[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
THE CONGRESSIONAL BUDGET OFFICE'S
LONG-TERM BUDGET OUTLOOK
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, SEPTEMBER 26, 2013
__________
Serial No. 113-9
__________
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COMMITTEE ON THE BUDGET
PAUL RYAN, Wisconsin, Chairman
TOM PRICE, Georgia CHRIS VAN HOLLEN, Maryland,
SCOTT GARRETT, New Jersey Ranking Minority Member
JOHN CAMPBELL, California ALLYSON Y. SCHWARTZ, Pennsylvania
KEN CALVERT, California JOHN A. YARMUTH, Kentucky
TOM COLE, Oklahoma BILL PASCRELL, Jr., New Jersey
TOM McCLINTOCK, California TIM RYAN, Ohio
JAMES LANKFORD, Oklahoma GWEN MOORE, Wisconsin
DIANE BLACK, Tennessee KATHY CASTOR, Florida
REID J. RIBBLE, Wisconsin JIM McDERMOTT, Washington
BILL FLORES, Texas BARBARA LEE, California
TODD ROKITA, Indiana DAVID N. CICILLINE, Rhode Island
ROB WOODALL, Georgia HAKEEM S. JEFFRIES, New York
MARSHA BLACKBURN, Tennessee MARK POCAN, Wisconsin
ALAN NUNNELEE, Mississippi MICHELLE LUJAN GRISHAM, New Mexico
E. SCOTT RIGELL, Virginia JARED HUFFMAN, California
VICKY HARTZLER, Missouri TONY CARDENAS, California
JACKIE WALORSKI, Indiana EARL BLUMENAUER, Oregon
LUKE MESSER, Indiana KURT SCHRADER, Oregon
TOM RICE, South Carolina
ROGER WILLIAMS, Texas
SEAN P. DUFFY, Wisconsin
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, September 26, 2013............... 1
Hon. Paul Ryan, Chairman, Committee on the Budget............ 1
Prepared statement of.................................... 2
Hon. Chris Van Hollen, ranking minority member, Committee on
the Budget................................................. 3
Prepared statement of.................................... 5
Douglas W. Elmendorf, Director, Congressional Budget Office.. 6
Prepared statement of.................................... 8
Response to question submitted for the record............ 60
Hon. Allyson Y. Schwartz, a Representative in Congress from
the State of Pennsylvania, question submitted for the
record..................................................... 60
THE CONGRESSIONAL BUDGET OFFICE'S LONG-TERM BUDGET OUTLOOK
----------
THURSDAY, SEPTEMBER 26, 2013
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 10:05 a.m. in room
210, Cannon House Office Building, Hon. Paul Ryan [chairman of
the committee] presiding.
Present: Representatives Paul of Wisconsin, Price, Garrett,
Campbell, Cole, McClintock, Lankford, Ribble, Flores, Rokita,
Woodall, Blackburn, Nunnelee, Hartzler, Messer, Rice, Williams,
Van Hollen, Yarmuth, Pascrell, Ryan of Ohio, Castor, McDermott,
Lee, Cicilline, Jeffries, Pocan, Lujan Grisham, Huffman,
Cardenas, Blumenauer, and Schrader.
Chairman Ryan. The hearing will come to order. I know we
still have our caucuses and our conferences are going on, so I
understand some of our members will be here a little later, but
we want to get started so we can start as close to on time as
we possibly can.
I want to thank everybody, and welcome. It has been a
little while since we have gotten back together as a committee
to see these things, but we have a new report that is worthy of
our attention.
It is good to see our CBO Director Doug Elmendorf once
again.
And I want to thank you, Doug, and your staff for putting
together this very important and valuable report. I know what
kind of work it takes, and we appreciate that.
We want to put it to good use because, as I read it, your
report makes one thing clear. We haven't solved the problem
yet. We still are spending too much money. Just look at the
numbers. Our total debt is bigger than our economy, and
according to your report, our publicly held debt as a share of
our economy is higher than at any point in the U.S. history,
except for a brief period around World War II. Some seem to
think that just because the deficit is not $1 trillion anymore,
we don't have to worry, problem solved.
But we know better. In 2008, our publicly held debt was 39
percent of gross domestic product. Today, it is 73 percent. In
other words, it has doubled in just 5 years. So today if we
were to have an emergency, we will have a lot less leeway.
When you owe more than you make, your creditors get antsy.
Sooner or later they cut you off. The problem is, they could
cut us off at exactly the wrong time.
We have heard a lot of talk these days about how we need to
pay our bills, but we need to make sure that we can pay our
bills today and tomorrow. Look, we know what is driving our
debt. It is spending, especially spending on health care. CBO
says that most of the spending growth in the near future will
be in Medicare, Medicaid, and the Affordable Care Act. In the
next 25 years, it expects spending on health care programs to
grow by 74 percent or maybe as much as 83 percent. And yet all
of this spending, for all of this spending, what are we getting
for it? The Medicare Trust Fund will go broke in just 10 years.
That is after payrolls went up, after the health care law made
cuts to the program, and after the sequester made even more
cuts. All of these adjustments, especially the health care law,
were supposed to patch the hole, but instead we took on more
water.
Clearly, a little tinkering isn't enough. We need a whole
new approach. Your report says that the debt is too high, and
the sooner we get to work, the better. That is a really
important point here. You have looked at the spending package
that would have saved $4 trillion over 10 years, which is
roughly what the House-passed budget would do. If we enacted
such a law, a $4 trillion spending package, interest rates
would be 1 percent lower in 2038; our economy would be 7
percent bigger; and our publicly held debt would be just over
31 percent of GDP. But if we stayed on the current path,
interest rates would rise; our debt would grow; and our economy
would be 4 percent smaller in 2038.
What does that mean? That means about $3,200 less per
person in America at that time. I think the best illustration
of our problem is what you call the fiscal gap. What would it
take in spending cuts, tax hikes or both just to keep our debt
stabilized? If we took action now, it would cost us roughly
$145 billion per year, but if we waited, it could cost us up to
$350 billion per year. We have got one foot on each side of a
crater, and every day we wait, the gap grows larger. Every day
we wait, it gets harder to bridge that gap.
Washington's motto is never do today what you can put off
until tomorrow, but tomorrow is a whole lot closer than we
think, and we know what the answer is. We know that with real
reforms, we cannot only pay down the debt, we can help grow the
economy and put people back to work. It is not a matter of
ability. It is a matter of will.
And with that, I would like to recognize the ranking member
for his opening remarks.
[The prepared statement of Chairman Ryan follows:]
Prepared Statement of Hon. Paul Ryan, Chairman, Committee on the Budget
Thanks, everybody--and welcome. It's good to see our friend,
Director Elmendorf, once again. I want to thank him and his staff for
putting together this report. We appreciate your hard work. And we'll
put it to good use--because, as I read it, your report makes one thing
clear: We haven't solved the problem. We're still spending too much
money.
Just look at the numbers. Our total debt is bigger than our
economy. And according to your report, our publicly held debt--as a
share of our economy--``is higher than at any point in U.S. history
except a brief period around World War II.'' Some seem to think that
just because the deficit isn't $1 trillion anymore, we don't have to
worry. Problem solved.
But we know better. In 2008, our publicly held debt was 39 percent
of GDP. Today, it's 73 percent. In other words, it doubled in just five
years. So today--if we have an emergency--we have a lot less leeway.
When you owe more than you make, your creditors get antsy. Sooner or
later, they cut you off. The problem is, they could cut us off--at
exactly the wrong time. We've heard a lot of talk these days about how
we need to pay our bills. But we need to make sure we can pay our bills
both today--and tomorrow.
Look, we know what's driving our debt. It's spending--especially
spending on health care. CBO says most of the spending growth in the
near future will be in Medicare, Medicaid, and the Affordable Care Act.
In the next 25 years, it expects spending on health-care programs to
grow by 74 percent--or maybe even as much as 83 percent.
