office of Tax Policy’s career staff includes 30 lawyers and 44 economists as well as support staff for an overall staffing level of 93. This is lower than its usual complement of over 100 professionals.

Our Fiscal Year 2010 Budget would increase the office budget by $4.9 million to add 15 full-time equivalent (FTE) positions in order to increase overall staffing to 108, and would therefore represent a return to historical norms. The additional staff is needed to perform analysis and revenue estimates for new policy proposals, conduct research for, among other things, congressionally mandated studies, and develop regulations and guidance for new legislation.

The vast majority of the new funds that we request in this Budget are for improving the enforcement efforts and the information technology of the IRS.

As I have said, $332 million would go to new IRS enforcement efforts, including $128.1 million to improve international tax compliance. The balance of these funds would be used to support three critical programs: 755 employees to increase examinations of tax returns for businesses and high-income individuals; 300 employees to expand the IRS document matching program, which compares tax returns to other forms such as W-2s and 1099s; and an additional 491 employees to improve collection operations and build two new IRS automated collection center sites.

Turning to IT, our Budget requests a $90 million increase in funding to protect taxpayers’ personal records from the increasing number and sophistication of Internet-based attacks. With these funds, the agency will deploy state-of-the-art, automated tools to improve record access management, risk assessment and system auditing. This effort would address concerns noted in the past by both the Government Accountability Office and the Treasury Inspector General for Tax Administration.

Our Budget also requests an additional $18 million for systems to help the IRS return review program detect noncompliance and fraudulent refunds, and a $22 million increase to continue modernizing the agency’s core taxpayer account database and modernized the e-File web-based platform.

Reengaging with the World on Economic Issues

The President assigned Treasury to ensure that this country reengages with the world, not just on issues of war and peace, but also on the current crisis, and on issues crucial to our common economic futures.

This is a global crisis. Recovery here depends on recovery abroad. We are working closely with other major economies to put in place the fiscal stimulus and make the financial repairs necessary to ensure U.S. and global recovery.

The U.S. is seeking to mobilize the financial resources of the better-off nations to help the emerging and developing economies that have been especially hard-hit by this crisis. We are doing this for more than simply humanitarian reasons; as recently as last fall, these economies accounted for fully 42 percent of all U.S. exports.

Last month, the President and leaders of the other G-20 nations agreed on the need to make more than $1 trillion in financial resources available to support global growth and trade.

Those funds include our commitment of up to $100 billion for an expanded New Arrangements to Borrow, a permanent back-up mechanism that provides the International Monetary Fund with supplemental resources to help emerging markets and developing nations weather the crisis.

As part of our effort to rekindle global growth for the sake of our own recovery, we are seeking to meet our past and present financial commitments to the multilateral development banks that help emerging and developing countries.

Although the funds to do this are not directly within the purview of your Subcommittee, I mention them to illustrate how Treasury’s entire budget is tailored to let us fulfill the missions that the President has set out for us. Our budget request includes $2.5 billion for international programs, most of which would serve to meet our past and present commitments to the multilateral development banks.

Our financial reform effort in the United States must be matched by similarly strong efforts elsewhere in order to succeed.

Conclusion

Before I end, let me say a word about the Department’s staff.  I have the honor of leading a team of smart and dedicated individuals who are working to make our government more effective and our society fairer, who are following a long tradition of debating policies fearlessly on their merits, doing what is right and not what is expedient, and drawing on the best ideas and expertise that are available. They are performing an incalculable service to our country in these challenging times, and I am immensely grateful to them.

The Department of the Treasury is responsible for promoting the nation’s economic prosperity and protecting its financial security. We advance our interests around the world through the strength not only of our economy but of our ideas.

This President and Treasury have already begun the hard work of recovery and reform. Our Fiscal Year 2010 Budget will allow us to pursue these critical goals, and deliver the balanced and sustainable growth that the American people seek and deserve.

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Current economic and financial conditions and the federal budget

Before the Committee on the Budget, U.S. House of Representatives, Washington, D.C.

June 3, 2009

Chairman Spratt, Ranking Member Ryan, and other members of the Committee, I am pleased to have this opportunity to offer my views on current economic and financial conditions and on issues pertaining to the federal budget.

Economic Developments and Outlook
The U.S. economy has contracted sharply since last fall, with real gross domestic product (GDP) having dropped at an average annual rate of about 6 percent during the fourth quarter of 2008 and the first quarter of this year. Among the enormous costs of the downturn is the loss of nearly 6 million jobs since the beginning of 2008. The most recent information on the labor market–the number of new and continuing claims for unemployment insurance through late May–suggests that sizable job losses and further increases in unemployment are likely over the next few months.

