[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

THE CONGRESSIONAL BUDGET OFFICE'S
BUDGET AND ECONOMIC OUTLOOK

=======================================================================

HEARING

before the

COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

SECOND SESSION

__________

HEARING HELD IN WASHINGTON, DC, FEBRUARY 1, 2012

__________

Serial No. 112-17

__________

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COMMITTEE ON THE BUDGET

PAUL RYAN, Wisconsin, Chairman
SCOTT GARRETT, New Jersey CHRIS VAN HOLLEN, Maryland,
MICHAEL K. SIMPSON, Idaho Ranking Minority Member
JOHN CAMPBELL, California ALLYSON Y. SCHWARTZ, Pennsylvania
KEN CALVERT, California MARCY KAPTUR, Ohio
W. TODD AKIN, Missouri LLOYD DOGGETT, Texas
TOM COLE, Oklahoma EARL BLUMENAUER, Oregon
TOM PRICE, Georgia BETTY McCOLLUM, Minnesota
TOM McCLINTOCK, California JOHN A. YARMUTH, Kentucky
JASON CHAFFETZ, Utah BILL PASCRELL, Jr., New Jersey
MARLIN A. STUTZMAN, Indiana MICHAEL M. HONDA, California
JAMES LANKFORD, Oklahoma TIM RYAN, Ohio
DIANE BLACK, Tennessee DEBBIE WASSERMAN SCHULTZ, Florida
REID J. RIBBLE, Wisconsin GWEN MOORE, Wisconsin
BILL FLORES, Texas KATHY CASTOR, Florida
MICK MULVANEY, South Carolina HEATH SHULER, North Carolina
TIM HUELSKAMP, Kansas PAUL TONKO, New York
TODD C. YOUNG, Indiana KAREN BASS, California
JUSTIN AMASH, Michigan
TODD ROKITA, Indiana
FRANK C. GUINTA, New Hampshire
ROB WOODALL, Georgia

Professional Staff

Austin Smythe, Staff Director
Thomas S. Kahn, Minority Staff Director

C O N T E N T S

Page
Hearing held in Washington, DC, February 1, 2012................. 1

Hon. Paul Ryan, Chairman, Committee on the Budget............ 1
Prepared statement of.................................... 2
Questions submitted for the record....................... 57
Hon. Chris Van Hollen, ranking minority member, Committee on
the Budget................................................. 3
Prepared statement of.................................... 6
Douglass W. Elmendorf, Director, Congressional Budget 0ffice. 8
Prepared statement of.................................... 12
Response to questions submitted for the record........... 57

THE CONGRESSIONAL BUDGET OFFICE'S BUDGET AND ECONOMIC OUTLOOK

----------

WEDNESDAY, FEBRUARY 1, 2012

House of Representatives,
Committee on the Budget,
Washington, DC.
The Committee met, pursuant to call, at 10:00 a.m., in room
210, Cannon House Office Building, Hon. Paul Ryan, [Chairman of
the Committee] presiding.
Present: Representatives Ryan, Garrett, Campbell,
McClintock, Stutzman, Lankford, Black, Ribble, Flores,
Mulvaney, Huelskamp, Young, Amash, Rokita, Woodall, Van Hollen,
Doggett, Blumenauer, McCollum, Yarmuth, Pascrell, Honda, Ryan
of Ohio, Moore, Castor, Tonko, Bass.
Chairman Ryan. The Committee will come to order. Welcome
all to this very important hearing on the difficult fiscal
challenges and economic challenges ahead of us. I want to
welcome the CBO director back with us again with his beautiful
daughters. It is good to have you here again, Doug, I wish we
had better news.
I want to thank Doug, first of all, Dr. Elmendorf and your
entire CBO staff for the hard work on the release of the annual
budget and economic outlook. We have a compressed timeline this
year, given the tardiness of the president's budget, given our
Easter coming earlier; so we know that CBO was going to be
pushed extra hard this year, and I know you are working really
hard around the clock over there. So first off I want to start
by saying thank you for all you have done.
There is no question about it; our fiscal and economic
outlook is grim. According to CBO's outlook, 2012 will mark the
fourth straight year of trillion dollar deficits. Trillions
more dollars will be added to the debt in the years ahead,
putting a chilling effect on job creation today and committing
the next generation to a diminished future. CBO projects
economic growth will remain sluggish and the unemployment rate
to hover near 9 percent through 2014. This report confirms what
too many Americans already painfully are aware of: President
Obama's economic policies simply are not working.
The president and his party's leaders successfully enacted
much of their agenda, but they have failed to advance policies
that get our economy growing. They have failed to advance
solutions that get our fiscal house in order. In the Senate,
they have failed to pass a budget in over 1,000 days. The
problems have been growing for years, and there is no question
that the blame is bipartisan in nature. For years politicians
from both political parties have failed to be honest with the
American people about the size and scope of this debt threat.
The new House majority has worked to chart a new course.
In this committee, we authored and advanced a principled
reform agenda that provides a brighter fiscal and economic
outlook. The House passed budget strengthens our critical
health and retirement security programs, it repairs our fraying
safety net, and it makes sensible reforms that spur job
creation and economic growth, while putting government spending
on a more sustainable path.
In response to our budget, the president and his party
leaders have still yet to put forward a credible plan to solve
our country's problems. Look, we have a big difference of
opinion on the big questions of the day, but I hope CBO's
alarming report encourages us to focus on the urgent need for
real solutions instead of resorting to the same old false
attacks with no alternatives.
Let's build upon the sensible spending cuts enacted last
year in a bipartisan basis. Here at the House Budget Committee,
we have worked in a bipartisan manner to advance budget reforms
aimed at reducing the deficit and improving accountability.
There are ongoing efforts to build a bipartisan coalition on
the critical need to save and shrink in Medicare, for example.
I invite the president and my friends across the aisle to join
us in this conversation. The CBO's outlook could not be more
ominous. I look forward to your testimony, Dr. Elmendorf, which
I hope can inform and guide this committee as we work to
advance solutions in the year head, and with that I will yield
to the ranking member Mr. Van Hollen.
[The prepared statement of Chairman Paul Ryan follows:]

Prepared Statement of Hon. Paul Ryan, Chairman,
House Committee on the Budget

Welcome all to this important hearing on the difficult fiscal and
economic challenges before us.
I welcome Congressional Budget Office Director Doug Elmendorf to
the Budget Committee. I thank you Doug and your entire CBO staff for
their hard work on the release of the annual Budget and Economic
Outlook.
There is no question about it: The outlook is grim.
According to CBO's outlook, 2012 will mark the fourth straight year
of trillion-dollar deficits. Trillions more dollars will be added to
the debt in the years ahead, putting a chilling effect on job creation
today, and committing the next generation to a diminished future. CBO
projects economic growth to remain sluggish and the unemployment rate
to hover near 9 percent through 2014.
This report confirms what too many Americans are already painfully
aware of: President Obama's economic policies are not working.
The President and his party's leaders successfully enacted much of
their agenda, but they have failed to advance policies that get our
economy growing and creating jobs. They have failed to advance
solutions that get our fiscal house in order. In the Senate, they have
failed to pass a budget in over 1,000 days.
The problems have been growing for years, and there is no question
that the blame is bipartisan in nature. For years, politicians from
both political parties have failed to be honest with the American
people about the size and scope of the debt threat.
The new House Majority has worked to chart a new course with bold
solutions. In this committee, we authored and advanced a principled
reform agenda that provides a brighter fiscal and economic outlook. The
House-passed budget strengthens our critical health and retirement
security programs, repairs the safety net, reforms the broken tax code,
and puts government spending on a sustainable path.
In response to our budget, the President and his party's leaders
have still not put forward a credible budget plan to tackle our
problems.
We have big differences of opinion on the big questions of the day,
but it is not enough to simply criticize. It is not simply enough to
oppose--we need to propose real solutions instead of resorting to the
same old false attacks.
Here at the Budget Committee, we've worked in a bipartisan manner
to advance budget reforms aimed at reducing the deficit and improving
accountability. There are ongoing efforts to build a bipartisan
coalition on the critical need to save and strengthen Medicare. I
invite the President and my friends across the aisle to join this
conversation.
The CBO's Outlook could not be more ominous. I look forward to your
testimony, Director Elmendorf, which I hope can help inform and guide
this committee as we work to advance solutions in the year ahead.
With that, I yield to Ranking Member, Mr. Van Hollen.

Mr. Van Hollen. Thank you, Mr. Chairman, I want to join the
chairman in welcoming you, Dr. Elmendorf, and your two
daughters. It is great to have members of the family here
today, and I want to reference the report that was issued by
CBO yesterday that the chairman mentioned because while it
shows that the economy remains very fragile, it also shows that
it is slowly recovering; it demonstrates that we still have
much work to do to create jobs, tackle the deficit and return
the budget to a long-term fiscally sustainable path.
For a moment let's focus on the positive signs of the
budding economic recovery, and remember where we were just
three years ago. If you could please put up the first slide.

What this slide shows is the day that President Bush left
office, the day that President Obama was sworn in, the economy
was collapsing at an even faster rate than originally thought.
The gross domestic product was plummeting at a rate of 8.9
percent, in other words, negative 8.9 percent GDP, and we were
shedding more than 840,000 jobs a month; so in the month the
president was sworn in, 840,000 jobs were lost.
As shown in previous CBO reports and findings, the passage
of the Recovery Act, coupled with actions to save the auto
industry and efforts by the Federal Reserve, helped end the
free fall, and began the climb upward toward economic growth.
Now we have all heard the expression that we are entitled to
our own opinions, but not our own facts. The fact is that the
CBO said that the Recovery Act helped save, or create, up to 3
million jobs in the year 2010, that it lowered the unemployment
rate by up 1.8 percentage points in calendar year 2010, and
lowered unemployment by up to 1.4 percentage points in 2011,
compared to what it would have done if the Congress had not
taken action.
The private sector has now added jobs in every month since
March 2010, adding 3.2 million jobs in total. More jobs were
created last year than in any year since 2005. What this chart
shows, very plainly, is that we were on a huge downhill
cascade. After the president was sworn in we began to reduce
the downward momentum, turn the corner, and we have been
steadily heading up, first reducing the rate of job loss, which
you obviously have to do when you are losing GDP at a 8.9
percent rate, and headed into positive job territory. So the
facts as reported by the CBO are clear that the Recovery Act
did serve its purpose. It is kind of like when you are walking
up an escalator that is going down very quickly. If you take no
action, you will go down very fast. Even if you take action, it
will appear at first that you are running in place, and then
slowly you will be moving up, and that is what we are doing.
The CBO report, of course, also shows that the economy
remains fragile and that we still face serious budget
obstacles. While the economy continues to grow, at the current
rate it will take too long for unemployment to return to the
pre-crisis levels, which is why our first priority has to be
making sure we do what we can to help small businesses and
businesses help put people back to work.
We should take immediate action in this House on the plan
the president submitted to the Congress last September. The
president's jobs plan, including his significant infrastructure
investments to help rebuild our infrastructure around the
country. We should finish the job with respect to extending the
payroll tax cut for 160 million Americans, and making sure that
unemployment insurance is there for people who have lost work
through no fault of their own.
Mr. Chairman, I am going to apologize to both you and Dr.
Elmendorf because after the statement I am going to have to go
to the Conference Committee on that issue, and I hope that
Conference Committee will move forward quickly and without
delay to get that job done.
Finally, the Congressional Budget Office's report
underscores the need to address the looming deficit in a
balanced, reasoned way. The Budget Control Act that this body
passed last year and the president signed saves about $1
trillion from cuts in the discretionary budget over the next
decade. It will also result in an additional $1 trillion in
deficit reductions starting in January 2013. There are better
ways to do that and there are worse ways to do that; I hope
this Congress will come together and do it in a way that makes
sense.
I think as we listen to the testimony from Dr. Elmendorf,
it will be clear that the bipartisan commission s that have
looked at this challenge were right: Simpson-Bowles, Rivlin-
Domenici, that you really need to tackle this in a balanced
way. I am just going to quickly put up two charts and then I
will conclude my opening statement.

What this chart shows, and I believe, Dr. Elmendorf, it is
in your testimony, is that under current law the deficit would
be reduced to that bottom heavily blue shaded line so that over
the 10 year period the deficit would decline substantially. If
we packed our bags and went away and did not come back until
next year, it would reduce the deficit significantly. That very
lightly shaded blue right over the bottom bar is the revenue
that is lost if we keep in place all the current tax policies,
and so clearly that is a factor. Now, I do not think anyone is
suggesting that we want to put in policies that would capture
all that revenue; I am not suggesting that, but this is an
important chart to understand what current law would do in the
impact of revenue.
If we go to the next chart, it quantifies those numbers and
makes it clear that if you extend all the 2001, 2003 tax cuts
in index AMT, that adds 4.5 trillion to the deficit.

The other tax extenders, if you continue those, it adds
$839 billion. If you add the debt service on that you get to
over $6.3 trillion in revenue; and if you look at the CBO
baseline deficits, cumulative over 10 years, they are just over
3 trillion. So the cost of continuing all those policies on the
revenue side leads to a doubling of the deficit over the next
10 years.
I want to make it clear: I am not proposing that we change
all the current policies, but I think this does give us a very
clear indication of the order of magnitude. I will give a very
clear example. One trillion of that is accounted for by the tax
cuts for the folks at the very top, and if you returned those
tax rates to where they were during the Clinton administration,
a period of great economic growth, that would be $1 trillion of
that. I think we need to tackle this through tax reform,
closing loopholes, sensible tax reform, but I do think this
underscores what the bipartisan groups have said, that you need
to take a balanced approach; yes we need to make some cuts, we
need to make some reforms, but we also need to deal with the
other side of the equation as well. Thank you, Mr. Chairman,
and I apologize for having to leave.
[The prepared statement of Chris Van Hollen follows:]

Prepared Statement of Hon. Chris Van Hollen, Ranking Member,
House Budget Committee

Thank you, Mr. Chairman. I want to join the Chairman in welcoming
you, Dr. Elmendorf, and your two daughters; it's great to have members
of the family here today. And I want to reference the report that was
issued by CBO yesterday, because while it shows that the economy
remains very fragile, it also shows that it is slowly recovering. It
demonstrates that we still have much work to do to create jobs, tackle
the deficit, and return the budget to a long-term fiscally sustainable
path. But for a moment, let's focus on the positive signs of the
budding economic recovery and remember where we were just three years
ago.
The day that President Bush left office, the day that President
Obama was sworn in, the economy was collapsing at an even faster rate
than originally thought. The gross domestic product was plummeting at a
rate of 8.9 percent, in other words negative 8.9 percent GDP, and we
were shedding more than 840,000 jobs a month. So in the month the
President was sworn in, 840,000 jobs were lost. As shown in previous
CBO reports and findings, the passage of the Recovery Act--coupled with
actions to save the auto industry and efforts by the Federal Reserve--
helped end the free fall and began the climb upward toward economic
growth.
Now, we've all heard the expression that we're entitled to our own
opinions, but not to our own facts. The fact is that the CBO said that
the Recovery Act helped save or create up to 3 million jobs in the year
2010. It also lowered the unemployment rate by up to 1.8 percentage
points in calendar year 2010, and lowered unemployment by up to 1.4
percentage points in 2011, compared to what it would have done if the
Congress had not taken action. The private sector has now added jobs in
every month since March 2010, adding 3.2 million jobs in total. More
jobs were created last year than in any year since 2005. It is clear
that we were on a huge downhill cascade and that after the President
was sworn in, and we began to reduce the downward momentum and turn the
corner. We have been steadily heading up, reducing first the rate of
job loss, which you obviously have to do when you're losing GDP at an
8.9 percent rate, and now heading into positive job territory.
So, the facts as reported by the CBO are clear that the Recovery
Act did serve its purpose. It's kind of like when you're walking up an
escalator that's going down very quickly. If you take no action, you
will go down very fast. Even if you take action, it will appear at
first that you're running in place and then slowly you'll be moving up.
That's what we're doing.
The CBO report, of course, also shows that the economy remains
fragile and that we still face serious budget obstacles. While the
economy continues to grow at the current rate, it will take too long
for unemployment to return to the pre-crisis levels. That is why our
first priority has to be making sure we do what we can to help small
business and businesses help put people back to work. We should take
immediate action in this House on the jobs plan the President submitted
to the Congress last September, including his significant
infrastructure investments to help rebuild our infrastructure around
the country.
We should also finish the job with respect to extending the payroll
tax cut for 160 million Americans and making sure that unemployment
insurance is there for people who have lost work through no fault of
their own. And, Mr. Chairman, I'm going to apologize to both you and
Dr. Elmendorf, because after this statement I'm going to have to go to
the conference committee on that issue and I hope that conference
committee will move forward quickly and without delay to get that job
done.
Finally, the Congressional Budget Office's report underscores the
need to address the looming deficit in a balanced, reasoned way. The
Budget Control Act that this body passed last year and the President
signed saves about $1 trillion from cuts in the discretionary budget
over the next decade. It will also result in an additional $1 trillion
in deficit reductions starting in January 2013. There are better ways
to make those additional cuts; I hope this Congress will come together
and do it in a way that makes sense. But I think as we listen to the
testimony from Dr. Elmendorf, it will be clear that the bipartisan
commissions that have looked at this challenge--both Simpson-Bowles and
Rivlin-Domenici--were right that you really need to tackle this in a
balanced way.
Under current law, if we packed our bags--and didn't come back
until next year, it would reduce the deficit significantly. And we
would lose significant revenue if we keep in place all the current tax
policies, and so clearly that is a factor. Now, I don't think anyone is
suggesting that we want to put in policies that would capture all that
revenue; I'm not suggesting that. But it is important to understand how
big an impact those projected revenues have on CBO's deficit estimates.
If you extend all the 2001, 2003 tax cuts and index AMT, that adds
$4.5 trillion to the deficit. And if you continue other tax extenders,
it adds $839 billion. If you add the debt service on that, you get to
over $6.3 trillion added to the deficit. Now, if you look at the CBO
baseline deficits, cumulative over ten years, they're just over $3
trillion. So the cost of continuing all those policies on the revenue
side leads to a doubling of the deficit over the next ten years. So I
want to make it clear, I am not proposing that we change all the
current policies, but I think this does give us a very clear indication
of the order of magnitude. I'll give a very clear example. If you
returned the tax rates for the folks at the very top to where they were
during the Clinton administration, a period of great economic growth,
we could reduce our deficit by about $1 trillion.
This report underscores what the bipartisan groups have said--you
need to take a balanced approach. Yes, we need to make some cuts, we
need to make some reforms, but we also need to deal with the other side
of the equation as well. I think we need to tackle this by also closing
loopholes and enacting sensible tax reform.
Thank you, Mr. Chairman, and I apologize for having to leave.