And yet for all this spending, what are we getting for it? The
Medicare trust fund will go broke in just over ten years. That's after
payroll taxes went up, after the health-care law made cuts to the
program, and after the sequester made even more cuts. All these
adjustments--especially the health-care law--were supposed to patch the
hole. But instead, we took on more water. Clearly, a little tinkering
isn't enough. We need a whole new approach.
Your report says our debt is too high. And the sooner we get to
work, the better. You looked at a spending package that would save $4
trillion over ten years--which is roughly what the House budget would
do. If we enacted such a law, interest rates would be one percentage
point lower in 2038. Our economy would be 7 percent bigger. And our
publicly held debt would be just 31 percent of GDP. But if we stayed on
the current path, interest rates would rise. Our debt would grow. And
our economy would be 4 percent smaller in 2038. That comes out to about
$3,200 less per person.
I think the best illustration of our problem is what you call the
``fiscal gap.'' What would it take--in spending cuts, tax hikes, or
both--just to keep our debt stable? If we took action now, it would
cost us roughly $145 billion per year. But if we waited, it could cost
us up to $350 billion per year. We've got one foot on each side of a
crater. And every day we wait, the gap grows larger. Every day we wait,
it gets harder to bridge the gap.
Washington's motto is ``Never do today what you can put off till
tomorrow.'' But tomorrow is closer than we think. And we know what the
answer is. We know that with real reforms we can not only pay down the
debt--we can help grow the economy and put people back to work. It's
not a matter of ability. It's a matter of will.
And with that, I recognize the ranking member for his opening
remarks.
Mr. Van Hollen. Thank you, Mr. Chairman.
And I want to join the chairman in thanking you, Dr.
Elmendorf, for this report which looks at the budget picture
out until the year 2035, and clearly demonstrates that, on our
current trajectory, we are on an unsustainable path with
respect to the debt.
It indicates that we need to move forward on two fronts, in
my view. First, we have got to act now to kick our economy into
higher gear, to put more Americans back to work. And there are
a number of steps we need to take to do that, but an earlier
CBO study and letter also indicated that one way we can do that
is to replace the sequester that is in place right now, which
you indicated earlier would cost us hundreds of thousands of
jobs between now and this time next year. That is a self-
inflicted wound. That is a wound that this country cannot
afford. More people could be put to work if we take care of
that issue.
Democrats in the House have now tried eight times simply to
get a vote on our plan to replace the sequester. This Congress
we have not seen a single plan put forward by our Republican
colleagues to do that. So let's work together to replace it in
a way that achieves the same amount of deficit reduction or
more without the self-inflicted wound of hundreds of thousands
fewer jobs. We can do that now.
We also should act now to put in place a plan to address
the long-term deficit challenge, and in my view, we should
adopt the kind of frameworks recommended by every bipartisan
group that has looked at this issue in recent times. Not adopt
every particular recommendation, but their overall framework in
terms of making cuts but also cuts to tax breaks for very
wealthy individuals and special interests.
The House Democratic budget, the President's budget, all
those budgets take that kind of balanced approach. We had hoped
that we would be able to go to a budget conference to try and
resolve some of the differences between the House Republican
budget and our budget. That is the way you deal with the long-
term challenge.
We have tried time and again to have conferees appointed,
and obviously, the clock has been run out. And the Speaker
refused to even allow us to go to conference to try to reach a
compromise and negotiate these issues.
So let's move forward. Unfortunately, right now, in the
House, we are focused on something very different than solving
this long-term challenge. We have got before us now a proposal
that would shut down the government if we don't shut down the
Affordable Care Act, the Affordable Care Act, which is already
providing help and health protections to millions of Americans
and will provide millions more with access to affordable health
care in the days to come.
But right now, the position our Republican colleagues,
unfortunately, have taken is that we are going to shut down the
government if we don't accomplish the goal of shutting down the
Affordable Care Act. And what is even more troubling is it
appears that they are going to double down on that strategy
with respect to the debt ceiling, with respect to whether or
not this country pays its bills on time. And they are going to
say that we are not going to pay our bills on time in the
United States of America, unless we shut down the Affordable
Care Act for 1 year. That is irresponsible and reckless, given
the impact that not paying our bills would have on the economy.
And, finally, Mr. Chairman, I just have to point out an
incredible irony. The Congressional Budget Office has pointed
out the Affordable Care Act will actually reduce the deficit by
billions of dollars over the next 10 years and even more over
the next 20 years. So to tie the defunding of the Affordable
Care Act to the debt ceiling is to say, well, we are going to
attach something that will increase the debt to a provision on
the debt ceiling. And this was recognized by our Republican
colleagues in their budget. I think many people have forgotten
that if you look at the Republican budget, it only balances in
10 years because they kept major parts of the Affordable Care
Act. They kept all the Medicare savings. And they have the same
level of revenues as the Affordable Care Act in their budget.
You don't have to take my word for it. Here is a quote from
the Heritage Foundation: Quote, Perhaps the biggest shortcoming
of this House Republican budget is that it keeps the tax
increases associated with Obamacare. In fact, the budget would
not be in balance, the Republican budget would not be in
balance in 10 years if not for the Medicare savings in the
Affordable Care Act and the fact that you have the same amount
of revenues. So it is saying two very different things at once,
trying to have it both ways to say you are going to balance
your budget and you are going to get rid of Obamacare, when you
rely on Obamacare to balance your budget.
So let's focus on the real issues here, Mr. Chairman, and
the issues in this report.
And I appreciate the time.
And again, welcome, Dr. Elmendorf.
[The prepared statement of Mr. Van Hollen follows:]
Prepared Statement of Hon. Chris Van Hollen, Ranking Member,
Committee on the Budget
Thank you, Mr. Chairman. And I want to join the Chairman in
thanking you, Dr. Elmendorf, for this report, which looks at the budget
picture out until the year 2035 and clearly demonstrates that on our
current trajectory, we're on an unsustainable path with respect to the
debt. It indicates that we need to move forward on two fronts, in my
view.
First, we've got to act now to kick our economy into higher gear,
to put more Americans back to work. And there are a number of steps we
need to take to do that, but an earlier CBO study and letter also
indicated that one way we can do that is to replace the sequester
that's in place right now, which you indicated earlier would cost us
hundreds of thousands of jobs between now and this time next year.
That's a self-inflicted wound. That's a wound that this country cannot
afford. More people could be put to work if we take care of that issue.
Democrats in the House have now tried eight times simply to get a
vote on our plan to replace the sequester. This Congress, we've not
seen a single plan put forward by our Republican colleagues to do that.
So let's work together to replace it in a way that achieves the same
amount of deficit reduction or more without the self-inflicted wound of
hundreds of thousands fewer jobs. We can do that now.
We also should act now to put in place a plan to address the long-
term deficit challenge, and in my view we should adopt the kind of
framework recommended by every bipartisan group that's looked at this
issue in recent times. Not adopt every particular recommendation, but
their overall framework in terms of making cuts but also cuts to tax
breaks for very wealthy individuals and special interests.
The House Democratic budget, the President's budget, all those
budgets take that kind of balanced approach. We had hoped that we would
be able to go to a budget conference to try and resolve some of the
differences between the House Republican budget and our budget. That's
the way you deal with the long-term challenge. We've tried time and
again to have conferees appointed, and obviously the clock has been run
out--and the Speaker refused to even allow us to go to conference to
try to reach a compromise and negotiate these issues. So, let's move
forward.
Unfortunately right now in the House we're focused on something
very different than solving this long-term challenge. We've got before
us now a proposal that would shut down the government if we don't shut
down the Affordable Care Act. The Affordable Care Act, which is already
providing help and health protections to millions of Americans, and
will provide millions more with access to affordable health care in the
days to come. But right now the position our Republican colleagues
unfortunately have taken is that we're going to shut down the
government if we don't accomplish the goal of shutting down the
Affordable Care Act.
And what is even more troubling is it appears that they're going to
double down on that strategy with respect to the debt ceiling, with
respect to whether or not this country pays its bills on time. And
they're going to say we're not going to pay our bills on time, in the
United States of America, unless we shut down the Affordable Care Act
for one year. That is irresponsible and reckless given the impact that
not paying our bills would have on the economy.