However, the recent data also suggest that the pace of economic contraction may be slowing. Notably, consumer spending, which dropped sharply in the second half of last year, has been roughly flat since the turn of the year, and consumer sentiment has improved. In coming months, households’ spending power will be boosted by the fiscal stimulus program. Nonetheless, a number of factors are likely to continue to weigh on consumer spending, among them the weak labor market, the declines in equity and housing wealth that households have experienced over the past two years, and still-tight credit conditions.

Activity in the housing market, after a long period of decline, has also shown some signs of bottoming. Sales of existing homes have been fairly stable since late last year, and sales of new homes seem to have flattened out in the past couple of monthly readings, though both remain at depressed levels. Meanwhile, construction of new homes has been sufficiently restrained to allow the backlog of unsold new homes to decline–a precondition for any recovery in homebuilding.

Businesses remain very cautious and continue to reduce their workforces and capital investments. On a more positive note, firms are making progress in shedding the unwanted inventories that they accumulated following last fall’s sharp downturn in sales. The Commerce Department estimates that the pace of inventory liquidation quickened in the first quarter, accounting for a sizable portion of the reported decline in real GDP in that period. As inventory stocks move into better alignment with sales, firms should become more willing to increase production.

We continue to expect overall economic activity to bottom out, and then to turn up later this year. Our assessments that consumer spending and housing demand will stabilize and that the pace of inventory liquidation will slow are key building blocks of that forecast. Final demand should also be supported by fiscal and monetary stimulus, and U.S. exports may benefit if recent signs of stabilization in foreign economic activity prove accurate. An important caveat is that our forecast also assumes continuing gradual repair of the financial system and an associated improvement in credit conditions; a relapse in the financial sector would be a significant drag on economic activity and could cause the incipient recovery to stall. I will provide a brief update on financial markets in a moment.

Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further. We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly. In particular, businesses are likely to be cautious about hiring, and the unemployment rate is likely to rise for a time, even after economic growth resumes.

In this environment, we anticipate that inflation will remain low. The slack in resource utilization remains sizable, and, notwithstanding recent increases in the prices of oil and other commodities, cost pressures generally remain subdued. As a consequence, inflation is likely to move down some over the next year relative to its pace in 2008. That said, improving economic conditions and stable inflation expectations should limit further declines in inflation.

Conditions in Financial Markets
Conditions in a number of financial markets have improved since earlier this year, likely reflecting both policy actions taken by the Federal Reserve and other agencies as well as the somewhat better economic outlook. Nevertheless, financial markets and financial institutions remain under stress, and low asset prices and tight credit conditions continue to restrain economic activity.

Among the markets where functioning has improved recently are those for short-term funding, including the interbank lending markets and the commercial paper market. Risk spreads in those markets appear to have moderated, and more lending is taking place at longer maturities. The better performance of short-term funding markets in part reflects the support afforded by Federal Reserve lending programs. It is encouraging that the private sector’s reliance on the Fed’s programs has declined as market stresses have eased, an outcome that was one of our key objectives when we designed our interventions. The issuance of asset-backed securities (ABS) backed by credit card, auto, and student loans has also picked up this spring, and ABS funding rates have declined, developments supported by the availability of the Federal Reserve’s Term Asset-Backed Securities Loan Facility as a market backstop.

In markets for longer-term credit, bond issuance by nonfinancial firms has been relatively strong recently, and spreads between Treasury yields and rates paid by corporate borrowers have narrowed some, though they remain wide. Mortgage rates and spreads have also been reduced by the Federal Reserve’s program of purchasing agency debt and agency mortgage-backed securities. However, in recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen. These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows, and technical factors related to the hedging of mortgage holdings.

As you know, last month, the federal bank regulatory agencies released the results of the Supervisory Capital Assessment Program (SCAP). The purpose of the exercise was to determine, for each of the 19 U.S.-owned bank holding companies with assets exceeding $100 billion, a capital buffer sufficient for them to remain strongly capitalized and able to lend to creditworthy borrowers even if economic conditions over the next two years turn out to be worse than we currently expect. According to the findings of the SCAP exercise, under the more adverse economic outlook, losses at the 19 bank holding companies would total an estimated $600 billion during 2009 and 2010. After taking account of potential resources to absorb those losses, including expected revenues, reserves, and existing capital cushions, we determined that 10 of the 19 institutions should raise, collectively, additional common equity of $75 billion.

Each of the 10 bank holding companies requiring an additional buffer has committed to raise this capital by November 9. We are in discussions with these firms on their capital plans, which are due by June 8. Even in advance of those plans being approved, the 10 firms have among them already raised more than $36 billion of new common equity, with a number of their offerings of common shares being over-subscribed. In addition, these firms have announced actions that would generate up to an additional $12 billon of common equity. We expect further announcements shortly as their capital plans are finalized and submitted to supervisors. The substantial progress these firms have made in meeting their required capital buffers, and their success in raising private capital, suggests that investors are gaining greater confidence in the banking system.