Chairman Ryan. Sure, my pleasure. Dr. Elmendorf, the time
is yours.

STATEMENT OF DOUGLASS W. ELMENDORF, DIRECTOR,
CONGRESSIONAL BUDGET OFFICE

Mr. Elmendorf. Thank you, Mr. Chairman and Congressman Van
Hollen. Thank you for your kind words about CBO. I am
privileged to be leading a group of extraordinarily talented
and dedicated public servants, and we all appreciate it very
much this support that you, Mr. Chairman, and you, Congressman
Van Hollen, have shown for our work. We will continue to do our
very best for this committee and for the Congress as a whole.
I will be referring, as I talk, to some charts that I am
told are in your notebooks. It is about half a dozen slides.
They are mostly out of the outlook, but they are collected in
this little handout to makes it easier for you to follow what I
say.
Let me begin by noting that our baseline economic and
budgetary projections are conditioned on current law, not
because we expect that there will be no changes in law, but
because this approach provides a benchmark against which
potential changes can be measured. What we are presenting is a
benchmark, not a forecast. That distinction has a large impact
on the budget and economic projections.
What is our assessment of the economic outlook? As you
know, the pace of the recovery has been slow since the
recession ended two and a half years ago, and we project that
it will continue to be slow for the next two years, reflecting
both the lingering effects of the crisis in the financial
markets and the recession, and the fiscal restraint that will
arise under current law. Specifically, current law fiscal
policy will reduce the growth of output slightly in 2012 and
significantly in 2013 through a combination of large tax
increases and spending cuts. Our projections incorporate the
upcoming expiration of the payroll tax cut and emergency
unemployment benefits, the expiration of the tax cuts enacted
in 2001, 2003, and 2009, as well as other expiring tax
provisions.
The constraints on spending imposed by last year's Budget
Control Act and the winding down of the budgetary effects of
the 2009 Recovery Act. Taken together those policies will
generate a sharp fiscal contraction. In addition, the excess
number of houses, loss of wealth, run-up in debt, and other
legacies of the economic downturn are continuing to weigh on
household and business spending.
If you look at the first slide in the packet which looks
roughly like this, we project that real GDP will grow by only
two percent this year and only about one percent next year. We
expect economic activity to quicken after 2013, but real GDP to
remain below the economy's potential through 2017.
According to our projections, the economy is only about
halfway through the cumulative shortfall in output that will
result from the recession and its aftermath. This picture is
not the one to which I am referring at the moment. The costs
associated with that persistent output gap are immense and they
fall disproportionately on people who lose their jobs, who are
displaced from their homes, or who own businesses that fail. In
particular, the labor market still has a great deal of slack,
mainly as a consequence of continued weakness in demand for
goods and services.
In CBO's forecast, unemployment rate remains above eight
percent, both this year and next. As economic growth picks up
after 2013, the unemployment rate will gradually decline, but
in our projection it remains above 7 percent until 2015 before
dropping to 5 and one-quarter percent by the end of the coming
decade. While the economy continues to be weak during the next
few years, inflation and interest rates will remain low. Let me
turn now to our budget projections.
Under current law we expect that this year's deficit will
be about $1.1 trillion. At 7 percent of GDP, that is nearly 2
percentage points less than the deficit recorded last year, but
still larger than any deficit between 1947 and 2008. Over the
next few years projected deficits in CBO's baseline narrow
sharply, averaging one and a half percent of GDP and totaling
about $3 trillion between 2013 and 2022.
With deficits small relative to the size of the economy,
debt held by the public drops a little as a share of GDP, but
remains quite high. Much of the projected decline in the
deficit occurs because under current law revenues will rise
considerably. In particular, between 2012 and 2014, revenues in
our baseline shoot up by more than 30 percent because of the
recent or scheduled expiration of various tax provisions, and
new taxes and other collections that are scheduled to go into
effect. Federal spending on the baseline declines modestly
relative to GDP in the next few years as the economy expands
and the statutory caps constrain discretionary appropriations.
Later in the decade, spending turns up again relative to
GDP because of increasing expenses generated by the ageing of
the population, rising costs for health care, and because the
accumulation of debt and rising interest rates will cause a
surge in the government's interest costs.
Of course, these baseline projections are heavily
influenced by the changes in tax and spending policies that are
embodied in current law; changes, that in some cases, represent
a significant departure from recent policies.
To illustrate the budgetary consequences of maintaining
some tax and spending policies that have recently been in
effect, CBO developed projections under an alternative fiscal
scenario. Like the baseline, this is not a prediction by us
about policy or a recommendation about policy, it is simply
meant to show to you the consequences of some fiscal actions
that are regularly discussed in the Congress. This alternative
scenario incorporates the following assumptions.
First, that all expiring tax provisions other than the
payroll tax reduction are extended.
Second, that the alternative minimum tax or AMT is indexed
for inflation after 2011.
Third, that Medicare's payment rates for physician's
services are held constant at their current level, rather than
dropping by 27 percent in March and more thereafter as
scheduled under current law; and fourth, that the automatic
spending reductions required by the Budget Control Act, in the
absence of legislation reported by the join select committee on
deficit reduction, do not take effect; although, in this
scenario the original caps on discretionary appropriations
would remain in place.
Under that alternative fiscal scenario, deficits over the
2013, 2022 period would be far higher than in the baseline,
averaging five and a half percent of GDP rather than one and a
half percent, and totaling $11 trillion, rather than roughly $3
trillion.
Debt held by the public would climb on an unsustainable
path, reaching 94 percent of GDP in 2022, the highest figure
since just after World War II. Under that scenario, the economy
would be noticeably stronger during the next few years than
under current law, but noticeably weaker later in the decade.
The report presents estimates of those effects using ranges of
numbers to reflect the uncertainty involved. The midpoints of
the ranges for the end of 2013 show GNP, that is two percent
higher, and an unemployment rate that is 1 percentage point
lower than would be the case under current law. However, the
midpoint of the range for 2022 shows GNP that is almost two and
a half percent lower than under current law because of the
crowding out of investment that would be caused by the
escalating debt.
It bears emphasis that projecting economic outcomes for any
path of fiscal policy, and the budget outcomes that would
result from them, is very difficult. Many things could turn out
to cause the economy and the budget to be worse or better than
we project; however, there is no plausible economic outcome
under which the policies of the alternative scenario I have
outlined would lead to a sustainable budget outcome.
The fundamental fiscal challenge, during this decade and
beyond, remains the aging of the population and rising costs
for health care. The number of people aged 65 or older will
increase by one-third in the coming decade, substantially
raising the cost of Social Security, Medicare, and Medicaid. In
addition, the Affordable Care Act will significantly increase
the number of non-elderly people receiving assistance through
federal health care programs.
Furthermore, CBO predicts that the cost per enrollee for
Social Security and the major health care programs will
continue to rise. Because of these forces the stated budget
policies that were in effect in the past cannot be maintained
in the future.
Here is one way to think about the problem using CBO's
projections under the alternative fiscal scenario, which as I
have said, represents a combination of many recent and current
policies. Under this scenario, outlays for Social Security and
the health care programs would be much higher by the end of
this coming decade than in the past, more than 5 percent of GDP
higher than in that 40 year average. However, outlays for all
other federal programs are projected to be much lower than in
the past, averaging in the past 40 years, they have averaged
about 11 percent of GDP. In our projections for this scenario
they would be about 8 percent of GDP in 2022. That would be
lower than any year in the past 40 years.
Despite the constraint on those programs, the rise in cost
for Social Security and the federal health care programs mean
that the budget deficit under this scenario is projected to be
6.1 percent of GDP. To keep debt from rising, relative to GDP,
the deficit would need to be about $900 billion smaller in
2022; and that year alone would be the case under this
scenario.
Therefore, to put the federal budget on sustainable path,
policy makers will need to allow federal revenues to increase
to a much higher percentage of GDP than we have seen in the
past 40 years, or make very large changes to Social Security
and federal health care programs, or pursue some combination of
those two approaches.
Let me close by highlighting the consequential choices that
policy makers face this year. One on hand, if policy makers
leave current laws unchanged, the federal debt will probably
recede slowly relative to the size of the economy. That will
occur because of a large increase in revenues and a sharp
restraint in federal spending apart from the largest programs I
have mentioned. However, both of those budgetary changes from
historical patterns will have significant economic and social
effects. Moreover, the sharp fiscal restraint will markedly
slow the economic recovery.
On the other hand, changing current laws to allow current
policies to continue would boost the economy and allow people
to pay less in taxes and benefit more from government programs
in the next few years, but would put the nation on a quickly
unsustainable fiscal course. If policy makers wanted to achieve
both a short-term economic boost and medium-term and long-term
fiscal sustainability, they would need to enact policies that
lead deficits significantly wider than in our current law
baseline for the next few years, but significantly narrower
than would occur under this continuation of current policies
that we have described in the alternative fiscal scenario.
In conclusion, how much and how quickly the budget deficit
declines over the coming decade will depend, in part, on how
well the economy does. Probably more critical though, will be
the choices you make as you face the substantial changes to tax
and spending policies that are slated to take effect within
this year. Thank you. I am happy to take your questions.
[The prepared statement of Douglas Elmendorf follows:]