And finally, Mr. Chairman, I just have to point out an incredible
irony. The Congressional Budget Office has pointed out the Affordable
Care Act will actually reduce the deficit by billions of dollars over
the next 10 years, and even more over the next 20 years. So to tie the
defunding of the Affordable Care Act to the debt ceiling is to say,
well, we're going to attach something that will increase the debt to a
provision on the debt ceiling. And this was recognized by our
Republican colleagues in their budget. I think many people have
forgotten that if you look at the Republican budget, it only balances
in 10 years because they kept major parts of the Affordable Care Act.
They kept all the Medicare savings and they have the same level of
revenues as the Affordable Care Act in their budget.
You don't have to take my word for it. Here is a quote from the
Heritage Foundation: `Perhaps the biggest shortcoming of this budget is
it keeps the tax increases associated with Obamacare.' In fact, the
budget would not be in balance--the Republican budget would not be in
balance in 10 years if not for the Medicare savings in the Affordable
Care Act and the fact you have the same amount of revenues. So, it is
saying two very different things at once, trying to have it both ways,
to say you're going to balance your budget and you're going to get rid
of Obamacare when you rely on Obamacare to balance your budget.
So let's focus on the real issues here, Mr. Chairman, and the
issues in this report. I appreciate the time and again, welcome Dr.
Elmendorf.
Chairman Ryan. Clearly, we see things differently.
Dr. Elmendorf, the floor is yours.
STATEMENT OF DOUGLAS W. ELMENDORF, DIRECTOR, CONGRESSIONAL
BUDGET OFFICE
Mr. Elmendorf. Thank you, Mr. Chairman and Congressman Van
Hollen.
To all the members of the committee, I am very pleased to
be back with you again today.
The bottom line of CBO's long-term budget outlook this year
is the same as it was last year. The Federal budget is on a
course that cannot be sustained indefinitely. In our extended
baseline, which largely follows current law, we project that
Federal debt held by the public would rise from 73 percent of
GDP today, already very high by historical standards, to 100
percent of GDP in 25 years, even without accounting for the
harmful effects of rising debt.
The deficit has shrunk dramatically during the past few
years, from nearly 10 percent of GDP in 2009 to about 4 percent
this year, and we expect, under current law, the deficit will
decline further in the next few years to about 2 percent of
GDP.
After that respite, however, we project the deficits would
begin growing again. Federal spending would be pushed up by
rising interest payments on the Federal debt and by growing
costs for Social Security and the major health care programs,
Medicare, Medicaid, and subsidies to be provided through
insurance exchanges.
Interest payments on the debt would rise as interest rates
rebound from their current unusually low levels. In particular,
with debt so large, the increase in interest rates that we
expect would have a very large effect on interest payments by
the Federal Government.
Projected spending for Social Security increases relative
to GDP in our extended baseline, principally because of the
retirement of the Baby Boom generation, which would increase
the number of people eligible for Social Security by more than
one-third during the next 10 years alone.
Spending for the major health care programs would increase
for three reasons. First, because of retirement of the Baby
Boomers; second, because of rising health care costs per
person; and, third, because of the expansion of Federal
subsidies for health insurance.
Meanwhile, projected Federal spending for all other
programs put together declines sharply relative to GDP in our
extended baseline. This category of all other spending has
averaged about 11 percent of GDP during the past 40 years. It
is currently about 10 percent of GDP, although below the 40-
year average, and would fall to about 7 percent of GDP by the
end of the decade in 2038.
By 2020, under current law, Federal spending apart from
Social Security, the major health care programs and interest
payments would be a smaller percentage of GDP than at any time
since the 1930s. Thus, the upward pressure on Federal spending
relative to the size of the economy does not come from general
growth in the size of the government but instead from growth in
just a handful of large programs--Social Security, Medicare,
and Medicaid--and from rising interest costs on the Federal
debt.
Federal revenues would also increase over time under
current law but more gradually than Federal spending. Revenues
have averaged 17.5 percent of GDP during the past 40 years.
They are now a little lower but will rise to 18.5 percent by
2023 and nearly 20 percent by 2038 under our extended baseline.
The gap between Federal spending and revenues would widen
steadily after 2015. By 2038, under our extended baseline, the
deficit would be 6.5 percent of GDP, and Federal debt held by
the public would be 100 percent of GDP, even before we account
for the economic effects of that increase in debt. That would
be more than any year except 1945 and 1946. With such large
deficits, debt would be growing faster than GDP, a path that
could not be sustained indefinitely.
In our report, we separately project how the economic
consequences of the policies that underlie the extended
baseline would affect the long-term budget outlook. The growth
in debt would reduce the Nation's output and raise interest
rates relative to what they would otherwise be in the long run,
which in turn would lead to wider budget deficits. With those
effects included, debt under the extended baseline would rise
to 108 percent of GDP in 2038.
Debt that is so large relative to our annual output would
in the long term reduce output and income relative to what they
would be if debt were closer to its historical average
percentage of GDP. Debt that is so large would also require
higher interest payments, would reduce your flexibility to use
policy to respond to unexpected developments, and increase the
risk of a fiscal crisis.
In addition, our report shows the effects of some
alternative sets of fiscal policies, some that would produce
larger deficits than under current law and some that would
produce smaller deficits. The report also examines the
uncertainty of long-term budget projections, which is
substantial, but our analysis shows that under a wide range of
possible assumptions about some key factors, the budget is on
an unsustainable path.
As lawmakers consider changes in policies that would put
the Federal budget on a more sustainable course, you will face
choices about the magnitude of deficit reduction, the policies
to use in reducing deficits, and the timing of deficit
reduction. Economic analysis does not say what the optimal
amount of Federal debt is nor what the right amounts of Federal
spending and revenues are, but a significant reduction in debt
from its current percentage of GDP would require substantial
changes in tax policies, spending policies or both.
As an illustration, if you wanted to bring debt down to 31
percent of GDP in 2038, a little below its 40-year average,
using policies that phased in over the next decade, you would
need to enact a combination of increases in revenues and cuts
in spending relative to current law totaling about $4 trillion
during the coming decade.
In deciding how quickly to reduce the deficit, you face
difficult tradeoffs again. Waiting to cut Federal spending or
increase taxes would lead to a greater accumulation of debt and
increase the size of the policy adjustments needed to achieve
any chosen debt target. However, implementing spending cuts or
tax increases quickly would weaken the economic expansion.
The negative short-term effects of deficit reduction on
output and employment would be especially large now because
output is so far below its potential or maximum sustainable
level that the Federal Reserve is holding interest rates very
close to zero and could not lower them further to offset the
impact of changes in tax and spending policies.
Thank you very much. I am happy to try to answer your
questions.
[The prepared statement of Douglas Elmendorf follows:]
Prepared Statement of Douglas W. Elmendorf, Director,
Congressional Budget Office
Chairman Ryan, Congressman Van Hollen, and Members of the
Committee, thank you for inviting me to testify on the Congressional
Budget Office's (CBO's) most recent analysis of the long-term outlook
for the budget and the economy. My statement summarizes the report The
2013 Long-Term Budget Outlook, which CBO released last week.
Between 2009 and 2012, the federal government recorded the largest
budget deficits relative to the size of the economy since 1946, causing
federal debt to soar.
Federal debt held by the public is now about 73 percent of the
economy's annual output, or gross domestic product (GDP). That
percentage is higher than at any point in U.S. history except a brief
period around World War II, and it is twice the percentage at the end
of 2007. If current laws generally remained in place, federal debt held
by the public would decline slightly relative to GDP over the next
several years, CBO projects. After that, however, growing deficits
would ultimately push debt back above its current high level. CBO
projects that federal debt held by the public would reach 100 percent
of GDP in 2038, 25 years from now, even without accounting for the
harmful effects that growing debt would have on the economy (see Figure
1). Moreover, debt would be on an upward path relative to the size of
the economy, a trend that could not be sustained indefinitely.