Fiscal Policy in the Current Economic and Financial Environment
Let me now turn to fiscal matters. As you are well aware, in February of this year, the Congress passed the American Recovery and Reinvestment Act, or ARRA, a major fiscal package aimed at strengthening near-term economic activity. The package included personal tax cuts and increases in transfer payments intended to stimulate household spending, incentives for business investment, increases in federal purchases, and federal grants for state and local governments.

Predicting the effects of these fiscal actions on economic activity is difficult, especially in light of the unusual economic circumstances that we face. For example, households confronted with declining incomes and limited access to credit might be expected to spend most of their tax cuts; then again, heightened economic uncertainties and the desire to increase precautionary saving or pay down debt might reduce households’ propensity to spend. Likewise, it is difficult to judge how quickly funds dedicated to infrastructure needs and other longer-term projects will be spent and how large any follow-on effects will be. The Congressional Budget Office (CBO) has constructed a range of estimates of the effects of the stimulus package on real GDP and employment that appropriately reflects these uncertainties. According to the CBO’s estimates, by the end of 2010, the stimulus package could boost the level of real GDP between about 1 percent and a little more than 3 percent and the level of employment by between roughly 1 million and 3-1/2 million jobs.

The increases in spending and reductions in taxes associated with the fiscal package and the financial stabilization program, along with the losses in revenues and increases in income-support payments associated with the weak economy, will widen the federal budget deficit substantially this year. The Administration recently submitted a proposed budget that projects the federal deficit to reach about $1.8 trillion this fiscal year before declining to $1.3 trillion in 2010 and roughly $900 billion in 2011. As a consequence of this elevated level of borrowing, the ratio of federal debt held by the public to nominal GDP is likely to move up from about 40 percent before the onset of the financial crisis to about 70 percent in 2011. These developments would leave the debt-to-GDP ratio at its highest level since the early 1950s, the years following the massive debt buildup during World War II.

Certainly, our economy and financial markets face extraordinary near-term challenges, and strong and timely actions to respond to those challenges are necessary and appropriate. Nevertheless, even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance. Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby-boom generation and continued increases in medical costs. The recent projections from the Social Security and Medicare trustees show that, in the absence of programmatic changes, Social Security and Medicare outlays will together increase from about 8-1/2 percent of GDP today to 10 percent by 2020 and 12-1/2 percent by 2030. With the ratio of debt to GDP already elevated, we will not be able to continue borrowing indefinitely to meet these demands.

Addressing the country’s fiscal problems will require a willingness to make difficult choices. In the end, the fundamental decision that the Congress, the Administration, and the American people must confront is how large a share of the nation’s economic resources to devote to federal government programs, including entitlement programs. Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run. In particular, over the longer term, achieving fiscal sustainability–defined, for example, as a situation in which the ratios of government debt and interest payments to GDP are stable or declining, and tax rates are not so high as to impede economic growth–requires that spending and budget deficits be well controlled.

Clearly, the Congress and the Administration face formidable near-term challenges that must be addressed. But those near-term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances. Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.

Federal Reserve Transparency
Let me close today with an update on the Federal Reserve’s initiatives to enhance the transparency of our credit and liquidity programs. As I noted last month in my testimony before the Joint Economic Committee, I asked Vice Chairman Kohn to lead a review of our disclosure policies, with the goal of increasing the range of information that we make available to the public.¹ That group has made significant progress, and we expect to begin publishing soon a monthly report on the Fed’s balance sheet and lending programs that will summarize and discuss recent developments and provide considerable new information concerning the number of borrowers at our various facilities, the concentration of borrowing, and the collateral pledged. In addition, the reports will provide quarterly updates of key elements of the Federal Reserve’s annual financial statements, including information regarding the System Open Market Account portfolio, our loan programs, and the special purpose vehicles that are consolidated on the balance sheet of the Federal Reserve Bank of New York. We hope that this information will be helpful to the Congress and others with an interest in the Federal Reserve’s actions to address the financial crisis and the economic downturn. We will continue to look for opportunities to broaden the scope of the information and supporting analysis that we provide to the public.

With the U.S. economy performing worse than hoped, revised White House figures point to deepening budget deficits, with the government borrowing 50 cents for every dollar it spends this year.

The deficit for the current budget year will rise by $89 billion to above $1.8 trillion — about four times the record set just last year. The unprecedented red ink flows from the deep recession, the Wall Street bailout, the cost of President Barack Obama’s economic stimulus bill, as well as a structural imbalance between what the government spends and what it takes in.