Chairman Ryan. So in other words, it is pretty bleak. I
just sum it up. There are so many areas I could go. Let's talk
about Medicare and your analytical tools in measuring what is
going to become the largest federal program. We have two
scenarios here which do a service of showing where we are
headed. Extended baseline and alternative fiscal scenario:
under the alternative fiscal scenario, which is your attempt to
try and get closer to reality, that is my description, I do not
know if that is yours, but from your June 2011 long-term
outlook, you show Medicare doubling as a percentage of GDP over
the next 20 years, and then rising to 14 percent of GDP in
2085. By 2037, debt exceeds 200 percent of GDP. So what we
find, and I think everybody agrees with this, I do not need to
belabor this, is that Medicare becomes unsustainable under the
alternative fiscal scenario because it drives debt to just
untenable levels. So that is a future we know is not going to
exist because it simply cannot sustain itself. You would agree
with that, right?
Mr. Elmendorf. So I agree with the alternative fiscal
scenario cannot persist indefinitely, and as you say, you were
referring to our projections over the long run from last June.
Chairman Ryan. Right.
Mr. Elmendorf. I think it is the combination of policies in
that scenario that cannot be sustained together. One could
sustain the Medicare path while making other changes, or the
Social Security path while making other changes, or the revenue
path while making other changes, and the set of changes that
will be made will depend on you and your colleagues. That
combination of policies cannot be sustained over the next
quarter century.
Chairman Ryan. So when we look at the extended baseline, my
own experience from being on the Medicare Oversight Committee
for 12 years now, is that whenever we seek to control costs by
cutting reimbursement rates to providers, what we learn is that
the cuts are either not sustained, meaning they are given back,
or they cause higher utilization rates that actually erode the
anticipated savings. The president's health care law cut
Medicare payments to providers by $500 billion over 10 years to
pay for the new entitlement. It also created the IPAB and under
this proposal that the president has more recently put out, the
IPAB will be tasked with holding Medicare's growth to GDP plus
.5 percent by cutting reimbursement to providers.
Now, last year you testified that CBO has, I think as you
said it, a gap in the toolkit when it comes to analyzing the
behavior of physicians and beneficiaries' ability to access
care. Do you still more or less have that gap in the toolkit to
try and analyze behavioral changes and access on both the
provider and the beneficiary side?
Mr. Elmendorf. I am afraid we do, Mr. Chairman. It is a gap
that we are trying to fill. We have projects underway, and we
have been in conversation with members of our panel, health
advisers, about what evidence we can draw on in trying to give
the Congress a better sense of how changes in payments to
providers would affect the beneficiaries access to care and
quality of care, but we are at the beginning of that road,
certainly not the end.
Chairman Ryan. So I obviously want to encourage you to keep
doing that because we are getting analysis from the actuaries.
Rick Foster, the chief actuary of CMS, was here just a few
weeks after you were the last time, where he basically told us
that he estimates that 40 percent of providers will become
unprofitable by 2050 and therefore go out of business, or just
stop taking Medicare according to the cuts in the current
health care law. So they are able to make those kinds of
projections. He also has told us that Medicare currently pays
physicians 80 cents on the dollar, but is on course to pay
physicians less than 30 cents on the dollar in decades ahead.
He is basically telling us that there are going to be
massive access problems and providers are just going to stop
taking Medicare beneficiaries. So we are getting this kind of
analysis from CMS, I think it would be helpful to get it from
CBO.
Let me ask you another question about your toolkit. There
have been many health care economists, both from the left and
the right, that have argued that choice and competition
actually would lower cost and improve quality, and we have seen
some anecdotal evidence of that even in Medicare areas. A
premium support model, which we have talked about here quite a
bit, you have bipartisan efforts that have been made: Alice
Rivlin, former CBO director and OMB director, and I had
recently worked with Senator Ron Wyden, which attempt to employ
a competitive bidding process to measure the growth rate of
premium support payments. Do you still lack the modeling
capabilities to measure the lower cost under such a competitive
premium support kind of a system?
Mr. Elmendorf. We are working very hard to try to fill that
gap as well Mr. Chairman. In the analysis that we did, for
example, your proposal last spring, we were able to incorporate
the effective competition and other factors on the cost of
insurance through Medicare or the private sector today, but we
did not have the tools to try to analyze how the flexibility of
the providers that insurers would have in your proposal, or
proposals like it, or how the price pressures that people would
face under your proposal, or proposals like it, would affect
the dynamic path of spending over time, and that is what we are
working to do. Again, we are working with our panel of health
advisers, getting their insights as well as our own work, but
we are only partway along that road as well.
Chairman Ryan. So here is the point I am trying to make.
The work you do on a long-term budget outlook with respect to
Medicare and health care spending because this, as you
mentioned, health care is the big driver of our debt issue in
the future. These gaps in the toolkit need to be filled.
I know you face serious challenges, but I want to basically
get your response to some of the caveats I have so we can
better understand how Medicare analysis works today to get a
better understanding of what we are really looking when we get
these analyses and where they are lacking. When you compare the
impact of proposed Medicare reforms relative to the alternative
fiscal scenario, we acknowledge that that scenario is
unsustainable. The comparison, therefore, is really not fair or
accurate since it is based on a scenario in which the federal
government would not have the means to fully fund Medicare
benefits to beneficiaries, so we do not want to compare
ourselves to some mythical future that we know is unsustainable
and will not exist.
When you compare Medicare reform options to the extended
baseline, we ignore the notion that providers, if they are
going to be paid 30 cents on the dollars, are not going to be
continuing to provide benefits. So that scenario is pretty
implausible, and we are not capturing a dynamic and a
phenomenon that has been advocated by experts on both sides of
the aisle that choice and competition actually work to reduce
costs, or to tame inflation. So I think it is important to
acknowledge that we are not fully capturing a proper analysis
of what reforms actually achieve relative to these two
scenarios which we know are pretty much untenable, or at least
we cannot even measure the full effects of these two
alternative scenarios. Is that pretty accurate?
Mr. Elmendorf. I certainly think we have not provided you
with all the information that we would like to provide to help
you and your colleagues understand better the trade-offs that
you face. As you know Mr. Chairman, let's make sure others
understand, over the course of this past year we have worked
desperately hard for a succession of deficit reductions that
have been pursued on the Hill.
Chairman Ryan. I know.
Mr. Elmendorf. Much of that work involved proposed changes
to health care programs, even though those were not ultimately
voted upon. So I have a team of people who have been doing an
awful lot of work on a number of proposals, but it has, no
doubt, slowed our work on the ideas that you are discussing.
Now, what effects we will find when we finish this work are
unclear, I think. There was an exchange recently in the last
couple of weeks in the New England Journal of Medicine about
premium support plans, that leading health economists wrote for
and against. Both the for and against people were members, our
members, on our panel of health advisers were among people that
we have consulted. I do not know, I do not want to prejudge
what our findings will be, but I agree, and we all agree at
CBO, that we need to push very hard to bring more to bear to
give you a fuller sense of the true choices that you face.
Chairman Ryan. That is basically the point I am trying to
make. Look, we understand that there was a lot of interplay in
Congress on all super committees and all of these efforts which
tied up CBO analysts to do that work instead of trying to
improve on the analysis of these kinds of health care reforms,
but the problem is that where we are is that these programs,
which are the biggest drivers of our debt in the future, we are
measuring in a reform effort against two futures that we know,
based on the latest CMS analysis and outside analysis, are
untenable. We know, from other analysis, that if we pay
providers pennies on the dollar, they are just not going to
keep providing. What good is having a program if no provider
will actually provide the benefit?
And then we also know that if we stick with the status quo,
meaning current policy baseline, that our debt gets so out of
control that basically we go into a tailspin. So there has got
to be another way, and we need to make sure that we have a
better analytical toolkit to analyze how best to chart that
better way, and we just have our work cut out for us still.
With that, let me turn it to Mr. Doggett.
Mr. Doggett. Thank you very much, Mr. Chairman, and thank
you Dr. Elmendorf for your testimony, service, and the various
studies that you bring to our work.
Mr. Elmendorf. Thank you.
Mr. Doggett. I think all America would benefit if we were
able to return to the prosperity of the Clinton years, contain
the short-term deficit as we did when President Clinton was in
office, and begin to work together to address these long-term
challenges of soaring health care cost. I think we have to do
it in a way that is different from what the chairman recommends
because I believe whatever label you put on it, what is
basically a Medicare voucher system simply shifts those health
care costs onto vulnerable seniors and individuals with
disabilities, and does not really resolve the problem, it just
shifts the problem from the taxpayer to the seniors.
Looking at the issues of how we advance our immediate
economic growth, your office put out a study back in November
that looked at the impact of the Economic Recovery Act and
while I believe you had a wide range of the effects of that
act, all of it was positive, was it not, encouraging economic
growth and encouraging job growth.
Mr. Elmendorf. Yes, we think the effects over the past few
years have been certainly positive and we have a range
reflecting the uncertainty in the economics' literature.
Mr. Doggett. And that range reflecting the uncertainties of
even predicting the past, if you will, that range suggested
that growth may have been advanced through the Economic
Recovery Act by over 4 percent in 2010, and again by over 2
percent in 2011, and that the Economic Recovery Act may well
have been largely responsible for creating millions of jobs in
this country, is that right?
Mr. Elmendorf. Yes, you have identified the high ends of
those ranges, Congressman, and you have identified those
correctly.
Mr. Doggett. And looking at the effects of the Economic
Recovery Act and the composition of it, and then trying to
understand what that means for policy choices now, again those
policies that would place dollars into the pockets of the
families that need them the most right now, for example,
extending unemployment compensation; that is the type of policy
that will encourage economic growth, is that correct?
Mr. Elmendorf. Yes, that is right, Congressman.
Mr. Doggett. The same thing would be true of a good
infrastructure investment in terms of roads, and bridges, and
rail across the country. Those also would be likely to
encourage economic growth.
Mr. Elmendorf. Yes, Congressman, they would.
Mr. Doggett. And on the other extreme, other than building
things that taxpayers can see the advantages of in encouraging
economic growth, how does it compare to eliminate the
inheritance tax, the estate tax in terms of encouraging
economic growth? Does that have much real benefit in
encouraging job growth?
Mr. Elmendorf. Congressman, I do not think we produced
estimates of changes in the estate tax directly. We prepared a
long testimony for the Senate Budget Committee in the fall that
had a chart of this sort that looked at the effects of
different sorts of tax and spending policies in boosting
economic activity this year and next. On the higher end of the
ranges, the policies that seem to have a higher bang for the
buck, if you will, are increasing aid to the unemployed and
payroll tax reductions for employees or employers. On the lower
end of the range are things like broad based cuts in income
taxes, but also on the low end of the range for the next few
years, actually, is infrastructure spending. That is not
because it does not matter when it happens, but because it
tends to happen rather slowly after the Congress acts because
of the planning and contracting process.
Mr. Doggett. And specifically, since you mentioned the
Senate and the effect of changes in the tax rate, I believe
that you did a study that was presented in the Senate in 2010
concerning what the effect would be of extending, over the next
decade, the Bush tax cuts, and what did you find would be the
effect on economic growth of extending the Bush tax cuts?
Mr. Elmendorf. So our findings in that testimony,
consistent with what I have said today, is that extending those
expiring tax cuts for a few years provides a boost to the
economy during those few years, but will, by the end of the
decade and beyond, be a drag on GDP because the effects of the
accumulating debt and crowding out private investment outweigh
the beneficial effects of lower tax rates; and that is what we
showed in this testimony you are referring to from 2010 in the
Senate, and again, consistent with the analysis we presented in
this outlook yesterday.
Mr. Doggett. Exactly, though it sounds really great in
political speeches, the actual effect of extending the Bush tax
cuts over the next decade is to reduce economic growth by
between 1 and 2 percent. Is that not correct over the decade?
Mr. Elmendorf. Yes, again, there is a range of estimates
depending on precisely what one does in the economic
assessments.
Mr. Doggett. That range does not include any plus economic
growth, all of it is negative in extending those tax cuts.
Mr. Elmendorf. Right, so in the outlook we released
yesterday, Congressman, I think what you are referring to when
we looked at the effects of the alternative fiscal scenario,
which is the tax cuts plus some other things, but the effect of
that set of policies is to boost the economy we think, over the
next few years, but by 2022 to reduce GNP by between 1 percent
and 3.7 percent relative to what would occur under the current
law baseline.
Mr. Doggett. And there were a number of things in that
alternate baseline that you looked at, other than the negative
effects of extending all these tax cuts over the next decade,
during the short-term, if I understand your testimony to
Chairman Ryan, it is that if we reduce the short-term deficit
too quickly with sudden reductions in expenditures for vital
public services, it will actually retard economic growth in the
short-term.
Mr. Elmendorf. Yes, I think that is right Congressman.
Reductions in the deficit too quickly, through either tax
increases or spending reductions, would retard the economic
recovery and that is consistent with, I think, the consensus of
thinking in the economics profession, consistent with the
experience that we are seeing in Europe where countries that
are in worse budget shape that we are and are forced by their
inability to borrow to make very drastic changes in policy very
quickly are suffering economic consequences from that. When we
wrote an issue brief a year or so ago about the risk of a
fiscal crisis in the United States, one of the risks that we
highlighted was that budget situations tend to deteriorate when
the economies are already in trouble, and that makes it a
particularly bad time to then have to implement these changes
very quickly, that emphasizes the importance of Congress acting
before we had a crisis of that sort, but given the low level of
current Treasury interest rates, our continued ability to
borrow, for now at least, I think many experts believe that
although that the changes should not be implemented right away;
and I want to emphasize that is not an argument against the
Congress deciding upon what changes in policy to make, given
the scale of the changes that will be needed relative to
current policies, but more warning that people have and
business have, that state and local governments have, about
what policies will be undertaken, the better it will be.
So there is a real cost to waiting to decide upon the
courses of action. Once one is decided, then there is a more
difficult tradeoff about the speed. Waiting too long, of
course, has the cost of ending up in a fiscal crisis. Moving
too quickly has the cost of slowing the economic recovery.
Mr. Doggett. So pursuing an aggressive austerity program
similar to that that the conservative government in the United
Kingdom has pursued, and some of the other European countries,
is likely to present some of the same type of economic problems
for us that it is presenting today to the Europeans.
Mr. Elmendorf. I think that is right Congressman. I want to
be careful not to second-guess the decisions those governments
have made. They face a particular set of circumstances and I
think in some cases had no choice because of an inability to
borrow money or a fear that they would be unable to borrow
money in the very short-term. So I am not suggesting that they
have done the wrong thing, necessarily, we have not studied
their choices carefully enough to speak to that; I am just
using that as an example of that sort of very sharp fiscal
contraction does weigh on economic activity and jobs in the
short run.
Mr. Doggett. And as far as encouraging more jobs, though it
is not my preferred policy choice, extending the payroll tax
cut is one very positive way of encouraging economic growth.
Mr. Elmendorf. Yes, we think so Congressman.
Mr. Doggett. Thank you very much, thank you Mr. Chairman.
Chairman Ryan. Thank you, Mr. Garrett.
Mr. Garrett. So just following up on a couple of points we
just raised on this point. With regard to what was done in
Europe and the decision making there, obviously, as you
correctly say, we cannot second-guess them. Some of that goes
to one of the questions I have is, your presumptions on
interest rates. According to your baseline, the American people
will be paying about $4.3 trillion in net interest over the
next 10 years based upon, I think it is on Page 30 or 31 of the
charts, and what have you, but obviously if those interest
rates are skewed in a different direction, that number goes up
significantly, right?
Mr. Elmendorf. Yes, Congressman, no doubt.
Mr. Garrett. What is that?
Mr. Elmendorf. Yes.
Mr. Garrett. And right now we have the benefit of the fact
that we are the reserve currency of the world, and that is able
to keep it down, but we saw what occurred in the private
sector, how the spreads changed in 2008 basically overnight
because these various companies that initially had very good
rates, is that not correct?
Mr. Elmendorf. Yes, that is right.
Mr. Garrett. And did we not see the exact same thing that
occurred over in Europe with the PIGs, with Portugal and Italy
and Greece especially, that their interest rates were somewhat
favorably for, but basically in an overnight, figuratively
overnight period of time, the spreads expanded beyond anyone's
projections. Is that a fair assessment?
Mr. Elmendorf. Yes, that is right. I mean, I'm not sure of
anyone's projections, but certainly in a way that surprised
many observers. Yes, I think a significant risk in our
projections is the interest rates will rise more rapidly than
we have projected. I should say there is risk on the other
side, too. Our projection of interest rates lies well above the
rates that are implicit in current financial market
transactions when one can essentially back out of the Treasury
yield curve, the market's predictions of interest rates over
the second half of the decade.
Mr. Garrett. But they are certainly not above historical
averages for the United States. All we have to do is go back
and look into the Carter years and we would see those rates off
the charts, and that would put this number at a multiple of
this 4.3 trillion. Is that not correct?
Mr. Elmendorf. Yes, that is right.
Mr. Garrett. So within our lifetime we have seen interest
rates in this country dramatically above where they are.
Mr. Elmendorf. Yes, Congressman.
Mr. Garrett. Which may give, in the final point of this,
credence to the argument that whether we not overly aggressive
contraction, but an aggressive contraction as far as spending,
might be the prudent direction this Congress should go in.
Mr. Elmendorf. Yes, I think and we have said in other
testimonies as well, that there is this trade-off.
Mr. Garrett. Right, I understand that. Let me just go back
on something. Earlier this past month, a bill came out of this
committee, 3581, the Budget and Accountability Transparency
Act, which among other things changes the credit reform
methodology. You are familiar with that, I am sure?
Mr. Elmendorf. Yes.
Mr. Garrett. Back in June, CBO testified before the
Committee, quote ``By including a market based risk premium,
fair value estimates provide a more comprehensive measure of
cost which recognizes that financial risk that the government
assumes when it is issuing guarantees, is more costly to the
taxpayers than estimates suggest.'' In other words, fair
accounting suggests. Do you agree?
Mr. Elmendorf. Yes, Congressman. We believe that the fair
value method of accounting for federal credit transactions
provides a more comprehensive measure of their true cost.
Mr. Garrett. Okay, moving on to another topic that we have
had in discussion here, and that is the FHA bailout. Very
quickly then, on FHA bailout, there is a possibility, it
reports that chances of future net losses on the current
outstanding portfolio could exceed current capital resources at
close to 50 percent, which could necessitate a taxpayer bailout
for them. Currently the numbers show that their leveraging
ratio is around 400 to 1, which obviously makes everything else
that we have been seeing on Wall Street basically pale by
comparison. Have you all examined this? Have you examined the
budgetary implications if we have to go through a bailout for
FHA; and B, what would the implications be to the debt limit;
and C, a quick answer on that one is can you give a projection
as to the next debt limit increase?
Mr. Elmendorf. So you are correct, Congressman, that the
reserves that FHA holds are below the statutory minimum, but
there will be no bailout required in the sense that the
Congress does not need to take any action to deal with this low
level of reserves. If more people default on FHA guaranteed
mortgages than FHA has reserves for, then like other federal
credit programs, there will be what is called a credit re-
estimate. There will be an assessment of a higher cost that
will be recorded in the budget, but will not require the
Congress to take any explicit action. This is the case for all
federal credit programs. What it will mean, of course, is that
if the FHA does not get money back, or pays money out, that it
would not have to, then that will affect future government
borrowing.
Mr. Garrett. So the estimates that we have seen by analysis
that we may have to pony up another $50 to 150 billion at that
2 percent capital level which is now at .25 basis points goes
to zero, and they will not have the money actually to make the
payments, that we would not actually have to come up with the
cash to pay that is incorrect?
Mr. Elmendorf. Depends what you mean by whether you have to
pony up. What I was saying was that automatically, in the
budget, without Congressional action there will be no vote
about whether to bail out the fund.
Mr. Garrett. But my question was have you have seen what
that impact would be on the budget deficit?
Mr. Elmendorf. Yes, so our baseline projection includes our
assessment of what the cost will be for FHA going forward, and
I think that is incorporated in the projections that we have
shown.
Chairman Ryan. We have a lot of members here, so with all
due respect, we have to keep to the time so everybody can get a
chance. Mr. Blumenauer.
Mr. Blumenauer. Thank you, Mr. Chairman. Thank you, doctor,
for the good work that your staff does and your patience with
this committee coming before us as we plow some of the same
ground, but I think each of your visits, for me, provides
greater clarity, and I am not as grumpy as our chair. I think
there is a pretty clear path going forward which actually is
buried in your report, implicit in your testimony, and I think
what most of the people here can sort of get their arms around.
The chair references the problem we have had in controlling
Medicare costs, for example, over time, and it is because we
have a flawed payment system more than anything else, and as
long as we are going to pay for volume, people will up the
volume. Congress will, when the heat comes on, dial down what
purported to be reforms and it is a bipartisan failing.
Congress has folded. More volume, less value.
What we have in the Affordable Care Act, at least, is an
outline of things that if your studies show if allowed to work
over the course of the next 20 years, would have a substantial
affect on bending the cost curve. I think we could have a very
robust conversation around this table if we focused on how we
right-sized the military. I think most of us do not think we
need troops in Western Europe 65 years after World War II. We
can dramatically scale down what is necessary to maintain a
nuclear arsenal. Do we need 12 multi-billion dollar aircraft
carriers and build another one, when nobody else in the world
has even one that is comparable to what we have got; and you do
not build those things overnight, so we could gear up if some
change took place.
I mean, I go through the things with the chairman on
agriculture, and actually that was, I thought, a little bright
spot in an otherwise mixed bag that was offered up. There is a
chance to come together to actually save money. What you buried
in your testimony there, I loved the line where you talked
about the various scenarios going forward, but you talked about
one where the deficit scale is up a little bit in the short-
term, but with balanced policies that deal with refinement and
revenue, we can end up having lower deficits in the out year
without economic disruption that are predicted with some of the
other scenarios that you are talking about.
I would hope that we get to the point where this committee
starts zeroing in on areas of agreement that are not
necessarily ideological or partisan, but really point us
towards the path that you have outlined. I think it is very,
very important. One thing that I am concerned about is
equipping you to be able to help us go through. There was a
fascinating article in Ezra Klein's column this morning where
he talked about how much of the deficit is attributed to
policies that President Obama signed into law, and how much is
attributable to policies that were part of the Bush
administration. He comes up with a calculation $1 billion
Obama, $5 billion Bush administration policies.
Now to debate, more or less, what you are talking about on
this, but this should not be from a columnist in the Washington
Post and a couple of think tanks. It would be great to be able
to work in a refined basis with you on things like that going
forward; but I wish that you would comment on your capacity to
deal with the demands of this committee for more data, more
methodology, more ideas that are coming thick and fast; that we
want faster turnaround, and the implications of what we do with
the data is profound, dealing with trillions of debt and
spending in the out year. What is happening to your budget and
your ability to respond to this committee?
Mr. Elmendorf. I appreciate your concern.
Chairman Ryan. And please answer in 30 seconds.
Mr. Elmendorf. I appreciate your concern for our capacity,
Congressman. Certainly for the three years that I have been at
CBO, the demand for work for us has greatly outpaced our
ability to supply it, and we feel bad about that all the time,
and the chairman referred to some specific cases, but it
happens many, many times. I am on the phone with colleagues of
yours apologizing for work we have not been able to get to.
On the specific question, yes our budget is being reduced,
I think along with the budgets of the other congressional
support agencies and the committee staffs, and from my
parochial perspective, that is too bad, but it is not for us to
judge that decision of the Congress any more than we can judge
the other divisions of the Congress.
Mr. Blumenauer. Right, my time is expired, I appreciate the
chair's patience, but I think that this is one thing that we
ought to look at. Cutting their budget 10 percent when we are
throwing more things at them and there is more that relies on
what they can produce for us, is something that every member of
the Budget Committee ought to maybe reflect on, if that is
maybe not penny wise and pound foolish.
Chairman Ryan. As you know, that is the jurisdiction of the
Appropriations Committee, but thank you. Mr. Campbell.
Mr. Blumenauer. No, no. We are so persuasive I think it
would make a difference if we outlined being the budget torch
carriers.
Chairman Ryan. Mr. Campbell.
Mr. Campbell. Wow, it is like I am at concerts ready to
sing. If I do sing I think I would rather sing like President
Obama than Mitt Romney, unfortunately, but one of them would be
better at being president, but that is not what we are here to
talk about, and not the same one that is better at singing. I
do not know whether I will be as obedient as Mr. Blumenauer, as
grumpy as Mr. Ryan; I will try to be cheerfully realistic.
Dr. Elmendorf, good morning. The ranking member, in his
opening comments, threw out a couple of figures that if all the
Bush tax cuts were allowed to expire and the AMT index et
cetera, it would raise about $6.3 trillion using static
modeling, which those of here do not always subscribe to, but
$6.3 trillion over the 10 years. He also said that if it was
just the wealthy, which I presume is $250,000 or more, since
that is the number the president has thrown out, it would raise
about a trillion. I do not know whether those numbers are
correct, but if they are, and you can tell me if they are
roughly in the ballpark, then that means that the over $250,000
account for about 15 percent, roughly, of the total tax
potential if you let everything expire over the next 10 years,
is that correct?
Mr. Elmendorf. I think that is right, Congressman. It is
about 20 percent of the set of tax provisions enacted 2001,
2003, 2009. Then we also show on our tables other expiring tax
provisions, including, for example, the research and
experimentation tax credit to set more standard tax extenders.
So I think the effects of the top tax rate as being about a
fifth, based on the latest estimates I have seen from the staff
of the Joint Committee on Taxation, of the set of things often
described as the Bush tax cuts.
Mr. Campbell. Right, okay. So if you take all of the
different tax things, 15 to 20 percent let's say, then if you
wanted to get to the alternative scenario, and you only raised
taxes on $250,000 or more, then you have to take, roughly, 80
to 85 percent of the rest of that money and get it out of
spending, is that correct?
Mr. Elmendorf. Yes, I think that is right. I mean, the
alternative fiscal scenario said what if you do not do these
things, and I think what you are saying is that the piece,
which is just raising those top tax rates, only makes a small
difference in moving the alternative fiscal scenario back
toward the current law baseline.
Mr. Campbell. Correct, thank you, and the reason I bring
this up is there is obviously a lot of rhetoric that goes on,
that somehow we can solve the deficit problem with just that
slice of the populace, and we cannot. If you want to do that,
then you have to do a lot on the spending side, or you have to
increase taxes on virtually everybody to get more towards the
alternative scenario.
Second thing I would like to ask about, and I think I have
these numbers correct, but the health care law, which we
affectionately call Obamacare, the numbers on that were on the
basis of some late 2009 CBO projections, and at that time CBO
projected that unemployment would be 4.9 percent in 2014. From
looking at your thing here, you have 2013 at 9.2 percent. You
have 2014 through 2017 at 5.6, so clearly in 2014 you project,
now, significantly more unemployment.
Mr. Elmendorf. 8.7 percent.
Mr. Campbell. Okay, 8.7 percent you now project in 2014
versus 4.9 percent when CBO's numbers scoring the Obamacare law
were put into effect. So, if we were rescoring that today,
based on the scores that you have today because that is when
some of the Medicaid increases and exchange subsidies kicked
into effect, would not the cost of Obamacare be projected to be
significantly larger because of that much higher unemployment
figure?
Mr. Elmendorf. So that piece alone would raise the cost of
the Affordable Care Act. I do not know by how much. We say this
in the outlook, but I should emphasize, we are not able, for
this outlook, to update those estimates; that is a particularly
involved job. We will be doing that as part of our March
baseline, which is due out in just a month and a half we hope.
In the March baseline you will see new estimates of all of the
programs in the budget, but part of that will be new estimates
of the cost of the coverage provisions in the Affordable Care
Act, and onboard that change.