BUDGET PROJECTIONS FOR THE NEXT 10 YEARS
The economy's gradual recovery from the 2007--2009 recession, the
waning budgetary effects of policies enacted in response to the weak
economy, and other changes to tax and spending policies have caused the
deficit to shrink this year to its smallest size since 2008: roughly 4
percent of GDP, compared with a peak of almost 10 percent in 2009. If
current laws governing taxes and spending were generally unchanged--an
assumption that underlies CBO's 10-year baseline budget projections--
the deficit would continue to drop over the next few years, falling to
2 percent of GDP by 2015. As a result, by 2018, federal debt held by
the public would decline to 68 percent of GDP.\1\
---------------------------------------------------------------------------
\1\ For details about CBO's most recent 10-year baseline, see
Congressional Budget Office, Updated Budget Projections: Fiscal Years
2013 to 2023 (May 2013), www.cbo.gov/publication/44172. In July 2013,
the Bureau of Economic Analysis (BEA) revised upward the historical
values for GDP; CBO extrapolated those revisions for this report when
projecting outcomes as a percentage of future GDP. Although CBO's
projections of revenues, outlays, deficits, and debt over the 2013--
2023 period have not changed since the baseline projections issued in
May, those amounts measured as a percentage of GDP are now lower as a
result of BEA's revisions. In this testimony, budgetary values
presented as a percentage of GDP have been rounded to the nearest one-
half percent.
---------------------------------------------------------------------------
However, budget deficits would gradually rise again under current
law, CBO projects, mainly because of increasing interest costs and
growing spending for Social Security and the government's major health
care programs (Medicare, Medicaid, the Children's Health Insurance
Program, and subsidies to be provided through health insurance
exchanges). CBO expects interest rates to rebound in coming years from
their current unusually low levels, sharply raising the government's
cost of borrowing. In addition, the pressures of an aging population,
rising health care costs, and an expansion of federal subsidies for
health insurance would cause spending for some of the largest federal
programs to increase relative to GDP. By 2023, CBO projects, the budget
deficit would grow to almost 3\1/2\ percent of GDP under current law,
and federal debt held by the public would equal 71 percent of GDP and
would be on an upward trajectory.
BUDGET PROJECTIONS FOR THE LONG TERM
Looking beyond the 10-year period covered by its regular baseline
projections, CBO produced an extended baseline that extrapolates those
projections through 2038 (and, with even greater uncertainty, through
later decades).
Under the extended baseline, budget deficits would rise steadily
and, by 2038, would push federal debt held by the public close to the
percentage of GDP seen just after World War II--even without factoring
in the harm that growing debt would cause to the economy.
By 2038, CBO projects, federal spending would increase to 26
percent of GDP under the assumptions of the extended baseline, compared
with 22 percent in 2012 and an average of 20\1/2\ percent over the past
40 years.
That increase reflects the following projected paths for various
types of federal spending if current laws generally remain in place:
Federal spending for the major health care programs and
Social Security would increase to a total of 14 percent of GDP by 2038,
twice the 7 percent average of the past 40 years.
In contrast, total spending on everything other than the
major health care programs, Social Security, and net interest payments
would decline to 7 percent of GDP, well below the 11 percent average of
the past 40 years and a smaller share of the economy than at any time
since the late 1930s.
The federal government's net interest payments would grow
to 5 percent of GDP, compared with an average of 2 percent over the
past 40 years, mainly because federal debt would be much larger.
Federal revenues would equal 19\1/2\ percent of GDP by 2038 under
current law, CBO projects, compared with an average of 17\1/2\ percent
over the past four decades. Revenues are projected to rise from 15
percent of GDP last year to 17\1/2\ percent in 2014, spurred by the
ongoing economic recovery and changes in provisions of tax law
(including the expiration of lower income tax rates for high-income
people, the expiration of a temporary cut in the Social Security
payroll tax, and the imposition of new taxes). After 2014, revenues
would increase gradually relative to GDP, largely because growth in
income beyond that attributable to inflation would push taxpayers into
higher income tax brackets over time.
The gap between federal spending and revenues would widen steadily
after 2015 under the assumptions of the extended baseline, CBO
projects. By 2038, the deficit would be 6\1/2\ percent of GDP, larger
than in any year between 1947 and 2008, and federal debt held by the
public would reach 100 percent of GDP, more than in any year except
1945 and 1946. With such large deficits, federal debt would be growing
faster than GDP, a path that would ultimately be unsustainable.
Incorporating the economic effects of the federal policies that
underlie the extended baseline worsens the long-term budget outlook.
The increase in debt relative to the size of the economy, combined with
an increase in marginal tax rates (the rates that would apply to an
additional dollar of income), would reduce output and raise interest
rates relative to the benchmark economic projections that CBO used in
producing the extended baseline. Those economic differences would lead
to lower federal revenues and higher interest payments. With those
effects included, debt under the extended baseline would rise to 108
percent of GDP in 2038.
HARMFUL EFFECTS OF LARGE AND GROWING DEBT
How long the nation could sustain such growth in federal debt is
impossible to predict with any confidence. At some point, investors
would begin to doubt the government's willingness or ability to pay
U.S. debt obligations, making it more difficult or more expensive for
the government to borrow money. Moreover, even before that point was
reached, the high and rising amount of debt that CBO projects under the
extended baseline would have significant negative consequences for both
the economy and the federal budget:
Increased borrowing by the federal government would
eventually reduce private investment in productive capital, because the
portion of total savings used to buy government securities would not be
available to finance private investment. The result would be a smaller
stock of capital and lower output and income in the long run than would
otherwise be the case. Despite those reductions, however, the continued
growth of productivity would make real (inflation-adjusted) output and
income per person higher in the future than they are now.
Federal spending on interest payments would rise, thus
requiring larger changes in tax and spending policies to achieve any
chosen targets for budget deficits and debt.
The government would have less flexibility to use tax and
spending policies to respond to unexpected challenges, such as economic
downturns or wars.
The risk of a fiscal crisis--in which investors demanded
very high interest rates to finance the government's borrowing needs--
would increase.
THE CONSEQUENCES OF ALTERNATIVE FISCAL POLICIES
Most of the projections in The 2013 Long-Term Budget Outlook are
based on the assumption that federal tax and spending policies will
generally follow current law--not because CBO expects laws to remain
unchanged but because the budgetary implications of current law are a
useful benchmark for policymakers when they consider changes in laws.
If tax and spending policies differed significantly from those
specified in current law, budgetary outcomes could differ substantially
as well. To illustrate the extent of that difference, CBO analyzed the
effects of some additional sets of fiscal policies.
Under one set of alternative policies, referred to as the extended
alternative fiscal scenario, certain policies that are now in place but
that are scheduled to change under current law would continue instead,
and some provisions of current law that might be difficult to sustain
for a long period would be modified. With those changes to current law,
deficits (excluding the government's interest costs) would be a total
of about $2 trillion higher over the next decade than in CBO's
baseline; in subsequent years, such deficits would exceed those
projected in the extended baseline by rapidly growing amounts. The
harmful effects on the economy from the resulting increase in federal
debt would be partly offset by lower marginal tax rates. Nevertheless,
in the long run, output would be lower and interest rates would be
higher under that set of policies than under the extended baseline.
With those economic changes incorporated, federal debt held by the
public would reach about 190 percent of GDP by 2038, CBO projects.
In a different illustrative scenario, deficit reduction would be
phased in such that deficits excluding interest costs would be a total
of $2 trillion lower through 2023 than in the baseline, and the
reduction in the deficit as a percentage of GDP in 2023 would be
continued in later years. In that case, output would be higher and
interest rates would be lower over the long run than in the extended
baseline. Factoring in the effects of those economic changes on the
budget, CBO projects that federal debt held by the public would be 67
percent of GDP in 2038, close to its percentage in 2012. Under a third
scenario, with twice as much deficit reduction--a $4 trillion reduction
in deficits excluding interest costs through 2023--CBO projects that
federal debt held by the public would fall to 31 percent of GDP by
2038, slightly below its percentage of GDP in 2007 (35 percent) and its
average percentage over the past 40 years (38 percent).