As the economy performs worse than expected, the deficit for the 2010 budget year beginning in October will worsen by $87 billion to $1.3 trillion, the White House says. The deterioration reflects lower tax revenues and higher costs for bank failures, unemployment benefits and food stamps.

For the current year, the government would borrow almost half the money it takes to run the government under the administration’s plan. In one of the few positive signs, the actual 2009 deficit is likely to be $250 billion less than predicted because Congress is unlikely to provide another $250 billion in financial bailout money.

MR. GREGORY:  Senator McCain, welcome back to MEET THE PRESS.

SEN. JOHN McCAIN (R-AZ):  Thanks, David.

MR. GREGORY:  Very, very nice to have you here.

SEN. McCAIN:  Nice to be back.

MR. GREGORY:  You just heard Secretary Geithner.  What’s your level of confidence in him?

SEN. McCAIN:  Well, I have some confidence in him.  I think he’s very smart. And I hope that this new plan–which, by the way, I thought was well-described…

MR. GREGORY:  Good.

SEN. McCAIN:  …earlier–will work.  My preference would have been to go in and, you know, with stress testing these banks and go ahead and sell off the–take the toxic assets and sell them off, and then let the good asset banks continue.  But this proposal, I hope it works.  We all want it to work. But what I’m most worried about is laying a debt on future generations of Americans.  The, the multitrillion-dollar debts, unprecedented debts that we are–we are committing generational theft.  I’m confident that the economy will recover.  The question is after it recovers, what kind of a debt are we going to carry which will cause us to print money, inflation, and go through a worse wringing out than we went in the late 1970s and early ’80s?

MR. GREGORY:  And I want to ask you specifically about the debt in just a moment.

SEN. McCAIN:  Mm-hmm.

MR. GREGORY:  But more generally, in terms of fixing of the economy, fixing the financial industry, if you look at all of the programs that the government has now put in place, do you think they got the prescription right?

SEN. McCAIN:  Well, I hope they do with this plan.  I think the markets reacted well.  And I’m not an expert, but it seems to me that it gave us a little optimism that there was a plan that people could understand, that was coherent, that might lead us out of this mess that we are in.  So there was a great deal of incoherency for a long time, beginning with Secretary Paulson saying the TARP money would be used to…

MR. GREGORY:  Mm-hmm.

SEN. McCAIN:  …on the home loan mortgage crisis, and then switch to financial institutions.  And it seemed that every few days there was a target du jour, and that obviously eroded dramatically any confidence that Americans might have.

MR. GREGORY:  Do you think that the banks will need more government money, and would you be willing to support that?

SEN. McCAIN:  I would not unless I certainly saw a way that it would not be used the–as the first TARP money was.  I think that’s the general opinion throughout the Congress on both sides of the aisle.  There’s got to be more transparency.  You didn’t ask him, but the secretary of Treasury I understand will not reveal is how much money is left in TARP 1.  Don’t you think the American people should know that?  There–we still don’t have the transparency and oversight.

One other thing we need, we do need a select committee in Congress to look at what happened so people can–this train hit them without any knowledge.  They still don’t know what happened.  Why did it happen?  So then they would have some more confidence on, in what actions we might take in the future to prevent it from happening again.

MR. GREGORY:  And what is your take on the anger, the populist anger in the country?  Do you think it’s justified, or do you think it’s been overblown? Has the president showed leadership in standing up to it?

SEN. McCAIN:  I think the president was trying to walk a careful line between reflecting public anger–which is all justified.  It’s all justified, ranging from the extreme of Madoff to just outright greed and people who knew better. So I think he was trying to walk a fine line between rechanneling and reflecting anger, at the same time not bashing people that are innocent.  I think that, that what we need to do here is understand, too, that sometimes Congress overreacts.  I share all that anger.  My constituents share that anger.  It’s, it’s real, it’s palpable and it’s justified.  But bills of attainder, basically going back and taxing people for what they’ve already by contract earned or are going to earn, I think is a dangerous course of action as well.

MR. GREGORY:  Let me ask you for your assessment of your former opponent in the presidential race and now president, Obama.  This is what you said on election night.  Let’s watch.

(Videotape, November 4, 2008)

SEN. McCAIN:  I urge all Americans who supported me to join me in not just congratulating him, but offering our next president our good will and earnest effort to find ways to come together, to find the necessary compromises to bridge our differences.

(End videotape)

MR. GREGORY:  Have Republicans heeded that call, and do you think President Obama has heeded that call?