Mr. Campbell. Right, that and then the CLASS Act which we
may be dealing with this week and the fact that likely that is
going to be pulled back. Thank you very much; I yield back the
remaining three seconds of my time.
Chairman Ryan. Ms. Bass is next in line.
Ms. Bass. Thank you for your testimony this morning.
Earlier when we opened, I believe the chair mentioned the need
for the president to present solutions instead of just
criticizing, and I just wanted to mention that yesterday the
president sent his Start Up America Legislative Agenda to
accelerate start up and small business growth to Congress.
Parts of this agenda have already won bipartisan support in the
House, including allowing small businesses to raise capital
using social networks and eliminating taxes on capital gains
and key investments in small businesses; and I think this is an
example of the types of economic stimulus we should be
pursuing, and I am hoping that my colleagues on the other side
of the aisle will bring the president's package to the House
floor for a vote soon.
I did want to ask you about states and the fiscal pressure
on states, which I do see as a major obstacle to sustainable
recovery. At the start of 2012, 29 states have already
projected a gap of about 44 billion for fiscal year 2013, and I
imagine that this number is going to grow. Given that federal
aid was a lifeline for states and now, far from providing
assistance to states, I am sure that we will likely be
proposing additional cuts. I wanted to know if you could
respond to what toll on the overall economic growth is due to
states still facing a long and uncertain recovery.
Mr. Elmendorf. Congresswoman, of course we do not study
state budgets as carefully as we study the federal budget, but
state budgets do matter for the overall economic outlook for
the economy, and for the federal budget outlook as well.
States, as you know, have been through a terribly tough time.
Things are a little brighter than they used to be; revenues
have started to grow a little bit in many states, but the
overall levels of revenues remain well below what they were, in
most cases, before the recession. Obviously, the experiences
varies a great deal across states, but in general, revenues
remain well below pre-recession levels.
As you have said, the federal support, much provided
through the Recovery Act of 2009, is extra federal support and
is now waning, which will put increasing pressure on state
budgets. One way in which that matters for the economy is that
state and local governments have been reducing their level of
employment. So if you look back from the peak of the business
cycle, before the recession started at the end of 2007, since
then state and local governments have shed nearly half a
million workers and that is part of what has, not a large part,
but a non-trivial part of the loss of jobs.
Ms. Bass. Thank you. Could you also comment about the
proposed changes to unemployment insurance, specifically what
impact it would have on the economy to reduce the number of
weeks, that is currently being proposed?
Mr. Elmendorf. I will answer the question sort of a little
backward, if I might. Our baseline, our projections that you
see assume current law and thus assume the expiration at the
end of this month; however, if the Congress were to extend the
emergency unemployment benefits along the same lines that they
are currently in place, and that is one of many options of
course, that they would extend along the same lines that would
add maybe about a quarter of a percent to the level of GDP at
the end of this year without any other changes in policies, and
that would then add maybe about a quarter million jobs by the
end of the year.
Ms. Bass. Thank you. Chairman Ryan. Mr. McClintock.
Mr. McClintock. Thank you, Mr. Chairman. Mr. Elmendorf, we
have been hearing a recurrent them from the other side that the
recovery is pretty strong, the economy is getting better, of
all is well with the world. Let me ask you, are there more
people working today or fewer people working today than on
Inauguration Day of 2009?
Mr. Elmendorf. I believe the answer to that is there are
fewer people, Congressman.
Mr. McClintock. Is the unemployment rate higher or lower
than it was on Inauguration Day?
Mr. Elmendorf. To be honest, Congressman, I do not know the
unemployment rate on Inauguration Day.
Mr. McClintock. In January 2009 I believe it was 7.8
percent. Is that higher or lower than it is today?
Mr. Elmendorf. So the current rate is higher than that rate
that you have identified Congressman.
Mr. McClintock. And if the labor participation rate had
remained the same as it was on Inauguration Day, that is if so
many workers did not get discouraged and leave the workforce,
what would the unemployment rate be today?
Mr. Elmendorf. Let me see if we have an answer to that
question. I am sorry; I do not have that off-hand Congressman.
Mr. McClintock. Would you say it is over 10 percent?
Mr. Elmendorf. I do not know. It is a complicated question;
I do not want to speculate.
Mr. McClintock. Is the debt higher or lower today than it
was on Inauguration Day?
Mr. Elmendorf. The debt is higher, Congressman.
Mr. McClintock. How much higher?
Mr. Elmendorf. Again, Congressman, I have a lot of tables,
but they do not really keep track of political events, they
keep track mostly of economic events.
Mr. McClintock. Would $4.5 trillion more be in the
ballpark?
Mr. Elmendorf. That may be right; I do not know.
Mr. McClintock. How about the price of a gallon of
gasoline, more or less than it was on Inauguration Day?
Mr. Elmendorf. I am sorry Congressman, I do not know.
Mr. McClintock. Would it be up about 83 percent, perhaps?
Mr. Elmendorf. I do not know.
Mr. McClintock. Let me ask you this. We heard it said that
we just need to go back to the Clinton prosperity, and I would
heartily agree with that. That looks awfully good by today's
standards. Did the Clinton administration increase or decrease
spending as a percentage of GDP during his eight years in
office?
Mr. Elmendorf. I can check; we have these nice tables in
the back of our book.
Mr. McClintock. As a percentage of GDP, did it not decrease
under the Clinton administration by a whopping 3.5 percent?
Mr. Elmendorf. Depends, of course, how one aligns the
fiscal years with the presidencies. Fiscal year 1994, for which
the budget was set in 1993, spending was 21 percent of GDP, and
in the year 2000, it was 18.2 percent of GDP.
Mr. McClintock. So he cut spending relative to GDP?
Mr. Elmendorf. Well, I would have said that the president
and the Congress in that era made a set of decisions.
Mr. McClintock. Give credit where credit is due, the
president signed that legislation. Did he expand or contract
the federal government's entitlement obligations during this
period?
Mr. Elmendorf. That is a hard question to answer
Congressman, I do not have it off-hand.
Mr. McClintock. I am referring to specifically to welfare
reform that abolished the open ended welfare system that we had
at the time.
Mr. Elmendorf. Yes, so that was a change.
Mr. McClintock. Did it turn in deficits or surpluses during
the last four years of his administration?
Mr. Elmendorf. There were several years of surpluses,
Congressman.
Mr. McClintock. Okay, so Clinton reduced spending relative
to GDP, he contracted our entitlement obligations, he turned in
budget surpluses during his final years in office. Bush, on the
other hand, increased spending relative to GDP, expanded our
entitlement obligations, and turned in major budget deficits.
It seems to me if increasing spending, increasing our
entitlement obligations, and turning in major deficits were the
path to prosperity, we should be in the golden age of the
American economy right now.
Let me ask you this question. How does this recovery track
with the Reagan recovery? Senator Phil Gramm has estimated that
if the economy tracked under the Obama administration as it did
under the Reagan administration; and if you recall, Reagan
inherited a double digit unemployment, double digit inflation,
mile long lines around gas stations, interest rates at 21.5
percent. Gramm estimates that if the economy tracked today as
it did under the Reagan years, at this point of the
administration there should be 16 million more Americans
working with per capita income $4,000 higher than it is today.
Do you have a comment on that?
Mr. Elmendorf. No doubt Congressman this recovery has been
very unusually weak by U.S. historical experience, and we have
shown charts like that.
Mr. McClintock. One final quick question, and that is last
year we had a number of experts including yourself warning that
we were about five years away, at best, from a sovereign debt
crisis.
Where are we today?
Mr. Elmendorf. I was not one of the people who put a date
on that. What we said consistently is that is very difficult to
predict: what set of economic and budgetary circumstances, what
set of political dynamics will drive financial markets to stop
being willing to lend a government money at reasonable interest
rates?
Chairman Ryan. Mrs. Castor.
Ms. Castor. Thank you very much. Thank you for your
testimony. The economy is creating jobs right now. The trends
are positive; they are in the right direction. Private sector
payrolls added nearly 1.9 million jobs in 2011. The announced
unemployment rate in December is 8.5 percent, which is the
lowest in three years. We always hear that if the economy can
create more jobs, it would lower the deficit. Could you give us
a little more detail on that? I know you have a certain
projection, now. If your projections of the unemployment rate,
if we created more jobs how does that reduce the deficit?
Mr. Elmendorf. So we actually wrote a letter, which I was
looking for but cannot find off hand, to Congressman Van Hollen
a few months ago that talked about the effects of a stronger
economy on the budget, and the largest part of the widening of
budget deficits over the past few years has been the weakness
of the economy. The explicit actions of the government, the
Recovery Act and other things, have also led to wider deficits,
but the largest part of the widening has been the automatic
changes, particularly in revenues, but also on the spending
side to a weak economy: less taxable income, more people out of
work, and those things have had a big effect on the budget. A
very important part of the narrowing that we see in the budget
deficit over the next few years under current law is
improvement in the economy. There is also, of course, a very
large part, which is the changes in policies scheduled to take
effect under current law; but the economy matters a great deal.
We show in an appendix in this outlook a rule of thumb for how
stronger or weaker economic growth would affect budget
outcomes.
Ms. Castor. Is there a precise number, if the unemployment
rate is reduced, say, by .2, the exact impact that has on
cutting the deficit?
Mr. Elmendorf. There certainly is not a precise number in
my head, whether we could estimate a number for you, I think we
probably could. I did find the letter we wrote to Congressman
Van Hollen, this was actually October 4th of last year. In this
experiment I think we looked at the effects of moving the
economy all the way back to its potential level, but we could
certainly look, Congresswoman, at what the effects of a
particular change in the unemployment rate might be.
Ms. Castor. Because this is the great frustration, that
over the last year the Congress really has the ability to do
some things, for example, the Transportation Bill that is long
overdue, I know you said there is a lag there, but what if we
had gotten it done a year ago? What if we had some short-term
investments in some jobs initiatives that the president laid
out in the American Jobs Act? People at home love the idea of
repairing schools, putting people to work there; we have got so
many bridges in the state of Florida and schools that are in
need of repair, and it would just seem to be a great common
sense solution that would put people back to work and help us
reduce the deficit.
Mr. Elmendorf. I found the answer to your specific
question, actually, and this was in the letter to Congressman
Van Hollen. We estimate that a one percentage point reduction
in the unemployment rate would reduce the deficit by about a
half a percent of GDP, using some average historical
relationships.
Ms. Castor. Great, thank you very much. On another topic,
colleagues, we really should all be working together to try to
find a solution on a permanent Medicare ``doc fix.'' I know one
proposal that is being considered is looking at the savings,
President Obama has now ended the war in Iraq with the support
of the American people, and there are savings in the overseas
contingencies funds, which are the funds where, I guess, CBO
has said we are going to anticipate staying in Iraq longer.
What is available in the OCO for us to use in possibly
developing a permanent fix so that our parents and grandparents
can maintain their relationship with the doctor of their
choice?
Mr. Elmendorf. So let me try to explain this issue of the
Overseas Contingency Operation funding and how it appears in
our projections; I think it is a technical and complicated one.
Let me try to explain for everyone. There is not an OCO fund in
the sense of a set of money which is sitting somewhere. What
our baseline does do is for discretionary spending that is not
capped by the Budget Control Act, and this OCO funding is not
capped by the Budget Control Act, for that sort of funding we
take the latest level of appropriations provided by Congress,
and we extrapolate that with increases for inflation over time,
and that extrapolation from the latest funding that Congress
has provided for those purposes amounts to about $1.4 trillion
over the coming decade; but that is just our extrapolation
based on the latest actions of the Congress, and how the
Congress might want to think about that money in relationship
to other things that Congress wants to do, is really up to you
all.
Chairman Ryan. Which is all borrowed money.
Mr. Elmendorf. Well, there is a lot of tax revenue, there
is a lot more spending than tax revenue; we are borrowing a lot
for some purpose, Congressman.
Chairman Ryan. Thank you. Mr. Stutzman.
Mr. Stutzman. Thank you, Mr. Chairman and thank you Mr.
Elmendorf for being here today and I really appreciate your
testimony today and I think we would all be wise to take your
report and act upon it. I would like to touch on two things. I
would like to touch on the tax rate, and then also on Social
Security a little bit. Could you, and maybe you touched on this
a little bit and maybe I missed it, but could you touch on if
Congress would raise taxes at the end of this year outside of
the payroll tax rates, what kind of effect would that have on
the economy immediately?
Mr. Elmendorf. If Congress did nothing, so the tax rates
automatically increased going into next year, then we have
shown an estimate in the outlook for the effects of that and
other policies together, but I can give you an estimate for the
effects of the tax piece alone. Let me be clear about what
experiment I have in mind here. In the current law baseline,
taxes go up and spending is cut, particularly because of the
Budget Control Act; and our economic forecasts has conditioned
on that. If instead the Congress extended the expiring tax
provisions for the next few years, then that would increase the
level of GDP at the end of 2013 by between .3 percent and 2.5
percent, by our estimates. That is about two-thirds of the
total effect of this alternative fiscal scenario that we show
in the outlook, the other third is the effects of relaxing the
spending cuts that we include in the scenario.
Mr. Stutzman. Would you recommend that Congress extend the
current tax rates for three to five years to boost the economy
and then revisit the issue once the economy started to
progress?
Mr. Elmendorf. It is not our place, Congressman, to make
recommendations, but we have tried to illustrate here in the
analysis we did and the comments I have made, the short-term
negative economic consequences of fiscal contraction that is
very rapid, and of course, as you understand, as we talked
about there are long-term very negative economic consequences
of our not having fiscal restraint relative to the current
policies in place.
Mr. Stutzman. I think the facts are pretty clear that if we
would raise taxes, if taxes were to be raised at the end of
this year, that could be a detriment to the current state of
our economy, is that correct?
Mr. Elmendorf. We think that the increases in tax rates
built into current law for the end of this year, will reduce
economic activity and employment next year, relative to what
would occur if those tax rate increases were deferred.
Mr. Stutzman. I want to touch on the payroll tax rates
currently. Your estimate of the deficit does not include any
costs associated with extending the payroll holiday. What is
the cost of extending the payroll holiday to the end of this
year and what would be the deficit that would be added to that
cost?
Mr. Elmendorf. If the lower payroll tax rate were extended
through the end of this calendar year, we estimate that would
add $75 billion to the fiscal year 2012 deficit, and $25
billion to the fiscal year 2013 deficit; of course that is just
because fiscal year 2013 starts in the last quarter of this
calendar year. So the total is about $100 billion.
Mr. Stutzman. So what does that do to Social Security? How
many years are we shortening the life of Social Security if we
continue the current rates?
Mr. Elmendorf. Well, it has no direct effect on the Social
Security trust fund. It depends, of course, how you do it, but
what has happened in these lower payroll tax rates so far is
that general revenue has been transferred to the Social
Security trust fund in the amount of the foregone payroll tax
receipts. So the trust fund has been held harmless on the lower
payroll tax rate, and if you extend the lower payroll tax rate
with the same provision as is in place now, then the trust fund
would continue to be held harmless. If you did not do that,
then the trust fund would be $100 billion to the worse by the
end of the year, relative to what would happen under current
law. I do not know what effect that has on, say, the expiration
date of the trust fund. The trust fund is trillions of dollars,
we think the Old-Age and Survivors Insurance fund, that part of
Social Security has decades before it will be exhausted.
Mr. Stutzman. Did you look at if the payroll tax rates were
not to be extended at the current levels, what kind of effect
would that have on the economy? If we let Americans keep more
of their money in their pocket, does that have any effect on
the economy, positive or negative?
Mr. Elmendorf. Yes, relative to current law extending the
payroll tax cut for the end of the year will increase output
and increase employment by the end of the year. I mean, in
general, lower taxes or higher spending, in the short-term,
given an economy with so many unused resources, those actions
would tend to provide a boost in the short-term. The amount of
the boost depends on the specifics of the policy, and the
testimonies that we have done, including the one last fall, we
tried to lay out what we estimate to be the relative bang for
the buck of different sorts of policies, but the directions are
pretty consistent. The crucial point to remember is that works
for a few years in an economy with unemployed resources because
the constraint on economic activity now is really the demand
for goods and services.
By later in the decade, the constraint on their economic
activity will be the supply of savings, it will be the later
supply, it will be productivity, and in that sort of world, the
way the budget choices matter is importantly through the amount
of borrowing the government does, also through the effects of
tax rates on people's behavior and through the effects of
certain spending programs.
Chairman Ryan. Mr. Pascrell.
Mr. Pascrell. Thank you Mr. Chairman. There was a sharp
increase in military spending in 1943, guess why? So when you
take numbers out of context and game the numbers, I think we
all have a responsibility here to set the record clear. We have
an entirely different situation.
Chairman Ryan. Who are you addressing?
Mr. Pascrell. The gentleman from California just took off.
Chairman Ryan. The gentleman is not here.
Mr. Pascrell. I will reduce my remarks about it, if that is
okay with you. We had a very different situation in terms of
President Bush I when you lowered taxes, and Mr. Clinton raised
taxes. So if you want to put numbers in context and why things
were better at one time and not so good at another time, we
need all of the facts. Both of those presidents worked hard to
do what was necessary at the particular time in history when
they took office. This president took office in January of
2009, and you know what the employment and unemployment was in
the two months before him, and in the two years before him, and
in the two months after he raised his hand and in the two years
after he raised his hand?
So I want to show you a chart, if I may.
We are gaming the numbers. The blue line in this chart
shows the rate at which state and local government have been
growing or shrinking as compared to real GDP since the late
1980s; it is very clear, even I understand it; so you all
should understand it. Those are the numbers. You did not put
them there, and I did not put them there. These are the
numbers. In 2007, if you try to look closely, the private
sector and government were growing, then the economy began to
shrink and then fell off the cliff during the financial crisis
which occurred at the end of 2008.
Can I see the second chart please?
Thank you. This chart shows the rate of government
investments or how we are sacrificing the future as well as the
present. At the beginning of 2009, in the face of political
timidity and outright obstructionism, we acted to stem the drop
in economic growth and unemployment, and we passed the Recovery
Act, February of 2009. The most successful parts of the
Recovery Act were state fiscal relief that went directly into
state and local jobs. The result was the blue line's upward
spike in 2009.
Then we all know the rest of the story. The private sector
2009 recovery stalled, and everything started to drop in the
second quarter of 2010. The president proposed the American
Jobs Act, which included $35 billion to reverse this trend, but
it stalled in the Congress. We lose teachers, we lose police,
and we lose firefighters. Now we have lost close to 700,000 in
the public sector; so one is going up, and the other is going
down dramatically.
Last night, so we could put a human touch on this, Mr.
Elmendorf, police officer Kevin Brennan in Brooklyn was shot
down, shot in the face pursuing an individual with an illegal
gun. We have reduced, in human factors, when we glibly talk
about what we can cut, and what we cannot cut. I mean, the
direction we are going we are going to have to cut money to the
FBI, transportation, border security, vets benefits because
that is where we are headed. There are people here that want to
destroy the government, and that it has no responsibility and
they cannot live up to the obligations. Now, my question to you
is this: In your opinion, was the effect of the elimination of
thousands of public sector jobs, teachers, police, and
firefighters, in overall economic growth to the economy?
Mr. Elmendorf. No, Congressman.
Mr. Pascrell. Why not?
Mr. Elmendorf. The loss of public sector jobs is, as I said
earlier, a part of the overall loss of jobs that we have seen
in this very prolonged and severe economic downturn.
Mr. Pascrell. We have seen that sector of the job market
shrink.
Mr. Elmendorf. Yes, Congressman.
Mr. Pascrell. Thank you very much.
Chairman Ryan. Mr. Flores.
Mr. Flores. Thank you, Mr. Chairman, thank you director
Elmendorf for joining us today. Start out with a caveat to
begin with. Economic growth is virtually the same as employment
growth, right? I mean, if we talk about economic growth, we can
talk about more people working.
Mr. Elmendorf. They certainly move together, obviously not
perfectly.
Mr. Flores. Not perfectly, but pretty good correlation. So
my question starts with this, and I would like to keep the
answers fairly short. Which economic activity provides greater
economic growth and employment, option A is private investment
or option B is federal spending.
Mr. Elmendorf. Congressman, it depends on the nature of the
federal spending you have in mind.
Mr. Flores. Well, I have a chart, I do not have it with me
right now, but private investment is the correct answer.
Private investment trumps federal spending almost every time.
Which policy option provides greater economic growth, leaving a
dollar in the hands of a taxpayer, or taking that dollar from
that taxpayer and increasing federal spending?
Mr. Elmendorf. Depends on the nature of the federal
spending, Congressman. I am not trying to be difficult, but it
does matter what money is used for.
Mr. Flores. Okay. Well, let's put it this way then. What
would create more jobs, Keystone XL pipeline or Solyndra? We
spent about a half billion dollars on Solyndra, how many jobs
do we have from that?
Mr. Elmendorf. Congressman, we have not studied those
particular examples.
Mr. Flores. Not very many though, right?
Mr. Elmendorf. Companies that fail generally do not create
a lot of jobs, they do along the way, of course, and I have not
tried to study the history of that firm.
Mr. Flores. And how many federal dollars is it going to
take to build the Keystone XL pipeline?
Mr. Elmendorf. I do not know Congressman.
Mr. Flores. Zero. And the estimates varies widely; some
people say 20,000 temporary jobs, some people say it is just in
the thousands, but it does not make any difference. On one
hand, option A is Solyndra, where we spent a half a billion
taxpayer dollars and got no jobs. On the other hand, we have $7
billion of private investment and we get good long-term
economic job growth out of it, right?
Mr. Elmendorf. Certainly a shortfall in private investment
in the past years has been a drag on the economy during the
past few years and will continue to be a drag on the economy
over the decade. Part of the reason we say in that report that
we have marked down the projection of GDP at the end of the
decade, relative to what we would have had without the
financial crisis and recession, is a shortfall in investment.
Mr. Flores. That takes us to my next question. In your
opinion or in your agency's analysis, what is the optimum level
of these activities as a percentage of GDP? Tax revenues, what
is the optimum level at which you have good economic growth,
you are not raising the deficit too high to cause long term
damage, but at the same time you are taxing at an appropriate
level to fund the government. What percentage of GDP is that?
Mr. Elmendorf. I do not think there is an analytic answer
to that question, Congressman, it is a matter of people's
choices. Deciding the level of taxes that one thinks is
appropriate cannot really be done separately from deciding the
level of spending that one thinks is appropriate.
Mr. Flores. Well that is my next question. So what is
optimal? I mean, one of the things you have talked about here
is the rub that we have, on one hand, you have said that the
increase in tax rates that we are going to have on January 1st
of next year is going to dampen economic activity, and it is
going to have a pretty big dampening impact on economic
activity.
On the other hand, you said that the deficits, which
deficits are just transfer payments; they represent government
spending and excess revenues; so you could call it a giant
stimulus bill if you wanted. If you have a trillion dollars of
deficits, it is really a trillion dollars of government
stimulus. You said that stimulus is going to ramp up economic
activity; if we turn that spending down it is going to lower
economic activity. So what I am trying to get to is what the
optimum percentage of tax revenues versus spending is? I mean,
in the real world they ought to be the same, and I am just
trying to get a feel for what that should be, and, again, as a
percentage of GDP.
Mr. Elmendorf. It certainly cannot be too far apart for too
long.
Mr. Flores. Right.
Mr. Elmendorf. So the thing that cannot happen is that the
ratio of our debt to our GDP rises indefinitely. That cannot
occur because at some point, we cannot really predict when, but
at some point people will stop lending that government money.
Mr. Flores. Right. Let's go to the next one. What was the
cost per job created under the stimulus spending, under the
ARRA?
Mr. Elmendorf. I am sorry, Congressman, I do not have an
answer to that off-hand. We can take the estimate we have of
the changes in employment, and divide that by the $837 billion,
but I do not know off-hand what the answer to that would be.
Mr. Flores. Okay. Well, it is substantial. It is a lot more
than private dollar investment or the number of jobs you get
for a private investment dollar spent. Lastly, you noted in
your report that the cost of the stimulus has increased from
$821 billion to $839 billion. What is behind that cost
increase?
Mr. Elmendorf. I think we made some small revisions to the
cost of some of the refundable tax credits enacted in that
legislation, and maybe on the unemployment insurance side as
well: just the refundable, I am told. Some revision of the
refundable tax credits.
Mr. Flores. I guess the bottom line is the cost of the
stimulus plan is still going up, and we do not have many jobs
from it. Thank you.
Chairman Ryan. Mr. Honda.
Mr. Honda. Thank you. Thank you very much. Thank you Mr.
Chairman and welcome back.
Mr. Elmendorf. Thank you, Congressman.
Mr. Honda. I enjoyed that last discussion and congratulate
your daughters coming to watch you work.
Mr. Elmendorf. Thank you.
Mr. Honda. I am sure they are going to learn something
here. One of the things I have learned over the last couple
years of being in this Budget Committee is that your job is to
be neutral in your responses, and to respond in ways that are
objective and honest and not be shaded by some the way we would
like to lead our questions, and to have some sort of a response
that appears to be favorable or unfavorable. I appreciate the
difficulty of your task and I am awed at your grasp of the
information that you have, having to respond to the different
folks here.
Mr. Elmendorf. Now you are going to stump me. You set me
up.
Mr. Honda. No, I am trying to just reflect my thinking on
the kinds of things that we are trying to struggle with here in
the Budget Committee on behalf of the country. I think every
member of Congress agrees that we do have a deficit and a debt
problem that deserves our serious attention. This attention
should be looked at in terms of the dynamics of what has
happened in the past, what could happen in the future, but how
we put together the different policies and the mixture of that
so that we try to figure out what is the best outcome in the
future. We only disagree, I guess, about the best way on how to
solve it, and I hope that we can really take a balanced
approach and use a mix of the many tools at our disposals.
So in your initial gut reaction to a plan that has these
kinds of characteristics, what was your reaction to having the
plan that balances the budget by 2021, and makes a targeted
investments in areas like infrastructure and education, and
then finances these changes with a progressive tax code, and
also ending our overseas military engagements? What would be
your gut reaction to a plan that has those kinds of elements in
it?
Mr. Elmendorf. Congressman, I mean, we can and do analyze
the economic effects of particular sorts of policies that
Congress is considering. We have done quite a bit of this, for
example, in terms of different tax policies that we have talked
a little about today. We have also written about the value of
certain sorts of government investments in physical capital, of
a sort, of traditional sorts of highways and other
infrastructure, but also in what economists call human capital,
the skills of workers. That is harder to quantify, though. So
we can talk about specific choices of that sort.
We have not been asked to analyze the effects of an
overarching fiscal plan, except to the extent that we do an
analysis every year of the president's budget, both the direct
budgetary effects and the economic effects; and we have done an
analysis in this outlook of this particular alternative
scenario, which is not good in the long run. We have not looked
at what you are talking about, exactly, and we would have to
know exactly what it was. But also, I want to emphasize that
the reason that CBO does not make policy recommendations is
because the policy choices are not just a matter of analysis.
It is a matter, ultimately, of value judgments by you and your
colleagues on behalf of me and my fellow citizens of what we
want the government to do and not to do. I think the lesson of
this alternative fiscal scenario and the size of the gap in
2022, and the fact that relative historical pattern we see
there is so striking is the rise in the cost of Social Security
and the health care programs.
The ultimate question will be whether we want to make, as a
country, substantial cutbacks in Social Security and the
federal health care programs, relative to how they are
scheduled to work now, or substantial increases in tax revenue,
relative to the historical experience. We have to pick at least
one, we could do a combination of those two, we cannot do
neither. We cannot sustain the traditional levels of tax
revenue and the current benefits we provide for Americans when
they become older at the same time, given the rising number of
older Americans and the rising cost of health care. So any
proposal that is set on one side of that or the other, has
implications for the other side, and it is up to you and your
colleagues to weigh those, and we can provide some analysis
that I hope is helpful, but ultimately it is a matter of value
judgments.
Mr. Honda. Thank you, and I guess the analogy remains X
equals whatever your value system is.
Mr. Elmendorf. Thank you, yes.
Chairman Ryan. Mr. Mulvaney.
Mr. Mulvaney. Thank you, Mr. Chairman, thank you Mr.
Elmendorf. I am going to move away from the policy and get down
into the weeds on some of the numbers if I can. If I could get
that first slide up, that would be great; it's probably
something that is just of interest to you and me, but let's
take five minutes and go over some detail.