Those different scenarios for fiscal policy would also have
different effects on the economy in the short term. During the next
several years--when the nation's economic output will probably remain
below its potential, or maximum sustainable, level--the spending
increases and tax reductions in the alternative fiscal scenario
(relative to what would happen under current law) would increase the
demand for goods and services and thereby raise output and employment.
The reductions in deficits under the other illustrative scenarios, by
contrast, would decrease the demand for goods and services and thereby
reduce output and employment.
THE UNCERTAINTY OF LONG-TERM BUDGET PROJECTIONS
Even if the tax and spending policies specified in current law
continue, budgetary outcomes will undoubtedly differ from CBO's current
projections as a result of unexpected changes in the economy,
demographics, and other factors. Because the uncertainty of budget
projections increases the farther the projections extend into the
future, CBO's report focuses on the next 25 years.
To illustrate the uncertainty of those projections, CBO examined
how altering its assumptions about future productivity, interest rates,
and federal spending on health care would affect the projections in the
extended baseline. Under those alternative assumptions--which do not
cover the full range of possible outcomes--federal debt held by the
public in 2038 could range from as low as 65 percent of GDP (still
elevated by historical standards) to as high as 156 percent of GDP,
compared with the 108 percent of GDP projected under the extended
baseline with the economic effects of fiscal policy included.
Those calculations do not address other sources of uncertainty,
such as the risk of an economic depression or major war or the
possibility of unexpected changes in birth rates, life expectancy,
immigration, or labor force participation. Nonetheless, CBO's analysis
shows that under a wide range of possible assumptions about some key
factors that influence federal spending and revenues, the budget is on
an unsustainable path.
CHOICES FOR THE FUTURE
The unsustainable nature of the federal government's current tax
and spending policies presents lawmakers and the public with difficult
choices. Unless substantial changes are made to the major health care
programs and Social Security, those programs will absorb a much larger
share of the economy's total output in the future than they have in the
past. Even with spending for all other federal activities on track, by
the end of this decade, to represent the smallest share of GDP in more
than 70 years, total federal noninterest spending would be larger
relative to the size of the economy than it has been, on average, over
the past 40 years. The structure of the federal tax code means that
revenues would also represent a larger percentage of GDP in the future
than they have, on average, in the past few decades--but not large
enough to keep federal debt held by the public from growing faster than
the economy starting in the next several years. Moreover, because
federal debt is already unusually high relative to GDP, further
increases in debt could be especially harmful. To put the federal
budget on a sustainable path for the long term, lawmakers would have to
make significant changes to tax and spending policies--letting revenues
rise more than they would under current law, reducing spending for
large benefit programs below the projected levels, or adopting some
combination of those approaches.
The size of such changes would depend on the amount of federal debt
that lawmakers considered appropriate. For example, bringing debt back
down to 39 percent of GDP in 2038--as it was at the end of 2008--would
require a combination of increases in revenues and cuts in noninterest
spending (relative to current law) totaling 2 percent of GDP for the
next 25 years. (In 2014, 2 percent of GDP would equal about $350
billion.) If those changes came entirely from revenues, they would
represent an increase of 11 percent relative to the amount of revenues
projected for the 2014--2038 period; if the changes came entirely from
spending, they would represent a cut of 10\1/2\ percent in noninterest
spending from the amount projected for that period.
In deciding how quickly to carry out policy changes to make the
size of the federal debt more sustainable, lawmakers face other trade-
offs. On the one hand, waiting to cut federal spending or raise taxes
would lead to a greater accumulation of debt and would increase the
size of the policy adjustments needed to put the budget on a
sustainable course. On the other hand, implementing spending cuts or
tax increases quickly would weaken the economy's current expansion and
would give people little time to plan for and adjust to the policy
changes. The negative short-term effects that deficit reduction has on
output and employment would be especially large now, because output is
so far below its potential level that the Federal Reserve is keeping
short-term interest rates near zero and could not lower those rates
further to offset the impact of changes in spending and tax policies.
This testimony reiterates the summary of The 2013 Long-Term Budget
Outlook, which is one in a series of reports on the state of the budget
and the economy that CBO issues each year. Prepared under the
supervision of Joyce Manchester, the report represents the work of many
people at CBO. In accordance with CBO's mandate to provide objective,
impartial analysis, neither the report nor this testimony makes
recommendations. Both are available on CBO's website, at www.cbo.gov/
publication/44521 and www.cbo.gov/publication/44602, respectively.
Chairman Ryan. Thank you. Let me start on the big picture
here. We haven't solved the problem. Revenues are projected to
go to, what, 19.5 percent of GDP, far higher than our average
that we have been at?
Mr. Elmendorf. Yes.
Chairman Ryan. So the revenues are rising, but spending is
taking off at an unsustainable trajectory, correct?
Mr. Elmendorf. The combination of the revenue path and the
spending path is unsustainable.
Chairman Ryan. Right.
Mr. Elmendorf. Whether you choose to fix, adjust one line
or the other is up to you.
Chairman Ryan. Right. What I find interesting in your
report is the main driver of these outlays that are going up so
fast are the health care programs, particularly the new one,
the Affordable Care Act, in the first 10 years. That is the
great contributor. I find your shadow box 1.1 is very
interesting where you look at aging, you break it down between
aging, excess costs, growth, and then the Medicaid expansion
exchange subsidies. So it is not just the fact that Baby
Boomers are retiring. That is a big contributor, correct.
Mr. Elmendorf. Yes.
Chairman Ryan. It is also the fact that health inflation is
getting out of control, it is running faster than everything
else. And then when you add more programs that exacerbate
those, that in lies the biggest driver of our debt, correct?
Mr. Elmendorf. Yeah. The one amendment I would make is that
health spending has outpaced GDP growth for sometime, as you
know.
Chairman Ryan. Right.
Mr. Elmendorf. In fact, it has been slower relative to GDP
recently, but nonetheless still growing relative to GDP, and
that is a contributor to growth.
Chairman Ryan. Thus excess cost growth?
Mr. Elmendorf. Yes.
Chairman Ryan. So what I find really interesting in this
report is when you add an economic analysis to it, correct me
if I am wrong, but you are basically saying if we get a fiscal
package in place now that, let's say, take the $4 trillion
number, that means we will have lower interest rates which will
help the economy, which will grow GDP, which will lower our
debt, so that is economic stimulus, using a term that my
friends use, 101, meaning lower--a bigger debt package, lower
interest rates, faster growth, lower debt burden.
Then lower marginal income tax rates I find is a very
interesting aspect of your analysis. What you are saying is if
we keep high marginal income tax rates that will slow down our
economy, we will not hit as much of a potential, but if we
lower our marginal income tax rates, albeit on a revenue-
neutral basis, that will accelerate economic growth, that will
help grow GDP and give us a smaller debt burden in the future.
Is that basically what I am getting out of this?
Mr. Elmendorf. Yes, I think that is right, Mr. Chairman.
The one thing I would add is that putting a package in place
that gives people confidence that future deficits will be
smaller can hold down interest rates today and boost the
economy. That is a slightly different point than the one I made
in my opening remarks about actually implementing the tax
increases or spending cuts today, and that part alone would
slow the economy in its economic expansion.
Chairman Ryan. You are basically making a timing point
there, though, correct?
Mr. Elmendorf. Yes.
Chairman Ryan. So from a Keynesian perspective, doing
something that is a shock now, from a Keynesian perspective, a
big spending cut that is immediate or a big tax increase that
is immediate will harm and put our base in the wrong direction?
Mr. Elmendorf. Yes.
Chairman Ryan. But if we put in place a long-term debt
reduction plan dealing with these primary drivers of our debt,
which are clearly these health care programs--there are other
factors, but health care programs--and if we have tax reform
that lowers our marginal tax rates, that will help us in a
couple of great ways. It will help us in lower interest rates,
which grows the economy, and the lower tax rates will help grow
the economy, which means we can get this thing under control
even with the retirement of the Baby Boom population. Is that
basically what I am getting out of this?