SEN. McCAIN:  I think neither side, perhaps, has done it as much as maybe we should.  But you establish an environment.  Really, bipartisanship is sitting down across a table from each other and negotiating, recognizing there’s got to be compromise.  And in all due respect to the incoming administration, the speaker said, “We won.  We wrote the bill.” There was never any serious negotiations over the stimulus package, over the omnibus spending bill.  Now there doesn’t seem to be any on the budget.  Those are all party line votes. There’s not the negotiations.  And I–look, I’ll take blame on our side for maybe not being more forthcoming, but really the president does beat the drum and sets the pace.  And so far there has not been not an instance where they sat down across the table and said, “OK, what do you want?  What are you demanding here?  What do you think is best?” And including some of those concerns as we come–as we move forward with really large, encompassing packages about the future of this country.

MR. GREGORY:  Instead, the administration has…

SEN. McCAIN:  I–could I say–could I just also say, though…

MR. GREGORY:  Yes.

SEN. McCAIN:  …on national security policy I think the president has done the right thing on Iraq.  We may get to it.  I think his proposal for Afghanistan, I might modify it a little, is good.  So I, I think in the area of national security policy there has been some working together.

MR. GREGORY:  And yet the White House says the Republicans have become the party of no.  Is that fair?

SEN. McCAIN:  Well, we did have an alternative to the stimulus package, we had an alternative to–on the omnibus bill.  We will have an alternative budget.  And so the–I, I understand the White House saying that.  But the White House, in order to have legitimacy to that charge, has got to give me one example where on a major issue we’ve sat across a table negotiating, each putting forth their proposals and reaching a compromise.  As far as I can tell, on any domestic issue that hasn’t happened.

MR. GREGORY:  Has the president been true to his word to change the way Washington operates?

SEN. McCAIN:  I think he’s trying.  I want to give him credit for trying.  I think this is early in his administration.  I don’t think we should make judgments.  There’s no doubt this president has as great a challenges as any president ever has in the history of this country, certainly amongst the top three or four.  So let’s continue to work to, to try to make him succeed.  I believe the role of loyal opposition is loyal to the country, yet opposition where we disagree on principles and philosophy.  That makes for vigorous debate.  Could that debate be more respectful?  Yes.

MR. GREGORY:  Mm-hmm.  Earlier this month you took to the floor on that spending bill over earmarks, and you were quite upset about it.  This is what you said.

(Videotape, March 2, 2009)

SEN. McCAIN:  I just went through a campaign, Mr. President, where both candidates promised change in Washington; promised change from the wasteful, disgraceful, corrupting practice of earmark, pork-barrel spending.

So what are we doing here?  Not only business as usual, but an outrageous insult to the American people.

(End videotape)

MR. GREGORY:  You made it very clear, in that instance the president had not been true to his word.

SEN. McCAIN:  The president said he’d go line by line over any appropriations bill and get rid of those that are unnecessary.  All he had to do was veto that bill, send it back and say, “No more earmarks.  None of this stuff now while the American people can’t keep their jobs, can’t–don’t have health care, all, all the challenges we’re facing.” One point seven million dollars for pig odor research, on and on and on.  But the practice–the reason why I sounded as upset and I am as upset, because it’s not just wasteful spending, it’s not everything I just said, it’s also corruption.  A senior staff member of the Appropriations Committee just pled guilty in federal court.  A lobbying outfit was shut down and the FBI investigated it.  I mean, there’s former members of Congress in federal prison.  And we need it now, we need the confidence and trust of the American people as never before.  Instead, on this earmarking, pork-barrel spending, it’s business as usual.  And someone will come on here and say, “It’s only a small amount of money, only a few billion dollars.” I just don’t buy that and I don’t think Americans do, either.

MR. GREGORY:  On the economy, I don’t have to remind you, during the campaign you said, as this financial crisis was really unraveling, as the economy was taking a dive, that the fundamentals of the economy were strong.  You were criticized as being out of it, not getting it, not understanding the economy. And yet just a couple of weeks ago this was the president in the Oval Office. Watch.

(Videotape, March 13, 2009)

PRES. OBAMA:  If we are keeping focused on all the fundamentally sound aspects of our economy, then we’re going to get through this.  And I’m very confident about that.

(End videotape)

MR. GREGORY:  What did you think when you saw that?

SEN. McCAIN:  I think we’re in agreement.  I think what the president is saying now, and it’s needed to be said to the American people, that we have the best workers, we’re the most innovative, we’re the most productive.  We still have the fundamentals of a very strong economy.  And we need some confidence to get, to get through this.  We need–that’s part of, of the recovery.  So I’m glad we’re in agreement.

MR. GREGORY:  In the, the campaign, you think that criticism was unfair?

SEN. McCAIN:  Life isn’t fair.  We all know that.