I was looking at the report last night, and noticed
something fairly interesting regarding the inflation numbers,
and it is something that you and I have talked about before, I
have talked about with Dr. Bernanke, a bunch of different
folks. To run through the quick history, in your forecast of
last year, you all expected inflation, and we're talking about
the CPI now for urban workers, we can pick any measure you
want, but we use them across this same analysis. You thought it
would be 1.3 percent, then in August you adjusted that up to an
assumption of 2.8 and then we finished the year at about 3.3.
At the same time that we saw in actual rates of inflation
that were higher than your estimates, you did not change the
assumptions for 2012, roughly the same: 1.3 last January, 1.3
again in August, and 1.4 in the report from yesterday. That
grabbed my attention and it led me to the next slide, which I
want to ask you about.

We took a look at your projections for CPIU for the next
five year window, the first five year window and the second
five year window; they are slightly different, off by a year
because of they are a rolling number, but let's call it the
first year in the five year window. You have, despite the fact
that inflation turned out to be considerably higher last year
than you had expected, you actually revised down your
expectations for inflation over the course of the first five
year window, and left it the same for the second five year
window. What we did, Mr. Elmendorf, was went in and looked at
the historical data from the BLS since 1970, and took a series
of five year rolling averages, and it turns out you are using
an assumption for the first five year window in this report
that would be the lowest five year rolling average in recorded
history; and I am just wondering how you can justify that? If
you take a look at what we have got: the average five year
rolling average, which I know sounds strange, but I think you
can see where I am going, over the last 40 years is almost 4.5
percent. The average five year rolling average over the last 10
years is 2.5 percent. The lowest we could find of any five year
rolling average, going back to 1970, was actually 2006 through
2010, and that was still 2.2 percent, 2.18; and the worst, as
Mr. Garrett referenced earlier in his questioning, was 1977
through 1981, when the average was above 10 percent. What is
the justification in taking these unprecedented rates of
inflation, as your assumption, as you look into the future?
Mr. Elmendorf. I have not looked at those precise numbers,
but I understand your point, I think, Congressman. You are
certainly correct that our forecasts of inflation have errors
in them like our forecasts of all other economic variables. In
terms of last year, there were some particular developments in
energy markets and other parts of the economy that pushed
inflation above what we and many people have been expecting,
and a number of people thought at the time that those were
likely to be transitory developments, and the way the data are
unfolding, is so far consistent with that story. So the change
in the CPIU over the past three months is less than it was over
the past six months, which is less than it was over the past 12
months. The latest information about inflation suggests that it
is in fact coming down.
Now, more broadly, I will mention two things. One is that,
relative to years preceding the early 1980s, there has been a
fundamental change in the behavior of central banks, in this
country and around the world, related to a fundamental change
in economists understanding of the role of central banks in
keeping inflation down.
So as we look out to the second half of the decade, we
think it is very clear that the Federal Reserve's objective is
to keep inflation around 2 percent, and we think they have the
tools to do that. For the next few years, I think the crucial
thing to realize is that we have a period of unprecedentedly
prolonged high unemployment since the Depression. We are living
through a period that is the longest period of excess workers
and houses and so on in the economy, that we have had in my
lifetime, and there is a systematic relationship.
Mr. Mulvaney. And I do not mean to cut you off but I am
running out time, and I may have to finish this in a second
round, but I understand the relationship between GDP growth and
the fact there is excess capacity in the labor markets, and
that would allow us to grow the economy without seeing a lot of
inflation, and this is the next slide, you all have actually
revised up your GDP estimates over the course of the first five
year window from 3.4 percent when we did this last January to
4.1 percent today, which again is well above the historical
average and approaching the highest ever of the actual
performance within the GDP growth in a five year window.