Mr. Elmendorf. Yes, Mr. Chairman, that is right.
Chairman Ryan. That is the point we are trying to make
here. This is where we want to go. The reason this debt limit
fight is coming is because when we have had great fiscal
bipartisan agreements in the past, whether it was Reagan with
Gramm-Rudman, whether it was Bush with Democrats in the Senate
in 1990 at Andrews Air Force Base, whether it was Gingrich and
Clinton, or BCA and Bowles-Simpson, these things were part of
debt limit agreements. They have always been the forcing
actions that got us agreements.
And what we are getting here is if we put together a
package now before the Federal Reserve normalizes, before
interest rates start going, we will put ourselves as a Nation
in a very good position. But if we miss this moment, if we just
kick the can because we keep fighting each other, then we will
not get this opportunity; the Federal Reserve will start
tapering, we all know that. It is not an ``if,'' it is a
``when.'' Interest rates will go up, and shame on us because
the hole we will have to dig ourselves out of then will be that
much deeper. He is already giving us numbers, $145 billion a
year versus $350 billion a year. And it is so clearly in our
interest as a country--this is not a Republican-Democrat thing;
this is a math thing--to do something about this. And what we
are seeing here, it is these health care programs are the
primary drivers of our debt. This is why we are focused on
these health care programs. This is also why we are focused on
tax reform, because what we are getting is if we keep high
marginal tax rates, we hurt businesses, we hurt job growth, we
slow down the economy from hitting its potential.
If we lower our marginal tax rates, we have more economic
investment, we have more entrepreneurship, small businesses can
compete.
The highest, the top effective marginal tax rate as of
January now is 44.6 percent. Eight out of 10 businesses in
America, they don't file their taxes as corporations. They file
their taxes as people. We call them subchapter S corporations,
LLCs, sole proprietorships, partnerships, pass-throughs. The
international average tax rate on businesses is 25 percent.
Most other industrial nations don't tax themselves like we do
ours. They don't have a pass-through regime like we have. They
just have business tax rates, and they are, on average, 25
percent. Our corporate rate is 35, that is the highest in the
industrialized world, and that is for 20 percent of our
businesses. The other 80 percent go as high as almost 45
percent effectively. We are really hurting ourselves with these
high tax rates. And so what we are getting here is if we lower
our tax rates--and believe me, there is a way to do this
without losing revenue. Lower our tax rates, we can have faster
economic growth. If we take advantage of the moment we are in,
the low interest rate moment we are in, which will not last
that much longer, and get a fiscal consolidation package on
spending and entitlement reform, we will do our country a big
favor; we will do our children a big favor because we will bank
debt reduction and economic growth at a time where it makes the
most bang for the buck, the most difference. But if we don't
take advantage of this moment--this is why we are focused on
the debt limit, this is why we are focused on these issues--
then shame on us because the hole we will have to dig ourselves
out of will be that much deeper. I will reserve the balance of
my time.
Mr. Van Hollen.
Mr. Van Hollen. Thank you, Mr. Chairman.
And the whole purpose of the budget law, which establishes
a process for the House and the Senate to pass budgets and then
go to conference, is to try and work out these big issues on
the budget deficit, not just for this year but for future
years. And the law requires that the conference committee
between the House and the Senate report by April 15th.
And yet our Republican colleagues have prevented us from
going to conference and instead gone for a strategy where they
drive this country right up against the debt limit, create huge
uncertainty and, in that context, try and make huge demands. If
you read the papers today, they say, Okay, United States will
pay its bills, but only if you adopt the entire House
Republican agenda, anti-environmental laws, get rid of the
Affordable Care Act for a year. That is irresponsible.
The responsible way to do it is the way the law prescribes,
and unfortunately, Mr. Chairman, the Speaker absolutely refused
to go to conference so we could be working on these issues for
a number of years.
Now, here is where we agree, that it is about math. It is
about math. And every bipartisan group that has looked at our
long-term deficit challenge has said, you have got to look at
both sides of the budget equation. Yes, of course, you have to
look at the spending side, and we have to deal with the long--
care--health pieces, and by the way, Mr. Chairman, again, you
did include in your budget the Medicare savings that we achieve
without diminishing quality after your presidential candidate
demagogued against those for months on the campaign trail, but
you recognized that they were important to help reduce the
deficit, and in fact, the Republican budget wouldn't balance in
10 years without them.
So we understand that we have to have savings on the health
care side in a responsible way, but we also recognize that
simple math tells you that the other side of the equation needs
to be looked at as well, revenue.
Dr. Elmendorf, you pointed out the fact, which is that if
we keep running high deficits and debt, as the economy
improves, that will crowd out private investment, right?
Mr. Elmendorf. Yes.
Mr. Van Hollen. And that will increase interest rates, and
that would slow down economic growth, right?
Mr. Elmendorf. Yes.
Mr. Van Hollen. And you have said that if, in the next 10-
year period, we reduce the projected deficit by $2 trillion,
then, in 2035, we would have a debt-to-GDP ratio where we are
today, right?
Mr. Elmendorf. Yes, that is right.
Mr. Van Hollen. And you have been clear that you could
achieve that $2 trillion deficit reduction through cuts or
through revenue or through a combination; isn't that right?
Mr. Elmendorf. Yes, Congressman.
Mr. Van Hollen. And so if you want to have, if you want to
eliminate that drag on economic growth, the key point in your
report is that we have to reduce the deficit, right?
Mr. Elmendorf. Yes.
Mr. Van Hollen. And it is up to policymakers to decide what
mix.
And we totally agree, Mr. Chairman, that we need to reduce
the deficit, just as the CBO has said, but we think that we
need to have a balanced approach because if you do it only by
cutting on the health care side, you are going to be asking
Medicare beneficiaries, whose median income is $23,000, and for
many of them who get half of that income from Social Security,
that $23,000, you are going to be asking them to take a big hit
when you are not asking people who are earning a million
dollars to eliminate some of their deductions or you are not
going to ask big oil companies to get rid of their special
interest tax breaks, which is why we have argued, just like
every bipartisan commission, that you have to do a combination
of things, and that is simple math. You have got to do
something on the revenue side, and you have got to do something
on the spending side.
Now, Dr. Elmendorf, as I look at your analysis here, and
you look out to 2035, and you compare this year's projection to
the previous current law projections, in fact, the biggest
driver of increased deficits in the out years is the fact that
we changed the tax law so that less revenue will be coming in,
isn't that the case?
Mr. Elmendorf. Yes, that is right, Congressman.
Mr. Van Hollen. So the reason the deficit in 2035 is much
higher under this report than in previous reports is because we
changed the tax law and less revenue will be coming in. So our
point is the point I think the overwhelming majority of
American people support, which is to tackle this challenge, you
need to address both pieces of this going forward.
Chairman Ryan. Can I ask you a question about that then?
Mr. Van Hollen. Sure.
Chairman Ryan. Are you suggesting we should raise tax rates
on middle income taxpayers, which is what we prevented from
happening in that tax----
Mr. Van Hollen. Actually, no, Mr. Chairman. In fact,
reclaiming my time, our view is that your tax plan does exactly
that, because you say you are going to get the top rate down to
25 percent, you say you are going to do it in a revenue neutral
manner, which according to lots of analysis means you have got
to come up with $4 trillion, even while you are providing the
folks at the top with a big tax cut. And the way you are going
to have to make it up mathematically is to increase the burden
on middle income folks.
And if it is not the case, we would love to see your tax
plan, you know. It has been in the Republican budget for 3
years now. Let's see it. Just like for the last 3 years, you
have been talking about repeal and replace on health care. We
have had 42 votes on repeal; not a single House Republican plan
has been voted on to come up with a different system.