MR. GREGORY:  Let’s move on to the budget and the deficit picture that you referenced just a moment ago.  The Washington Examiner reported this this week:  “Last week in a little-noticed conference call featuring Budget Director Peter Orszag…[Orszag was asked:] Are those deficits sustainable? Relenting, Orszag said such deficits, in the range of 5 percent of the Gross Domestic Product, `would lead to rising debt-to-GDP ratios in a manner that would ultimately not be sustainable.’ The simple version of that is:  If the Congressional Budget Office projections are correct, we’re headed for hell in a handbasket.” How concerned are you that, with the goals the administration has for spending on major programs, they’re going to have to raise taxes?

SEN. McCAIN:  Well, that’s always the inevitable result of increasing spending and increasing the size of government.  They’ve earmarked $634 billion for cap and trade; by the way, a betrayal of everything I’ve ever believed in about cap and trade, which I’m a supporter of.  They, they have earmarked or budgeted for hundreds of billions of dollars in increases in spending in health care to bring down the cost of health care.  So my great worry, my great worry is the trillions.  The $10 trillion we already owe, the $1 trillion or $2 trillion that the Chinese now own.  The Chinese comments about a world currency and their complaints about our fiscal policies concern me.  The–you know, there’s only one thing worse than, than the Chinese owning a lot of American debt, and that is Chinese stop buying American debt.

MR. GREGORY:  Is that a real fear in your mind?

SEN. McCAIN:  Oh, I think it’s of a concern.  I don’t think in the short term.  But we’ve got to get our fiscal house in order.  We were talking about the party of saying no.  Our proposal on the stimulus package was once this country reaches a 2 percent increase in GDP, inflation adjusted, then we’d be on an automatic spending reduction path.  We’ve got to get the spending under control.  And the old line about deficits as far as the eye can see is, is now so large that it staggers the imagination.  And it can’t continue.  No country can continue to do this.

MR. GREGORY:  During his press conference on Tuesday, the president pushed back a bit.

SEN. McCAIN:  Mm-hmm.

MR. GREGORY:  This is what he said.

(Videotape, Tuesday)

PRES. OBAMA:  I suspect that some of those Republican critics have a short memory.  Because as I recall, I’m inheriting a $1.3 trillion deficit, annual deficit from them.  That would be point number one.

Now, none of us know exactly what’s going to happen six or eight or 10 years from now.  Here’s what I do know.  If we don’t tackle energy, if we don’t improve our education system, if we don’t drive down the costs of health care, if we’re not making serious investments in science and technology and our infrastructure, then we won’t grow 2.6 percent, we won’t grow 2.2 percent.  We won’t grow.

(End videotape)

MR. GREGORY:  The response?

SEN. McCAIN:  Well, first of all, let me say he was inheriting about half of what he described until we added the spending.  Second of all, no…

MR. GREGORY:  This new round of spending from, from last year.

SEN. McCAIN:  Yeah.  No, no nation can spend this way and get out of it without debasing the currency and us returning to a period that we had in the late ’70s and the early ’80s where we had inflation, a high unemployment and higher taxes, because it, it–you can’t do it.  And so I hope that the president’s next objective will be to work on this deficit.

MR. GREGORY:  Do you think that Republicans should provide a detailed budget alternative?

SEN. McCAIN:  Yes.

MR. GREGORY:  With numbers?

SEN. McCAIN:  Yes.

MR. GREGORY:  Will that happen in the Senate?

SEN. McCAIN:  We’re working on it, working very hard on it.

MR. GREGORY:  And the, the key elements of it would be what?

SEN. McCAIN:  Well, obviously less spending, obviously more restraints, obviously not having $630 billion for “revenues from cap and trade.” By the way, that’s cap and tax, that’s not cap and trade.  The other spending restraint measures that would–that have to be taken.  We’ll, we’ll–we’re working on it very hard.

MR. GREGORY:  Let me turn to the issue of Afghanistan.  The president has ordered 17,000 additional forces to go to Afghanistan and announced on Friday 4,000 additional, so a total of 21,000.  Those 4,000 additional would specifically help police and Afghan forces.  This is the threat that the president described on Friday.

(Videotape, Friday)

PRES. OBAMA:  The situation is increasingly perilous.  Multiple intelligence estimates have warned that al-Qaeda is actively planning attacks on the United States homeland from its safe haven in Pakistan.  And if the Afghan government falls to the Taliban or allows al-Qaeda to go unchallenged, that country will again be a base for terrorists who want to kill as many of our people as they possibly can.

(End videotape)

MR. GREGORY:  Does this strategy have it right when it comes to preventing that sort of outcome?