So I guess my question is: How is it that you are assuming
historic rates of growth and historically low rates of
inflation?
Mr. Elmendorf. The 15 second answer, Mr. Chairman, if I
might, is that we are starting that growth from a particularly
large gap between our actual output and the potential output of
the economy. Then I am happy to take this up with you
additionally, Congressman, later.
Mr. Mulvaney. Thank you, Mr. Chairman.
Chairman Ryan. Ms. McCollum.
Ms. McCollum. Thank you very much Mr. Chair. Dr. Elmendorf,
it is good to have you here. I have two questions. They are
rather brief and so I will give them to you together. Many
Americans get up and go to work every day. More of them would
like to be able to get up and go to work today, but Americans
get up and go to work every day. They work hard and they
contribute to the success of our country. For every dollar of
income from wages, these working Americans, they will end up,
quite often, paying as much double the tax rate: double the tax
rate of investors receiving income from dividends or capital
gains. So to me this hardly seems fair. Since there is such a
significant tax benefit, even a bias I would say, extended to
investors over working Americans, is there some equitable,
qualifiable benefit to the economy and job creation inherent in
every dollar investors receive from dividends or capital gains,
versus the dollar that is earned in wages? So what is the
impact the federal deficit and this tax inequity and the
benefits provided to investors over workers?
My second question I would like you to kind of summarize
the different options because people have asked you a lot of
questions, so you have some scenarios that you can talk about
that you have presented to us. Again, all the Bush tax cuts are
allowed to expire at the end of 2012, what is the effect on the
economy and the federal deficit if only the upper end Bush tax
and income earners over a million are allowed to expire, or if
all the Bush tax cuts were extended for the next 10 years, what
is the effect on the economy, what is the effect on the federal
deficit? I have been struggling with this, you know, a worker
who earns a dollar versus an investor who gets a benefit?
Mr. Elmendorf. Congresswoman, as you know, in setting tax
rates Congress takes a number of considerations into account.
The equity issues are part of that, so is the effect on the
economy and, you know, the economic effects are not necessarily
correlated with what you or others might view as the justice of
the situation, so it is really sort of a separate issue, and I
am not qualified to speak to the equity issues, except in my
own personal role.
When we do analysis of the effects of changes in tax rates,
higher tax rates generally discourage the thing that is being
taxed. Higher tax rates on work on balance, reduce work effort.
Higher tax rates on the returns of saving, on balance reduces
the amount of saving, and we incorporate those effects in the
estimates that we do. I do not think there is a right answer
from a economics perspective of what the relative tax rates
should be because it is this combination of what the economic
effects and value judgments again. We can do work about the
effects of changes in the particular sorts of taxes, as can our
colleagues and staff in the Joint Committee on Taxation, but I
do not have comparisons of different sorts of things to use
here.
On the second question you asked, the economic effects of
extending all of the expiring tax provisions would be a little
larger than the economic effects of extending all the expiring
tax provisions, except for the top tax rates. So in the short-
term the lower the taxes are in general and the higher spending
is in general, that tends to boost the economy as I have said.
Now an analysis we have done, before we have said that the
effects of lowering the top tax rates is smaller on the economy
in the short-term than the effects of changes in tax rates
further down the income distribution because higher income
people tend to spend a smaller share of the money that they
have, and what the economy needs in the short-term is more
spending. So the effects of extending the expiring tax rates at
the top will be smaller, dollar for dollar, in the short-term
in stimulating the economy, than the effects of extending the
other tax cuts.
In the longer term it is more complicated because in the
longer term what matters, importantly, as I said, is not the
demand for spending, it really is the supply of saving and the
work effort and so on, and in the longer run it is more
complicated actually to look at the effects of different sorts
of changes in the tax rates, and we have some examples of this
in the testimony I did for the Senate Budget Committee a year
and a half ago, or so, and we talk more about that, but it is
more subtle in the longer term.
Chairman Ryan. Thank you. Ms. Black.
Ms. Black. Thank you Mr. Chairman, and thank you Dr.
Elmendorf for being here today. I want to turn our attention
back to a subject that has been mentioned several times in the
previous questions about trust funds, but more specifically
about Social Security. In understanding trust funds and I think
you have done a good job in the introduction to this particular
section and I want to lift up one paragraph that is in there on
Page 121 when you say, ``A trust fund receives cash receipts
that are not needed immediately to pay benefits or cover other
costs, the Treasury uses the extra income to reduce the amount
of new federal borrowing that is necessary to finance the
government-wide deficit, and the reverse happens when revenues
for trust fund falls short of the expenses in a given year.''
So I think that helps us to understand a little bit more about
how the trust fund works. Then I want to turn everyone's
attention to Page 122, and there just above the Social Security
trust fund statement or section you say, ``Without legislative
action, that there are three trust funds are projected to be
exhausted during that period,'' and that period you are talking
about is 2013 to 2022: Social Security Disabilities, Insurance
trust fund, Medicare hospital trust fund, and the highway trust
fund.
Now, looking at Social Security trust fund, we know that it
is running a cash deficit, and payments are going out for
benefits that exceed the Social Security payroll taxes that are
coming in, and of course, if this trend were to continue we
would need to redeem the Social Security trust fund's assets to
make payments. Do the Social Security trust funds represent
real assets that government can draw upon?
Mr. Elmendorf. So as we say Congresswoman, in the paragraph
following the one you read, the balance in the trust fund is an
asset for the individual program, but a liability for the rest
of the government, and the resources to redeem a trust fund
securities in some future year must be generated through taxes,
income from other government sources, or borrowing from the
public in that year. Therefore, trust funds have an important
legal meaning in that their balances are a measure of the
amounts the government has a legal authority to spend for
certain purposes, but they have little relevance in an economic
or budgetary sense.
Ms. Black. You say on Page 124 ``By 2022 the trust fund for
the Old Age and Survivor's Insurance is projected to show a
deficit.'' What then? What then do we do? Do we go into the
securities? Are there actual securities there that can be
redeemed to pay for the benefit?
Mr. Elmendorf. Well, there are actual securities there, the
trust fund is the legal owner of a very large pile of honest to
God government securities, but the resources to honor those has
to come from some other place, as we have discussed, so when
the trust fund starts to give securities back to the
government, the rest of the government, and ask for cash, that
cash has to come from some source in that year.
Ms. Black. And again, help me understand where they come
from. You mentioned borrowing.
Mr. Elmendorf. Basic sources of funds to the government on
a unified basis all the time is the revenue that is collected,
the taxes or fees or something else, and borrowing.
Ms. Black. So at the end of the day, it almost is a shell
game where we just move this money around and it appears that
in trying to understand when we tell people that are paying a
tax, a payroll tax, and at the other end they expect a benefit,
the dollars really that are being put in there, are not
necessarily the dollars that, at the end of the day, are going
to be redeemed because there is a lot of shifting and moving of
the money?
Mr. Elmendorf. How much people get out depends on the
decisions of the Congress about future benefits. As you know,
in CBO's work, we focus very much on the unified federal
budget. The Social Security trust fund and others are
accounting mechanisms and they have a useful role, I think, as
accounting mechanisms, but in our analysis of the budget
situation and our projections of the future budget, we focus on
the outlays for programs and the collection of money without
focusing on which particular account something is being kept
track of in. We do talk about the trust funds in this appendix
that you have read, but we think a more useful way for you and
your colleagues to think about the fiscal policy choices, is
not through the trust fund lens as much as in terms of the
overall activities of the government, in both providing
benefits and services, and in collecting revenue.
Ms. Black. I think, to make a point here, and I know my
time is up, but I need to make the point here is that at the
end of the day the money has to come from somewhere, and the
money, if it starts to run out, has to come from somewhere, and
i.e. many times that is borrowing more money and increasing our
deficit.
Chairman Ryan. Thank you. Mr. Ryan.
Mr. Ryan of Ohio. Thank you Mr. Chairman, thank you for all
that you do for us and welcome to your family that is here.
Mr. Elmendorf. Thank you.
Mr. Ryan of Ohio. So, how many jobs do you guys estimate
the stimulus bill created?
Mr. Elmendorf. As a path over time, our estimate is that in
2010, for example, that it added between .7 and 3.3 million
people in employment. In 2011, that it added between .5 and 2.6
million people in employment. In 2012, those numbers are
smaller because the budgetary effects of the Recovery Act are
waning.
Mr. Ryan of Ohio. The money is coming out of the economy,
or not going into the economy.
Mr. Elmendorf. Not going into the economy.
Mr. Ryan of Ohio. Right.
Mr. Elmendorf. Yes.
Mr. Ryan of Ohio. So we have CBO telling us that the
stimulus has created millions of jobs here officially on the
record. What was the change in GDP growth from, say, January
and February prior to the stimulus bill? We know we were
bleeding 600,000, 700,000 jobs a month. What was the change in
GDP growth, say from that January and February to now, for
example?
Mr. Elmendorf. Well, as you know, GDP was falling very
sharply at the beginning of 2009 and it reached its trough
around the middle of the year, economists call that the end of
the recession; recession is a technical term that means the
declining period when GDP is declining. Since then GDP has been
growing.
Mr. Ryan of Ohio. By how many points from the bottom in
that summer to the growth that we saw in the last quarter?
Mr. Elmendorf. So I am sorry, I do not know that off hand.
Mr. Ryan of Ohio. What did it grow last quarter, 2.8?
Mr. Elmendorf. Yes.
Mr. Ryan of Ohio. What was it in that summer? Do you
remember, the negative?
Mr. Elmendorf. I do not remember what it was in the first
half.
Mr. Ryan of Ohio. Okay, but we have had significant change.
We have had jobs created. So one of my colleagues said earlier,
you know, what is better, private investment and private
investment trumps federal spending, and I do not think there is
anybody here who would not rather have the private sector
coming in, making investments, creating jobs; that is what we
are all trying to figure out how to make that happen, and what
environment needs to be in place in order for that to happen
from deficits to investments that we make. But the issue
really, at that point, was that there was not private
investment, correct?
Mr. Elmendorf. Yes, I think there was a very sharp
reduction in household spending on the consumer goods, in
housing construction, in business investment, and as private
demand faltered, part of what happened in response to that was
an automatic change in the government budget. Tax revenues fall
when income falls, and spending rises when incomes are down,
but also then the government acted through the Recovery Act and
other measures, and we think that the Recovery Act provided
some additional demand, some from government purchases, but
some by lowering taxes in a way that boosted private demand.
Mr. Ryan of Ohio. Did you run any models on what the world
would have looked like had we not passed the stimulus package?
At that point you guys had to have been saying, if you do a
stimulus package that is 800 billion, if you do one that is 1.5
billion, or one 1.5 trillion, or if you do nothing, what was
the model looking like of the do nothing scenario?
Mr. Elmendorf. We did estimates in the winter of 2009 of
the effects of the versions of the Recovery Act as they were
being considered, and I think we published a chart at some
point that showed a decline in the level of GDP that was very
severe in the absence of the Recovery Act, and the decline that
was still severe, but not as severe, in the presence of the
Recovery Act. In a sense, one can take our estimates that we
published now of the effects of the Recovery Act and subtract
off those effects from the realized GDP growth and employment
levels, to get a sense of what we think would have happened in
the absence of the Recovery Act.
Mr. Ryan of Ohio. Okay, great. I just want to make that
point. I mean, no one here is happy with where we are at today,
believe me, I represent Youngstown, Ohio; we have the poorest
city in the country. No one is happy with where we are at, but
I think it is important for us to say wait a minute, there was
no private investment, this had had some significant effect,
CBO is telling us millions of jobs, a turnaround in GDP growth.
Last quick question, so now we are debating these value
judgments of raising taxes on hedge funds, billionaires,
millionaires, whatever, versus federal spending. What increases
the GDP more significantly, a tax cut for a millionaire or
higher, versus a federal investment in, say, building roads and
bridges and fixing the combined sewer overflow problem we have
in the country?
Mr. Elmendorf. Over the next few years, Congressman, we
think that higher income people spend a small share of the
incremental income or wealth they have from a tax cut, does not
provide very much stimulus to the economy relative to giving
money to people who will spend a larger share of that money,
and that includes sending money in the form of infrastructure
investment. The big issue in that case, as I mentioned before,
is the delay from your actions to the money actually flowing.
Chairman Ryan. Thank you. Mr. Ribble.
Mr. Ribble. Thank you Mr. Chairman. I do have a couple
slides, I wonder if we can get those brought up. Dr. Elmendorf,
thanks for being here, I know that it has been a long morning
already. I appreciate your patience; you have been kind with
your time. I want to take a look at two slides very briefly,
and then just kind of get you to comment on them.

This one shows consumer spending dating back to 2001. We
can see the recession period in there, the drop-off in at
consumer spending, but even that drop-off, it dropped off back
to about 2007 levels, which was at the end of the housing boom,
one of the largest growth periods in the nation's economy, and
then subsequently it has turned around and began to grow again.
I guess the thing that pops in my mind is we hear a lot about
consumer spending. If consumer spending is the ticket to job
growth, and consumer spending is up and up fairly dramatically
from 2007, I wonder why we do not have jobs.
Mr. Elmendorf. It is the sum of the demands for goods and
services that drive overall employment; so it is adding up what
is happening in consumer spending and business investment, and
housing investment and the federal and state and local
governments purchases of goods and services and net export.
Mr. Ribble. Good. Let me just bring another slide up. I am
going to talk along the same lines. Let's go ahead and I will
let you continue. I have got one more slide if we can bring
that up.