So let me ask you this, Mr. Elmendorf, because we need to
look at the long term, and we should act now to deal with it,
but we also should make sure we get the economy moving more
quickly. Now several months ago, we asked you, the CBO, that if
you were to get rid of the fiscal year 2013 sequester and the
fiscal year 2014 sequester, how many jobs would be saved? We
are obviously now not able to take back fiscal year 2013,
despite our efforts to try and replace that sequester. So just
for this coming fiscal year, just for fiscal year 2014, if the
sequester remains in place, what is your best estimate as to
how many fewer jobs we will have in this country this time next
year; 100,000, 200,000? What is your estimate?
Mr. Elmendorf. Well, so, Congressman, if the Congress were
to move discretionary funding back up to the original caps
under the Budget Control Act and turn off the sequestration for
2014, we think that would add about half a percent to the level
of GDP at the end of 2014, and it would add about 600,000 jobs
at the end of 2014. Those are the mid points of ranges. We
often present our economic estimates with ranges to show the
uncertainty. The effect on GDP we think would be somewhere
between two-tenths of a percent and eight-tenths of a percent
on GDP growth, GDP at the end of 2014. As I said, it was a
midpoint of half a percent, and the effect on full-time
equivalent employment would be between 200,000 jobs and a
million jobs, again with a midpoint of 600,000 full-time
equivalent jobs.
Mr. Van Hollen. Okay, just so I understand. Your best
estimate as to how many fewer jobs we will have in this country
if we keep the sequester in place between now and this time
next year is 600,000?
Mr. Elmendorf. Yes, that is right, Congressman.
Mr. Van Hollen. And just for the benefit of our colleagues,
the last 3 months, we have seen around 500,000, in fact, fewer
jobs, so you are talking about keeping the sequester in place
that wipes out more than the number of jobs that were created
in the last 3 months. That is an unnecessary self-inflicted
wound.
And so, Mr. Chairman, I would just, again, ask that the
majority in this House allow us a simple vote on our plan to
replace the sequester to save over 600,000 jobs, to end the
eating away at important investments, whether it is in
biosciences or our infrastructure, which clearly is having a
negative impact on the economy and on the country going
forward.
Mr. Elmendorf, let me just ask in the last minute here, if
we were to actually not pay our bills, if the United States
Government were to lapse on its full faith and credit, could
you discuss what the potential negative impacts could be on the
economy?
Mr. Elmendorf. Congressman, defaulting on any obligation of
the U.S. Government would be a dangerous gamble.
In a very uncertain world, one thing that everyone has been
able to count on is that the U.S. Government will pay its bills
on time; the benefit checks for older Americans, for needy
Americans will go out on time; that grants to State and local
governments will be paid when they are scheduled, that the
bills that small and large businesses submit to the Federal
Government in exchange for the goods and services the
government buys will be paid on time; and that the principal
and interest payments on the Federal debt will be made on time.
If the confidence in the reliability of those payments were
cast into doubt, then the consequences for the budget, for the
U.S. economy, for the U.S. and global financial systems could
be large and lasting and very damaging.
Mr. Van Hollen. Thank you, Dr. Elmendorf. I noticed that
you said default on any obligation because----
Mr. Elmendorf. Yes, Congressman.
Mr. Van Hollen [continuing]. Some of our colleagues have
this debt prioritization bill, we call it the Pay China First
bill, which says you don't have to pay our troops in the field,
you don't have to pay doctors on Medicare, but you pay
bondholders, including the government of China. What you are
saying is that default on any obligation would send a very bad
signal?
Mr. Elmendorf. Yes, Congressman. It is very hard for
economists to know exactly what would happen. It might be that
defaulting on some obligations would be different than
defaulting on others, but we don't have a basis for really
analyzing that because, fortunately, we have not had a lot of
experience with the government defaulting, but I think given
how much money the Federal Government owes, to stop paying what
is owed is a very risky strategy.
Chairman Ryan. Thank you.
I will reclaim the balance of my remaining time. To try and
just put this all in perspective, and I am not trying to pick a
fight here, I am just trying to clarify our goals and
intentions. If the minority would have been willing to agree to
limiting their motions to instruct conferees to two, which was
the offer given in the Senate, we could have gone to
conference. That wasn't--you know, nobody wanted that.
Mr. Van Hollen. Mr. Chairman----
Chairman Ryan. You and I spoke about that.
Mr. Van Hollen. No, I have never heard that offer until
this moment, Mr. Chairman, ever.
Chairman Ryan. That is not the case.
So the point we are trying to make is, the point I am
trying to make is having endless motions to instruct would have
done more to divide this Congress, more to prevent good,
legitimate, serious reforms from making it into that budget
agreement. When we have actually gotten bipartisan budget
agreements in this country, especially in eras of divided
government, such as the one we have right now, it has usually
accompanied the debt limit.
We now get a report, a fresh one from the CBO, which, by
the way, says that there are better Medicare reforms that can
lower beneficiary costs and government costs through premium
support. That is a pretty interesting report, I wonder if
anybody has read that. It came out about a week ago. We hear
that if we lower our marginal tax rates, it is good for growth
and good for debt reduction. So the problem is, can people
agree that it is not just rich guys we are hitting; it is
actually successful small businesses who are the job creators
that help grow the economy that is getting caught up in this,
and lowering those tax rates is good for jobs, investment, good
for the debt. And if we get fiscal consolidation, meaning
entitlement reforms, the drivers of our debt, health care
programs, that, too, will help us get our debt under control,
grow our economy, and leave the next generation better off.
The final point is the window of opportunity is narrowing
because interest rates are not going to be where they are for
much longer.
Mr. Price.
Mr. Price. Thank you, Mr. Chairman, and I want to welcome
the Director back to the committee. I think if one is looking
in this country and watching this on C-SPAN today, they are
scratching their head and trying to figure out why there is
agreement at the ground level that there is a debt but why we
can't come to any more agreement than that, and I really am
surprised at the ranking member in this conversation about the
Affordable Care Act and our focus on it, and it is appropriate
because it is of concern to the American people.
Thousands of stories of calamity across this country
already because of Obamacare. Full-time workers being shoved
into part-time status, destroying families, amazing that this
would be tolerated by the administration, our friends on the
other side of the aisle; thousands, hundreds of thousands of
families with members of their families being tossed off their
current health coverage because of the Affordable Care Act, not
because of anything they desire as families, and this is
destroying lives; huge numbers of doctors, and as a physician I
can tell you, huge numbers of doctors that are no longer able
to participate in the program. So I would urge my colleagues to
listen to their constituents.
Also, I am surprised by the amnesia that I seem to hear
from the other side. This is the President's sequester. The
President's sequester. We on our side tried to pass a piece of
legislation that would more appropriately prioritize the
spending, but that was not--the administration wasn't willing
to take that, and then the full faith and credit that we have
passed with this continuing resolution last week.
But I do want to turn to your report because I find it
very, very fascinating, the long-term budget outlook. This is
the picture that you all chose to demonstrate the challenge
that we have, and the outgoing line there is the increase in
debt over a relatively short period of time, a time that all of
us can remember in our lifetimes up here. Would you call that a
large and growing debt?
Mr. Elmendorf. Absolutely.
Mr. Price. So, on page 3, you state the harmful effects of
a large and growing debt, and I want to draw our attention to
one sentence there: At some point investors, with a large and
growing debt, begin to doubt the government's willingness or
ability to pay U.S. debt obligations.
That is a calamitous event when that occurs, is it not?
Mr. Elmendorf. Yes, Congressman, it would be.
Mr. Price. And if we on this side, on both sides of the
aisle are trying to look at the tea leaves and see how close we
are to that point, are there things that we can look at as
indicators?
Mr. Elmendorf. Congressman, as we say in the report, there
is no way to predict when the country would reach a fiscal
crisis because those events are rare, have not occurred in this
country, and depend not just on some particular amount of debt
but on people's confidence in the ability of the government to
manage its finances. So we don't know when we might reach that
point in this country.
One indicator would be rising interest rates. On the other
hand, when countries encounter fiscal crises, they have often
been borrowing at fairly low interest rates for a long enough
time to instill some confidence, some false confidence, in the
path they are on, and then rates can rise very sharply with
very little warning. So this sort of event may not have the
sort of leading indicators that one would hope for.