SEN. McCAIN:  I believe so.  As you know, and is well-known inside the Beltway in this town, there was a big debate in the White House over–and the administration–over a minimalist approach, send a few more troops, kill some bad guys and then get out as quick as you can.  I think this–the outlines of this proposal are good.  The best way to get out of Afghanistan fast is people to think we’re staying.  We have to more than double the size of the Afghan army.  We have to–I, I would have announced that 10,000 additional that have been requested would have been sent.  There’s several other changes.

MR. GREGORY:  You think more troops are necessary, as you did in Iraq.

SEN. McCAIN:  I know they are.  I know they are.  And the main thing I would have done in that speech, I’m sorry to say, tell the American people it’s going to be long and hard and tough.  And as these additional troops come in and we move into the south, which we do not have control of, the southern part of Afghanistan, there’s going to be an increase in casualties.  You’ve got to prepare the American people for a significant expenditure of American blood and treasure.  I think the president laid out the threat very well.

MR. GREGORY:  How do you define victory in Afghanistan?

SEN. McCAIN:  The same way as in Iraq.  You have a governing place where al-Qaeda and other terrorist organizations cannot base attacks on the United States and other–and our allies.  You have a government that functions ineffectively, but–I mean, with some effect.  You have an economy that’s growing.  You have normal trappings of emerging democracies as they move forward the difficult path towards a free and prosperous nation.  And this is complicated by Pakistan.

MR. GREGORY:  Mm-hmm.

SEN. McCAIN:  On the issue of Pakistan, we have to have a policy that’s oriented to Pakistan, not Afghanistan.  Pakistan’s a nuclear-armed country. It’s a huge country.  It’s an important country no matter what.  And we can–we need to work with Pakistan as much as possible, cooperate in those border areas in the problems and issues we all know about.  But the fact that we may not get as much help from Pakistan as we want because of their internal dynamics does not mean, necessarily, we don’t achieve success in Afghanistan. It does not mean that.  It mean–we can still succeed in Afghanistan and still have some of the difficulties that have in Pakistan.

MR. GREGORY:  It’s been suggested that the Taliban, which is now reconstituting itself primarily in Pakistan…

SEN. McCAIN:  Yes.

MR. GREGORY:  …to launch attacks into Afghanistan, that one of the ways to deal with them is to start negotiating with them…

SEN. McCAIN:  Mm-hmm.

MR. GREGORY:  …with those elements who are not as hard-core as, as other elements.  The vice president suggested this, the president alluded to this and Hamid Karzai is saying that that should be done.

SEN. McCAIN:  Mm-hmm.

MR. GREGORY:  Is that the smart thing to do?

SEN. McCAIN:  Well, it’s a smart thing to do as long as you–as these people believe that you’re not leaving and that you are not abandoning your goals as articulated by the president.  And by the way, we have problems with–in, in Iraq, and still do from Iran, from Syria.  And we didn’t invade those countries.  We were, we were able to achieve a strategy of success with those problems remaining.  And there’s no direct analogies.  There’s always difference in circumstances.  But I believe that we can succeed.  And the issue of Pakistan is vital not only because of Afghanistan, but because Pakistan is a nuclear-armed nation we–with tensions with India, with all of the, the, the problems with democracy and corruption that they have there as well.  I think that Karzai’s comments about the president’s policy can be helpful.

MR. GREGORY:  I want to move on to a couple of other topics, including one that hits very close to home for you as an Arizona senator, and that’s this drug violence on the border with Mexico.  What is your assessment of the threat, and what should the United States be doing about it?

SEN. McCAIN:  I think it’s an existential threat to the government of Mexico. I applaud President Calderon.  He is the first president of Mexico to really take on the drug cartels.  The corruption level is very high there.  The violence will spill over into the United States of America.  It already has to some small degree.  The Merida Initiative of working and helping the Mexican government and law enforcement has been succeeding, but it’s a huge problem. It is–my hometown of Phoenix, Arizona, is now the kidnapping capital.  That’s got all to do with the drug cartels.  These coyotes, these smugglers of illegal immigrants.  And it, it argues for us to work as closely as we can with the Mexicans, and that job is to secure our borders.

MR. GREGORY:  Does that mean U.S. troops if necessary, National Guard troops?  What?

SEN. McCAIN:  Both the, both the governor of Texas and the governor of Arizona have asked for National Guard troops on the border.  I think we need them.

MR. GREGORY:  And what would they do?

SEN. McCAIN:  I think they would help with enforcement.  We simply don’t have enough now of boots on the ground.  I think they would help with the enforcement.  And obviously that would require additional training, but we could give it to them.

MR. GREGORY:  I want to, in our couple minutes left, ask you about, as you look back on your 2008 campaign and think about the Republican Party, the future of the party.  Mike Murphy, who of course worked for you in 2000 as a Republican strategist…

SEN. McCAIN:  Mm-hmm.