All right, we have talked a lot, and my colleague did, Mr.
Ryan from Ohio just mentioned it, you just mentioned in your
comment, about private investment. I know that you are an
economist, but I am going to ask you to put on your psychology
hat, and can you possibly tell me because I spent 30 years in
the private sector running my own business creating jobs in
this country. I know that the political class here in
Washington likes to claim they claim jobs, Democrats claimed
all these jobs and Republicans create all these jobs. I find it
a little insulting. I thought I actually helped create them
myself in my company, but private investment is way off. Why do
you suppose that is?
Mr. Elmendorf. Well, investment is one of the more
cyclically sensitive parts of the economy. So in general,
business investment falls sharply in recessions and then
rebounds sharply in recoveries, but it is true that in this
particular downturn, business investment fell to an especially
low level; we show a picture of that ourselves in our outlook I
think. And there are a number of factors here, and it is hard
to disentangle them. We are actually doing some work now trying
to disentangle various factors that have led to the slow
recovery, and when that work is finished we will of course
supply it.
Mr. Ribble. Let me tell you what small business owners and
job creators are telling me back in my home district. They are
telling me that they have absolutely no confidence that the
political class in Washington, D.C. can solve these problems.
Until they have a sense that we can solve the problems, until
they have a sense that Democrats and Republicans can lay down
their swords, maybe put aside preconceived impressions of
reality, I have to defend this type of economic model, they
have to defend their type of economic model and we are going to
hold on to it until we die, business is not going to invest
money because they do not trust us. I would call on all my
colleagues to just lay down the sword and try to fix this
thing, and inject some confidence back into the economy because
I will tell you, the other thing I hear from them is that the
government has gotten too much in the way. They feel that a $16
trillion debt, it scares the living daylights out of them. They
feel that a regulatory environment that places thousands and
thousands and thousands of pages and new rules on them every
single year is a burden on them; and they feel that oppressive
tax rates that continue to take from them money that they could
use to create more and more jobs is a risk to them; and I hear
this over and over again, not from just one or two.
I am going to close with one other comment, and one other
question. I was really pleased to see that you brought your
daughters with you today; I wish my own two children were here
with me today and my grandchildren were here today. You have
done a wonderful job, I am sure they are very proud of you. Do
you think that their future is brighter today than it was $4
trillion of debt ago?
Mr. Elmendorf. A lot has happened in the country since our
debt was $4 trillion smaller, Congressman, and I think some
aspects of that have been good for their future and some not,
but that is a personal judgment in any case.
On the matter of business investment, I am not at all
surprised that the uncertainty about future government policies
is weighing on business. There is a recent paper, actually co-
written by a member of our panel of economic advisers, that
shows that uncertainty about government policies is especially
high now, and given the tempering nature of so many parts of
the tax code, such lack of clarity about what will happen in
health care policy, in financial regulatory policy and so on,
we think that is weighing on business investment decisions, but
I would just say quickly, that I think the surveys of business
suggest that the biggest factor weighing on their hiring and
investing is uncertainty about the future demand for their
products, and that is a sort of circular exercise, which is
that if some businesses spent more and hired more, that would
bolster demand for other business to work, and that would have
a virtuous circle, but I think the biggest source of
uncertainty that businesses face is their sales.
Mr. Ribble. And I completely agree with you, and I will
tell you that regulations and taxes are affecting that demand.
Thank you.
Chairman Ryan. Mr. Huelskamp.
Mr. Huelskamp. Thank you Mr. Chairman. Mr. Director, I
appreciate your time today. I was looking through the report
and on Page 36 you actually discuss participation in the labor
force, and you note the employment rate in the fourth quarter
of 2011 would have been one-quarter percentage point higher
than the actual rate 8.7 percent. Trying to understand this, so
when you factor in the number of people who quit looking for
work, our effective unemployment rate is really to 10 percent?
Mr. Elmendorf. Yes, I guess that is right. I cannot find
the specific place, but yes. It is often the case in downturns
that some people who lose jobs keep looking and some stop
looking, at least for a while, but I think that effect has been
particularly pronounced in this downturn, of course the rise in
unemployment and the duration of high unemployment has been
particularly pronounced as well.
Mr. Huelskamp. Yeah, it has been very difficult, but again,
10 percent effective unemployment rate, that still does not
factor in the underemployed, that is correct, that does not
include those?
Mr. Elmendorf. I think that is right.
Mr. Huelskamp. Okay. If we factor those in, what percentage
do we have of unemployed or underemployed?
Mr. Elmendorf. I am sorry, I do not have that. That is an
important concept, Congressman, I just do not have those
numbers at hand.
Mr. Huelskamp. It certainly is and so I appreciate that. To
follow up on that, my other question is turning to taxes, you
have two scenarios, but if I do back of the envelope estimate
is that if Congress does nothing we foresee at least a $5
trillion tax increase if the Bush/Obama tax cuts of 2001, 2003,
and 2010 all expire, is that about $5 trillion over that 10
year window?
Mr. Elmendorf. Yes, that is right, Congressman.
Mr. Huelskamp. Okay, and the net economic impact of a $5
trillion tax increase would be positive or negative?
Mr. Elmendorf. Well, in the short run we think that that
tax increase would have a negative effect on the economy. By
the end of the decade, we think that that tax increase
scheduled in current law would have a positive effect on the
economy, and the reason is because the increase in tax rates
embodied in current law has opposing effects on GDP over the
medium-term and long-term. The lower tax rates do encourage
additional work effort and saving in a way that we capture in
our models, and that are good for the economy, but the
tremendous amount of extra borrowing crowds out private
investment, and that is bad for the economy. In our modeling,
using a range of assumptions, the effects of the extra debt
dominates the effects of the lower tax rates by the end of the
decade.
Mr. Huelskamp. Even in the latter part of your comment
about crowding other investments, you would say that even in
light of Mr. Bernanke's statement that we are going to have
massively low borrowing cost for the foreseeable future, and
does that not play a significant role in trying to predict what
would occur, and that is a question I will ask Mr. Bernanke
openly in the next day or so?
Mr. Elmendorf. Yes, and I am curious to hear his answer.
Certainly the low borrowing cost is part of what we have in our
baseline projections, but it still may be the case, and we
think it would be the case that relative to what would happen
with a debt that was this big, having a debt of this big will
raise interest rates, so that increase was coming from a lower
baseline level than as often been the case, but we think that
extra demand for credit will still push up the cost of credit.
Mr. Huelskamp. And another question, I appreciate that. I
ask my staff regularly when they think the debt limit increase
will be needed, and they have been saying it would be kind of
March, but with the new higher deficit figures, another
trillion dollars for the fourth year in a row, just
unbelievable. What is your latest estimate for when the federal
government will run out of money without using extraordinary
means like is continually discussed?
Mr. Elmendorf. So we do not try to track Treasury's cash
flows on a monthly basis, so we are not the people to come to
for a specific prediction at any point of when a date might be.
Mr. Huelskamp. I would say going to the Treasury for a
specific prediction would be problematic as well. On the day
they said they would run out of cash in August 2nd, they
actually had another 10 days worth of resources. I appreciate
that, but just big picture, will we get to 2013 or will we run
out of money before a new president takes office?
Mr. Elmendorf. So under current law, we think that, yes,
the government can get to 2013 without raising the debt ceiling
or going to the extraordinary measures that you mentioned, but
that is quite uncertain. It depends on our economic projection;
it also depends, of course, on the actions that Congress takes.
Mr. Huelskamp. Okay. I appreciate, and lastly, one quick
question: last summer we had an exchange about which government
programs created economic growth, went back and forth with your
office, I know that is difficult to pull out, and looking at
the effective unemployment rate of 10 percent, and the anemic
economic projections, is it fair to say the tremendous run-up
in government spending of 2009 did not benefit the economy in
the long run?
Mr. Elmendorf. The extra government spending from the
Recovery Act in 2009 boosted the economy in the short-term, but
we believe yes, unless there are offsetting changes made, that
pay off the extra debt that was incurred, the economy will be
worse off as a result by the time we get back to potential
output and full employment later in the decade.
Chairman Ryan. Mr. Rokita.
Mr. Rokita. Thank you, Mr. Chairman. Dr. Elmendorf welcome,
thank you for being here. You and I always seem to talk about
this time in the day. Part of being a new member, that is the
last name with the letter ``R.''
Mr. Elmendorf. Happy to be here.
Mr. Rokita. I heard your testimony with the chairman, when
you had a discussion about un-sustainability, and I heard you
just say it is not Medicare, and I want to clear this up
because this was my impression, it is not Medicare that is
causing the un-sustainability, we have a mix of policies that
need to be worked on.
Mr. Elmendorf. Yes, I said what made the alternative fiscal
scenario unsustainable in the long run, is the combination of
policies, it is the growth, certainly, of Medicare, other
federal health programs, Social Security set against taxes that
remain close to their historical average share.
Mr. Rokita. So I want to be clear, for the record, for my
own understanding, for the American people, that you are not
saying that we do not have to reform Medicare or are you? If we
were to adjust all the other parts of that mix, and not touch
Medicare, is this country okay in the long run?
Mr. Elmendorf. So, in our projections from last summer for
2035, we have Medicare being about two percent of GDP larger
than it is today, so that alone can be accommodated through
other changes in policy. I do not think Medicare has to be
changed over the next 25 years that we focus on here, but
something has to be changed from current policies.
Mr. Rokita. So seniors going on Medicare now might use it
for the next 25 years, so I need a longer term view than that.
I want to talk about my 2-year-old, my 4-year-old, I want to
talk about their kids.
Chairman Ryan. Will the gentleman yield for a second? So
just looking at the CBO's long term budget outlook, to answer
your question because we have it right here, Medicare,
Medicaid, the health care entitlements, plus the interest on
debt at that time, will equal federal revenues. That means no
other program in the federal government outside of the health
care programs and the interest on the debt will be paid for by
any revenues in 2034.
Mr. Elmendorf. That is right, but as you know, the debt
service that we are paying at that point arises from the
combination of policies we have had in the intervening years.
So again, I think it is a judgment that you all need to make
about whether you want to have a country with historical levels
of revenues and changes in Social Security, Medicare programs
to come down to that level, or the programs as they are
currently structured, and increases in revenues to come to up
that level, or some combination of policies.
Mr. Rokita. I just think when you are talking about a
program that is going to be 14 percent of GDP and has no
interest in plateauing from there; it is going to keep going
and going; you have got to if you are going to have an honest
discussion with us, the American peoples, understand that this
is part, the centerpiece, perhaps, of the problem.
Mr. Elmendorf. Again, Congressman, I think I have been very
clear here and in many other times that it is the aging of the
population and the rising cost of health care that is putting
this unbelievable pressure on the federal budget, but there are
different ways to respond to that and it is not our place to
endorse.
Mr. Rokita. Yeah, I understand that you said that a few
times too, but when you say mix of current policies, you are
endorsing something. That is what I want to be clear about,
that Medicare reform is part of this mix, and that it has to be
reformed or not. So that is what I want to get to.
Mr. Elmendorf. Right, so I do not think that one can say
that any single piece has to be reformed; it is the combination
of policies that have to be pursued.
Mr. Rokita. All right, well thatis on record. All right,
let me go here. When Ms. Castor was asking you some questions
about growing out of this deficit, I want to be clear for the
record that you mean to say that we can have policies that
create growth, whatever we agree them to be, that could help
reduce the deficit, that has nothing to do with reducing the
debt. By definition, if you do not wipe out the deficit year to
year, you cannot start attacking the debt; so you cannot grow
your way out of the debt we are in, and the debt that is coming
down the road alone. Just by growing the economy, all the dials
not touched, you cannot grow your way out of this debt. In a
first world mature economy.
Mr. Elmendorf. In our baseline, our current law
projections, debt continues to rise because we continue to have
deficits, as you are saying, it falls slowly relative to GDP
because the debt is rising more slowly than GDP by the second
half of the decade under these current law projections.
Mr. Rokita. But if you are eliminating the deficit, you are
not reducing the debt.
Mr. Elmendorf. You are not reducing the dollar value of the
debt.
Mr. Rokita. So growth alone will not do this. Regarding the
extended payroll tax cut, I understood that the cost of the tax
cut, if extended this year, would be about $100 billion, and
you indicated that that is better for the near term economy
than the Bush tax cuts.
Mr. Elmendorf. Dollar for dollar that we estimate that
lower payroll taxes has a stronger stimulative effect than a
broad based.
Mr. Rokita. And you also would agree that of that $100
billion has be paid for by future generations? But for our near
term economic bump, other future generations need to pay for
that?
Mr. Elmendorf. Well, or this generation a few years later,
but yes, it has to be paid for by somebody.
Mr. Rokita. Right. With a small amount of time I have left,
John Maynard Keynes, what do you believe he got right and what
do you not subscribe to?
Mr. Elmendorf. I think it is a widespread view among
macroeconomists today that over the medium or long run,
economies are what we call classical or neoclassical, so that
the constraint on output and incomes is the supply of the
factors of production, labor supply saving and so on, but also,
I think, a view of most economists who are thinking about
business cycles, is that in the short-term, then a very
important determinant of the level of output and the level of
employment is the demand for goods and services, and that is,
at its heart, a Keynesian idea. The actual models we use, the
way this is structured has evolved a tremendous amount in the
75 years, but that view that in the short run the economy has
what people think of as Keynesian properties, in the medium and
long run it does not have those Keynesian properties. That is,
I think, a consensus view that you will find in leading
textbooks. Not everybody shares it, I do not want to say that,
but I think it is a consensus view that you will find in
leading textbooks and a lot of the writings of people over the
past few years, with a range of political views and a range of
views about whether the right way to proceed in the country is
to change taxes or spending and so on.
Mr. Rokita. And my time is expired. Thank you. I will call
the office from time to time.
Mr. Elmendorf. Please do.
Chairman Ryan. Thank you, Mr. Woodall.
Mr. Woodall. Thank you, Mr. Chairman, and thank you Dr.
Elmendorf for staying with us throughout the morning. Just so
you know, I tremendously appreciate the work you and your team
does; I know we are here to talk about your latest body of
work, but I want to talk a little bit about a publication you
all do every so often, the Historical Effective Federal Tax
Rates, just love this publication. As I turn to your most
recent addition, I see this: that if you were in the bottom 40
percent of income earners in this country, you actually profit
from the American income tax system. That almost half this
country, and I am not talking about the refund check you get in
April, I am talking about the tax code, the tax collection
system in this country sends you more money than you send to
it. The privilege of being American citizen is profitable
through the income tax code for the bottom 40 percent of all
Americans. I do not think we think about that, we all think
that we are paying our fair share, that somebody else needs to
pay a share. You know, I am a proponent of the fair tax, that
is HR 25 here in the House, it abolishes the entire income tax
code, and I look to your report that tells me for 40 percent of
Americans, the income tax does not collect taxes, it
distributes largesse. As evidence, the income tax code has lost
its way.
I also look at your Trends in Federal Tax Revenues and Tax
Rates, love that publication as well, and what I see,
particularly when I combine with figure 4.1 from your economic
outlook today, I look back during the Carter years, the Ford
years, the 1970s, where the highest ordinary income rate in
this country was 70 percent. The income tax rate was 70 percent
in this country, but I look at your CBO baseline of revenues,
and I see that revenues during that time were right there at
historical averages, maybe a little lower. I fast forward to
1986 and the income tax reformsthat Tip O'Neill and Ronald
Reagan put into place, I see the lowest ordinary individual
income tax rates on record, but then I go to your figure 4.1
again, the CBO baseline, and I find out that during those years
revenues were a little higher than the average revenues. So the
higher tax rates lead to lower revenues, and the lower tax
rates correspond to higher revenues; and as a freshman I
appreciate you being able to educate me in that way.
What has really gotten me confused, though, is going back
to figure 4.1, I see you have a CBO baseline projection and
alternative fiscal scenario, and the alternative fiscal
scenario assumes that President Bush's tax cuts, President
Obama's tax cuts, all of those tax cuts stay in place. Is that
correct?
Mr. Elmendorf. All the expiring tax provisions are extended
with the exception of the payroll tax.
Mr. Woodall. So according to what I see here in figure 4.1,
if we leave every single tax cut in place, in fact if we even
bring back the tax cuts that expired in 2011, revenues will
still be higher than the 50 year historical norm. We leave
every tax cut in place, federal revenues will be higher in this
10 year window than the 50 year norm, am I reading that chart
correctly?
Mr. Elmendorf. By the end of the decade they would be
higher than the average of the previous 50 years, yes. That is
right Congressman.
Mr. Woodall. But I have heard my colleagues talk about that
revenue is an important component of our deficit crisis, and
that the deficit is caused by these tax cuts, so I go to your
CBO baseline proposal that assumes all of these tax cuts
expire, and what I see is that if we allow these tax cuts to
expire, federal revenues as a percent of GDP will rise to the
highest levels in 50 years? Is that right? I only see a 50 year
window here; it is the highest level on the chart. Is that
correct?
Mr. Elmendorf. It is the highest on the chart, I cannot
speak to the longer history off-hand.
Mr. Woodall. So if we allow those tax cuts to expire, and
we allow federal revenues to rise to the highest level in 50
years, are we able to start paying down debt?
Mr. Elmendorf. If the tax cuts expire, as under current
law, and you keep to current law in spending, then the debt
continues to rise.
Mr. Woodall. So the highest tax rates over the last 50
years do not pay down any debt, but do they eliminate our
annual deficits?
Mr. Elmendorf. No, again, if the rest of current law
remains in place, then we continue in our current law
baselines, those continue to deficits.
Mr. Woodall. If we allow all the tax cuts to expire, if we
allow federal revenues to rise to the highest level in the last
50 years, we do not pay down a penny in debt, we do not
eliminate our national deficit and we continue to accumulate
that. What that tells me, Dr. Elmendorf, is that clearly
revenues are not the challenge in this scenario, it is spending
that is the problem and I know that folks back home are
wondering when we allow revenues to rise to their highest
levels in 50 years, what they are getting for that money.
Mr. Elmendorf. But the short answer to that, Congressman,
is there will be far more people collecting Social Security
checks in 2022 than any point in the past 50 years. There will
be far more people collecting Medicare benefits in 2022 than in
the preceding 50 years. More elderly people collecting benefits
for long-term care through Medicaid than in the preceding 50
years. So the American people are receiving benefits whether
you and they view those benefits as worth that cost is the
judgment that you and they have to make.
Mr. Woodall. Well, I guess that goes to my colleague and
Mr. Rokita's point, if we can allow revenues to rise to the
highest level in 50 years, and that still does not solve the
problem, we better focus on the spending side of the ledger. I
appreciate your bringing that to us today, thank you again for
spending so much time with us.
Mr. Elmendorf. Thank you, Congressman.
Chairman Ryan. Thank you. Let me just conclude by just
going to the outstanding work you do in your summer long-term
budget outlook, which the June budget outlook, and I just
simply want to impress upon the point that I think members here
are trying to make, which we tried, at the beginning of the
hearing. In 2034, using your numbers, spending on entitlement
health care programs plus interest exceeds all federal revenues
in 2034. In the end of the century, 2085, Medicare goes from
where it is now, approximately three percent of GDP to 14
percent of GDP. All health care entitlements, Medicare,
Medicaid, CHIP and the exchange subsidies, just those programs
right there exceed our revenue trend, so before the end of the
century, before our kids and our grandkids are raising their
families, all federal revenue that comes into the government
will not be enough to cover our health care entitlements. Sure,
I know you cannot give us policy recommendations or you do not
give us policy recommendations or value judgments, it is
obvious in your numbers that this path is unsustainable. I
mean, we cannot just be a government that only provides health
care benefits. We have national defense, we have education
concerns, we have environmental concerns, we have Social
Security, and so the sooner we recognize that the path we are
on is ruinous, which is what you are showing us in these long-
term numbers, the tax rates that you tell us that we need to
have, if we want to finance this through income taxes: the
bottom tax bracket is 25 percent, the middle income tax bracket
is 66 percent, the top tax rate is 88 percent, we will not have
an economy. Your own model breaks down, I think, in 2027
because of debt burdens. So I think we need to be a little more
candid about the absolute un-sustainability of it and it is not
simply a question of cutting back a little bit here on
discretionary spending or trimming this program over here; this
is all so unsustainable. It is the fault of both political
parties and the sooner we recognize that the better off we are
going to be, not only in keeping commitment to people who have
organized their lives around these programs, but for our
economy as well, and that is the point we are trying to make.
Mr. Elmendorf. Mr. Chairman, as you know, you are fonder of
our very long-term projections than we are when we talk with
our panel of health advisers for their guidance in setting the
very long term projections. They do not really talk with us
about it, they think it is a silly question to ask, so we do
provide them out the full 75 years, as the Social Security,
Medicare actuaries do, we do the same thing for our long-term
Social Security, Medicare projections, but if you look back 75
years ago, and picture what people in 1935 would have done in
trying to project health spending in 2010, you can see why that
is a very perilous business. So we try to focus, as we have, in
this long-term budget outlook, on the next 25 years. What I
think is there is an absolute trade-off between putting
revenues above their historical average share of GDP and
cutting Social Security and the federal health care programs.
Chairman Ryan. Are they being cut in real terms in what we
are talking about, are rates of growth going down?
Mr. Elmendorf. Let's actually be careful. Cut relative to
what will occur under current law, and we said this, as you
know, time and time again, that the Congress will need to
either raise revenues well above what has been the historical
average share of GDP, or make fundamental changes in the large
entitlement programs, or some combination, even if one reaches
for a combination, the changes to both revenues and these large
entitlements will each need to be large because the scale of
the problem, the gap between the revenues we are used to
sending to the government and the benefits that we are used to
getting from the government is getting so large.
Chairman Ryan. And the largest one is the health care
entitlements, correct?
Mr. Elmendorf. The fastest growing programs are the health
care entitlements. Medicare is a little smaller than Social
Security even 25 years from now, but Medicare and Medicaid
together are larger than Social Security by the end of the
decade.
Chairman Ryan. And this is why the point I tried to make
earlier about getting better data in research and analytical
tools on ideas and reforms on bending the cost curves of health
care is really crucial because if we can get at the root cause
of health inflation, that is one of the smartest, best things
we can do to deal with this situation because I think as you
have shown in your analysis the kinds of tax rates that this
country would have to absorb, would be growth destroying if we
actually went down that path.
Mr. Elmendorf. And, as you know, that work is a very high
priority for us.
Chairman Ryan. All right. Thank you.
Mr. Honda. Mr. Chairman, if I may just have a closing
comment also?
Chairman Ryan. Okay. I will get the last word, you know.
Mr. Honda. Well, you are the chair. There are a couple
comments I will make that I just needed to just respond to in
terms of highest income in past 50 years, or expenditures that
we see on the chart. The charts are kind of static in that we
have to take them in the context of other dynamics. I think
this is what is trying to be impressed upon by Dr. Elmendorf.
In terms of the highest income or highest expenditure in
last 50 years, 50 years ago I was probably making around $200 a
month, take home, and today, 50 years later, I have the highest
income that I could ever have imagined or ever dreamed of, but
it is because of the way the economy has changed, the cost of
living has changed, and things like that, so to compare
yesterday from today has to be taken in context of a lot of
information. So in terms of numbers and budget and projection
and things like that, the science and the art, if you will, of
budgeting and trying to make the right decisions for the future
and for our country has to be a thoughtful process, through
dialogue and debate, and I think that that is why I appreciate
today's session and, Mr. Chairman, you may have the last word.
Chairman Ryan. Okay. No, I am just having fun with you, but
I actually will. It is a technical question I am going to have
to ask you for the record. According to the March 2011
baseline, limiting spending to gas tax levels would result in
spending that would be in average of $13 billion per year below
current levels. Has that changed under the new baseline?
Mr. Elmendorf. So that number is one, I think, is one I am
not familiar with, but I can give you the current number.
Chairman Ryan. Okay.
Mr. Elmendorf. We estimate, I think this is the answer to
your questions which I was helpfully provided with late last
night.
Chairman Ryan. That is, I think, why we are asked to ask
you this right now.
Mr. Elmendorf. Over the coming decade, we estimate on
average annual outlays from the highway account, or the highway
trust fund, will be about $8 billion more than revenue and
interest credited to the account, although of course that gap
varies by year over the coming decade.
Chairman Ryan. So that is the change from last year's
baseline to this year's baseline? What is the delta?
Mr. Elmendorf. I do not have a number for last year, so I
do not know what it used to be, all I know is what it is now.
Chairman Ryan. Okay.
Mr. Elmendorf. And our current projection, on average, over
the coming decade, between the outlays and revenues is $8
billion per year.
Chairman Ryan. Okay, okay, all right. I think that answers
my question. Thank you.
Mr. Elmendorf. Okay. Thank you all.
Chairman Ryan. The hearing is adjourned.
[Questions submitted for the record and their responses
follow:]