MR. GREGORY:  …was on the program on March 1st, and he talked about what has to happen for the party.  Listen to this.

(Videotape, March 1, 2009)

MR. MIKE MURPHY:  At the end of the day, here’s the one statistic we all got to remember:  The country’s changing.  Ronald Reagan won in 1980 with 51 percent of the vote.  We all worship Ronald Reagan.  But if that election had been held with the current demographics of America today, Ronald Reagan would have gotten 47 percent of the vote.  The math is changing.  Anglo vote’s 74 percent now, not 89.  And if we don’t modernize conservatism, we’re going to have a party of 25 percent of the vote going to Limbaugh rallies, enjoying every, every applause line, ripping the furniture up.  We’re going to be in permanent minority status.

(End videotape)

MR. GREGORY:  Given that, assuming you agree, how does conservatism modernize itself?  How does the party get back to power?

SEN. McCAIN:  The party of ideas, party of inclusiveness, outreach to other ethnic aspects of the American electorate; in my part of the country especially, Hispanic voters.  We have to recruit and elect Hispanics to office.  We have to welcome new ideas.  And there are–you know, a lot of people complain about divisions within the Republican Party.  That’s good right now.  Let’s let a thousand flowers bloom.  Let’s have different clashes of ideas, sharing the same principles and goals.  Look, if we were having this show in 1982, Republican Party was dead.  1994, the Democratic Party was dead. Right now–there’s, there’s a great resilience in American politics, and I have–I’m very optimistic about the future of the Republican Party if we do the right things.

MR. GREGORY:  Speaking about the Hispanic vote, would you like to work on immigration policy with this president?

SEN. McCAIN:  At any time I stand ready, but the president has to lead.  The, the administration has to lead with a proposal.

MR. GREGORY:  Do you think they have that proposal, want to do that?

SEN. McCAIN:  They have not come forward with one yet.  They said that they are going to–I understand the president met with the Hispanic Caucus and he said he would have some forums and, and other things.

MR. GREGORY:  Right.

SEN. McCAIN:  But they have not come forward with a proposal.

MR. GREGORY:  In terms of future leaders of the Republican Party, would you like to see Sarah Palin become president?

SEN. McCAIN:  I’d like to see her compete.  I think we’ve got some very good candidates:  Jon Huntsman and–the problem when I run down these names, I always leave, leave out a, a name–Bobby Jindal, Tim Pawlenty.  There’s, there’s so many.  There’s a lot of good, fresh talent out there.

MR. GREGORY:  But would you support Palin?

SEN. McCAIN:  Oh, I’d have to see who the candidates are and, and what the situation is at the time.  But have no doubt of my respect, admiration and love for Sarah and her family.

MR. GREGORY:  This is your 54th appearance on MEET THE PRESS.  Now, I know you’re a competitive guy.  Bob Dole still holds the record at 63.  And so we’ve been doing the calculations here.  We think we can make this up, maybe within a year’s time.

SEN. McCAIN:  I’d love…

MR. GREGORY:  If you’re game for that.

SEN. McCAIN:  I’d love to try.  Thank you, David.

MR. GREGORY:  Senator McCain, thank you very much for being here.

A budget alternative released today by House Republicans, and reportedly primarily authored by Pence, shows just how little the once formidable GOP has to offer in the public policy arena – and how even once thoughtful conservatives such as Pence are flailing about, adrift.

The major Republican problem is that the current slate of emergencies facing the country – financial crisis, recession, Iraq, Afghanistan – is of their doing.  Granted, the financial crisis finds its roots in Clinton era permissiveness regarding Wall Street and the traditional roles of bankers, insurers and brokers.  But let’s not forget the greatest Republican icon of the once booming economy, Alan Greenspan.  Let’s not also forget that for several years, as Wall Street piled excess upon excess, Republicans controlled both houses of Congress and the White House.

Recent polling shows Americans still put these problems at the feet of Republicans.  What’s more, the Wall Street Journal-NBC News poll from March 3, shows most Americans believe Republican efforts against President Barack Obama’s agenda are more for political gain than for standing on principle. Today’s Republican plan, released this morning, became a blueprint by the end of the day.  Why? Because it doesn’t even answer the basics, like where will the deficit be down the road.

Glenn Thrush over at Politico has a great post today about the Republican infighting over the budget and Pence and Minority Leader John Boehner’s rush to make a political statement rather than offer a real alternative.  In their rush, they seem to have stepped all over fellow Republican leaders Eric Cantor’s and Paul Ryan’s efforts to build a real alternative plan.

If this sort of thing keeps up, I predict a fractured Republican Conference and changes in leadership before there’s ever a substantive change in the makeup of the House of Representatives.