Chairman Ryan's Questions Submitted for the Record
and Their Responses

Changes in CBO's Estimated Impact of the 2009-Enacted Economic Stimulus
Legislation
In a response to a question at our February 1, 2012 CBO Budget and
Economic Outlook hearing, Director Elmendorf indicated that CBO
estimates that the 2009-enacted economic stimulus legislation increased
employment by between 0.7 million and 3.3 million people in 2010. The
range he mentioned matches the low and high estimates for the
legislation's employment impact in 2010 (calendar year average)
published in CBO's November 2011 report on this subject (in the bottom
portion of Table 1 on p 3.). I mention this because Table 1 in CBO's
preceding August 2011 report displays an estimated employment increase
of 1.3 million to 3.3 million people for 2010. In other words, as you
know, CBO has significantly reduced the low estimate of employment
increase due to the stimulus. More broadly, the November report (on
page 8) confirms that CBO's low estimates of the stimulus legislation's
effect on economic output and employment for each year are now smaller
than its previous low estimates. A related footnote and Appendix in the
November report reference a Valerie Ramey article ``Can Government
Purchases Stimulate the Economy?'' published in the September 2011
volume of the American Economic Association's Journal of Economic
Literature as part of the basis for CBO's reduced low estimates. The
report's discussion on this is helpful, but it is difficult to get a
complete picture of the size of the changes in CBO estimates for real
GDP, the unemployment rate, and employment for each of 2009-2012. To do
this, it is necessary to compare the Table 1 estimates in the November
report with those in the August report.

Question: Can you provide a table that provides this comparison? In
other words, a table that displays the low and high estimates and the
differences between these estimates from the November 2011 and August
2011 reports of the stimulus legislation's effect on real GDP, the
unemployment rate, and employment for each of 2009-2012 (calendar year
averages)?

Answer: The first table below shows the change from August 2011 to
November 2011 in CBO's estimates of the impact of the American Recovery
and Reinvestment Act (ARRA) on output, the unemployment rate,
employment, and full-time-equivalent employment. The related tables
published in those reports are also reproduced below for your
information.
As discussed with additional detail on page 8 of the November 2011
report, CBO's estimates of the impact of ARRA on output and employment
differ from those CBO presented in August 2011 both because CBO
adjusted its methodology for making such estimates and because CBO
slightly revised its estimates of the timing of changes in federal
spending as a result of ARRA.
On the basis of its continuing review of relevant research, CBO has
decreased the lower end of its range of indirect multiplier effects
from 1.0 to 0.5, while leaving the upper end of the range unchanged at
2.5. The indirect multiplier effect is applied to the direct effect of
all changes in federal taxes and spending due to ARRA. As a result,
CBO's low estimates of ARRA's effects on output and employment were
smaller in November 2011 than in August 2011.

DIFFERENCE BETWEEN THE AUGUST 2011 AND NOVEMBER 2011 REPORTS

TABLE 1 FROM THE NOVEMBER 2011 REPORT

TABLE 1 FROM THE AUGUST 2011 REPORT

Highway Trust Fund
Question: The January 2012 baseline estimates the Highway Trust
Fund (HWTF) is now set to become insolvent in 2013 instead of the
second half of 2012. What is the reason for this brief reprieve and
does it materially change the financial status of the Highway Trust
Fund (including both the Highway and Transit accounts)?

Answer: CBO's January 2012 estimates of Highway Trust Fund (HWTF)
spending and revenue include minor technical changes from our earlier
estimates related to the expected pace of spending and the collection
of revenues. For example, in August 2011, CBO estimated that the trust
fund would have a balance of about $9 billion at the end of fiscal year
2012, while our January 2012 baseline reflects an estimated balance of
$12 billion at the end of the current fiscal year. The changes between
the August and January projections do not materially alter the
fundamental disparity between projected revenues to the fund under
current tax rates and projected spending if annual obligations are
continued at the current level. Spending from the fund totaled about
$45 billion in fiscal year 2011, while revenues deposited into the fund
last year totaled about $37 billion.

Question: On May 17, 2011, CBO Assistant Director for Microeconomic
Studies, Joseph Kile, testified before the Senate Finance Committee
stating that limiting spending in the Highway Trust Fund (including
both the Highway and Transit accounts) to the amount that is collected
in current taxes on fuel and other transportation activities would
result in spending that would be about $13 billion per year below the
current amount. Has this estimated average changed under the January
2012 baseline?

Answer: No, that estimate has not changed appreciably. Under CBO's
January 2012 baseline estimates, projected spending from the HWTF would
be greater than the revenues credited to it by around $13 billion a
year over the 2012-2022 period. But because the HWTF is not authorized
to borrow additional funds or incur a deficit, that level of spending
cannot be sustained in after 2013, according to CBO's estimates of fund
revenues and spending.

Question: If Congress did limit spending to gas tax revenue in the
Highway Trust Fund, how much lower, on average, would annual spending
be below the current amount in the Highway Account? What about the
Transit Account?

Answer: Over the 2012-2022 period, spending from the highway
account would need to be at least $9 billion lower each year and
spending from the transit account would need to be at least $5 billion
lower each year--relative to the baseline extrapolation that assumes
that future annual obligations from those accounts remain constant in
real terms. Those projected reductions in spending incorporate the need
for the Department of Transportation to maintain a cash balance in the
HWTF in order to meet obligations in a timely manner.
Student Loans
In 2007, the College Cost Reduction and Access Act (CCRA) became
law which temporarily lowered, for four years, subsidized Stafford
student loan rates from 6.8% to 3.4%. Some in Congress are calling for
a continuation of this lower rate that is set to expire later this
year. I have some questions about this last-minute call for action.

Question: Does the January 2012 baseline reflect this coming
increase in interest rates?

Answer: Yes, the January 2012 baseline reflects the scheduled
increase in interest rates because that increase will occur under
current law.

Question: Did any of the ``savings'' associated with the shift to
100% direct lending in the Health Care and Education Reconciliation Act
of 2010 come from the assumption that interest rates would rise to 6.8%
later this year? If so, how much?

Answer: None of the savings in CBO's estimate of the budgetary
impact of moving student loans to 100-percent direct lending came from
the scheduled increase in interest rates. At the time that the Health
Care and Education Reconciliation Act was being considered by the
Congress, that scheduled rate increase was already included in the
baseline for both the guaranteed loan and direct loan programs; thus,
moving to 100-percent direct lending did not affect those interest
rates.

Question: Since most of the ``savings'' in the Health Care and
Education Reconciliation Act of 2010 went to offset the cost of the
Pell program and other new spending. Is it fair to say that the savings
generated from the 6.8% interest rate have already been spent?

Answer: Public Law 107-139, which set a fixed interest rate of 6.8
percent on all newly disbursed Stafford loans (both subsidized and
unsubsidized) beginning on July 1, 2006, was enacted in February 2002.
Henceforth, following the law, CBO's baseline included that 6.8 percent
interest rate for all Stafford loans (guaranteed and direct) after July
1, 2006. The College Cost Reduction and Access Act (CCRA) temporarily
lowered that rate for five years for new subsidized Stafford loans made
to undergraduate students; under the CCRA, that lower rate does not
apply to new loans disbursed on or after July 1, 2012. Therefore, all
of CBO's baseline projections following enactment of CCRA have
reflected the scheduled increase in interest rates to 6.8 percent for
new subsidized Stafford loans disbursed on or after July 1, 2012.
Accordingly, none of the savings in the Health Care and Education
Reconciliation Act of 2010 were related to that scheduled increase.

Question: How much would it cost to continue the 3.4% interest rate
for one year? What about for four more years?

Answer: Under CBO's January 2012 baseline, we estimate that
extending the interest rate of 3.4 percent for one year would cost
about $5.9 billion over the 2012-2022 period (with most of that cost
falling in fiscal years 2012 and 2013). Under the January 2012
baseline, we estimate that extending the interest rate of 3.4 percent
for four years would cost about $19 billion over the 2012-2022 period
(with most of that cost falling in the first half of that period).

Poverty Trap
Question: This question pertains to antipoverty programs and their
potential impact on work incentives. Outside analysis has shown that
for lower-income individuals at certain segments of the earnings scale
(i.e. between $15,000 and $30,000) there can be a financial
disincentive to work. For instance, as these individuals earn more
income, their transfer payments and subsidies from the government (i.e.
EITC, food stamps, housing vouchers, etc.) decline and their marginal
tax rates jump. As a result, after-tax income plus government transfers
and subsidies may actually stay flat or even fall for some individuals
as their earnings increase. This disincentive to work and earn more has
been dubbed ``the poverty trap.'' Can CBO do an analysis which shows
(in chart form) earned income less taxes plus government transfers and
subsidies for a few hypothetical households (e.g, a family of 3 and a
single mother) as these households move up the earnings scale?

Answer: Low-income individuals and families may be eligible to
receive cash or in-kind assistance through various government transfer
programs. In addition, they may also be able to claim refundable tax
credits. With refundable credits, eligible individuals receive the
entire amount of the benefit even if it exceeds the income tax
liability they would have otherwise. Both transfer programs and
refundable tax credits increase an individual's or family's resources.
Over some earning ranges, the amount of a transfer or a refundable
tax credit neither rises nor falls as income increases. But over other
earning ranges, transfer or credit amounts do rise or fall. Because the
refundable earned income tax credit (EITC) and the partially refundable
child tax credit initially increase as earnings rise, those provisions
reduce marginal tax rates for very low-income workers and may encourage
work. However, to reduce the cost to the government of various tax
credits and transfer programs, benefits often limit eligibility to
individuals and families with incomes below a threshold or phase out as
earnings continue to rise. Those phaseouts increase effective marginal
tax rates and may reduce incentives to work--as do payroll taxes and,
in some cases, state income taxes that people owe as their earnings
rise.
The phaseouts of transfer programs do not affect marginal tax rates
of all low-income families. Not all families are eligible for those
transfer programs, and not all eligible families participate in the
programs. Data from a nationally representative household survey show
that the majority of working families headed by non-elderly and non-
disabled individuals with incomes below 250 percent of the federal
poverty level (FPL) do not receive a means-tested transfer--and, of
those who do, the majority participate in only one program (see Table
1). Although program participation tends to be underreported in survey
data, researchers using administrative data have also found low rates
of participation in multiple programs among low-income working
families.\1\
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\1\ See Stephen D. Holt and Jennifer L. Romich, ``Marginal Tax
Rates Facing Low and Moderate Income Workers Who Participate in Means-
Tested Social Programs,'' National Tax Journal, vol. 60, no. 2 (2007),
pp. 253-276.
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CBO calculated the relationship between a family's earnings and its
disposable income--the income it has after paying taxes and receiving
government transfer benefits--as earnings increase from zero to 250
percent of the FPL. Figures 1 to 3 display that relationship for three
hypothetical families in 2012: a single parent with one child, a
married couple with two children, and a single person without children.
In this analysis, taxes include federal income taxes, state income
taxes, and the employee's share of payroll taxes (calculated at the
temporary lower rate in effect for 2012). The transfer programs used in
the analysis include Temporary Assistance to Needy Families (TANF),
Housing Choice Vouchers, and the Supplemental Nutrition Assistance
Program (SNAP).\2\ Because participation in SNAP is more common than
participation in TANF, the following examples show disposable income
for families that participate only in SNAP (panel A of each figure) and
for families that participate in all three programs (panel B of each
figure).
---------------------------------------------------------------------------
\2\ CBO calculates disposable income using Pennsylvania's state
income tax rates and TANF rules because its income tax rates and rules
for means-tested transfer benefits are similar to those found in other
states. CBO also uses the median housing costs and median family
incomes in Pennsylvania in estimating transfer benefits, where
relevant. In Pennsylvania, households with gross incomes below 160
percent of the FPL are eligible for SNAP.
---------------------------------------------------------------------------
The figures show that:
For either a single parent with one child or a married
couple with two children, transfer programs and refundable tax credits
initially raise disposable income above earnings--especially for
families with very low earnings who receive TANF and housing vouchers.
The change in disposable income associated with an increase in earnings
fluctuates because tax and transfer benefits phase in and phase out at
varying rates across the range of earnings.\3\ For earnings between
about 100 percent and 150 percent of FPL, disposable income increases
very little (and in some ranges not at all) as earnings increase,
because tax and transfer benefits phase out.
---------------------------------------------------------------------------
\3\ Sharp drops in disposable income can occur when earnings rise
above thresholds for eligibility for certain transfer programs, because
once earnings exceed the threshold, the benefit ceases. If, however,
benefits phase out completely before earnings reach the threshold,
disposable income changes gradually as earnings cross that threshold.
---------------------------------------------------------------------------
As earnings rise above 150 percent of the federal poverty
level, disposable income falls below earnings because income and
payroll tax liabilities (before credits are included) exceed the sum of
transfer payments, the EITC, and child tax credits. (After families
stop receiving the transfer payments, either because they lose
eligibility or benefits phase out completely, disposable income is the
same as after-tax income.)
In contrast, because the EITC for a single person without
children phases in at a lower rate and has a smaller maximum amount
than for taxpayers with children, the EITC only slightly boosts
disposable income above earnings. In particular, because of the
temporarily lower payroll tax rate in 2012, the EITC exceeds payroll
taxes over a narrow range of earnings. Taxpayers without children are
eligible for SNAP and housing vouchers, which raises their disposable
income, though their benefits from these programs are generally less
than those of larger families.

[Whereupon, at 12:35 p.m., the Committee was adjourned.]