Mr. Price. Mr. Chairman, we are still in that window where
we can turn things around and move in the right direction?
Mr. Elmendorf. Yes, absolutely.
Mr. Price. But at some point, that window closes, does it
not?
Mr. Elmendorf. Yes, it would.
Mr. Price. I want to shift to page 88 in your report that
talks about the long-run effects of fiscal policies with
smaller deficits and a couple graphs, and you stated, I think,
in your comments that increasing debt decreases income.
Mr. Elmendorf. Yes.
Mr. Price. And the graph on the bottom here demonstrates an
alternative scenario where there is $4 trillion in deficit
reduction over a 10-year period of time, and you actually have
the debt and deficit decreasing and incomes increasing; is that
correct?
Mr. Elmendorf. Yes, that is right, Congressman.
Mr. Price. Can you help us understand why that, what the
correlation is between those two?
Mr. Elmendorf. Yes. So over time as the government borrows
more money, it is reducing the funds that are available to
private investors, and thus reducing the amount of capital
investment we do, and it is that capital investment that
together with education and other things makes workers more
productive and leads to higher incomes, so if there is less
investment, there is less productivity growth, less increase in
wages and incomes over time.
Mr. Price. And the budget that House Republicans adopted
had a debt reduction over a 10-year period of time of about----
Mr. Elmendorf. I think about $4 or $5 trillion,
Congressman.
Mr. Price. $4 trillion or $5 trillion. So if we want to get
on a path that decreases debt and increases income for the
American people, the House Republican budget is an example of
one?
Mr. Elmendorf. Yes, it is an example of one.
Mr. Price. Thank you.
I yield back.
Chairman Ryan. Ms. Schwartz. Wait, no, Ms. Schwartz is not
here.
Mr. Yarmuth.
Mr. Yarmuth. Thank you, Mr. Chairman.
Dr. Elmendorf, it is a pleasure to see you. Thank you for
being here.
Over the last couple of months, I have talked to a large
number of medical researchers, both in my district and
elsewhere, who have reached near panic, I guess, over the
effects of sequester on the projects that they have been
working on and are very, very concerned about the long-term
effects of sequestration on their work, but at the same time,
they have given some very encouraging news. Virtually every
researcher I have talked to believes that, within the next 10
years, we will have a disruptive change in the medical field,
one or more, and by a disruptive change, I mean curing cancer,
curing diabetes, something of major consequences to the medical
field and subsequently to the burden of health care costs in
the country.
Have you, CBO, given any thought or projection as to what,
say, curing diabetes--I think the estimates are somewhere
around $150 billion a year spent systemwide--what that kind of
disruptive change would mean on the projections of long-term
health care costs for the taxpayer?
Mr. Elmendorf. Congressman, our basic long-term projections
don't try to guess what particular sorts of changes might occur
in health care delivery. We have a gradual slowing of this
extra cost growth over time in response to rising pressures of
costs. We don't try to figure out the path for particular sorts
of diseases or treatments for them. Whether curing a disease
would help the Federal budget or not is actually not very
clear. It would be great for people's lives, obviously, but the
effects on the budget are complicated. When we looked at the
effects of raising the cigarette tax in the lengthy report that
we did, that would make people healthier. Fewer people would
smoke. They would live longer. But the Federal budget has some
odd cross currents; thus, less spending on health care for
people who don't get certain diseases, people live longer; they
collect Social Security benefits for longer. That is all to the
good for society but may not be good for the Federal budget.
So, for individual diseases and individual new approaches that
could have different sorts of effects on the Federal budget,
and we have not tried to work out any of those in great detail
except for the increase in the cigarette tax and reducing
smoking.
Mr. Yarmuth. Thank you. Let's look at in a different way.
You talked about the fact that $4 trillion in reduction of
either spending or a combination of reduction in spending and
increased revenues would bring the debt as a percentage of GDP
to below historic ranges. So we are talking basically about,
what, $400 billion a year?
Mr. Elmendorf. Yes, that is right.
Mr. Yarmuth. At current levels.
Mr. Elmendorf. Yes.
Mr. Yarmuth. What would be the impact on the economy of
taking $400 billion out of the economy, say, in the health care
arena, $400 billion a year?
Mr. Elmendorf. Well, if one takes it out of the economy
right away, and especially under these economic circumstances,
it would weaken the economy, it would reduce the number of
jobs. That is why many people who have constructed different
policies reducing deficits have focused on phasing in those
policies over time, and again, back to the discussion we had
earlier, there are pros and cons of how quickly one phases in
policies. I think a general agreement that making decisions
soon is good because the sooner you make decisions, the more
time you give people to plan and adjust to where policies are
going.
Mr. Yarmuth. Thank you.
The chairman of the committee talked about the--and stated
as apparently a matter of faith or irrefutable faith that
cutting marginal tax rates creates wealth and reduces the
deficit and so forth. Didn't we try that in 2001 and 2003?
Mr. Elmendorf. Well, Congressman, I think the economic
statement, I should say carefully, is that reducing marginal
tax rates while maintaining the same level of total revenue so
that deficits would not be affected would be good for the
economy. If one lowers tax rates and loses revenue through that
process, then the effects on the economy depend on the
magnitudes involved because the larger deficits are bad for the
economy and the lower tax rates by themselves are good for the
economy.
Mr. Yarmuth. But we did reduce the marginal tax rates in
2001 and 2003.
Mr. Elmendorf. Yes.
Mr. Yarmuth. And we did not see a reduction in the deficit
over the ensuing years; isn't that correct?
Mr. Elmendorf. Congressman, I think when economists study
the effects of changes in tax rates, we don't look at just a
few years. There are so many things that go on in the economy
and the budget, so we draw on a broader set of evidence.
Mr. Yarmuth. Thank you. I would yield the last 25 seconds--
okay, never mind. I will just yield back the balance of my
time.
Chairman Ryan. Mr. Garrett.
Mr. Garrett. Doctor, thank you for coming here to testify.
So, as Dr. Price was saying, the viewers who watch this
probably can see the difference of opinion as to whether we are
in financial difficulties or not. Looking at the issue of
health care, we see the discrepancy on that view, so I
appreciate that you are here and the report as well because we
can sort of dig down into some of the numbers.
In the report I believe I read that the balance of the
trust fund under Medicare, looking at that part right now, part
A, would fall from $229 billion at the end of fiscal year 2012
to $31 billion at the end of fiscal year 2023. Is that correct?
Mr. Elmendorf. Yes, Congressman.
Mr. Garrett. And then you go on to say the CBO concludes
that in a long-term budget outlook, what we are looking at here
right now, is that, quote, under the extended baseline the
trust fund would be exhausted just beyond the coming decades.
Is that correct?
Mr. Elmendorf. Yes, Congressman.
Mr. Garrett. Okay. So I guess my constituents at home, I
don't know whether they read this report or not, but----
Mr. Elmendorf. I hope they do, Congressman.
Mr. Garrett. Yeah, I hope they do, too. There are a lot of
pictures. I mean, it is a little dry, but it is important. But
they do get your message, and they do get your numbers, and
that is why they are asking us, what are we doing to try to fix
this? You use the word ``exhausted.'' What they are asking me
is what are we going to do to prevent bankruptcy by--another
way to describe exhausted, I think. Could you tell us or tell
them what will be the practical implications for seniors in my
district and across the country as well if we get to that point
where part A is exhausted or bankrupt, if you will?
Mr. Elmendorf. So, as you know, Congressman, the payments
for hospitals through Medicare come out of the Hospital
Insurance Trust Fund. If that trust fund were exhausted, then
the amounts that could be paid to hospitals for treating
Medicare beneficiaries would be limited to the amount of
revenues as they come in, and that would be less than would be
needed to meet all of the bills that would rise under current
law.
Mr. Garrett. What does that mean to a senior at home today
if that happens?
Mr. Elmendorf. Well, we have not--so far, the Congress has
not let either the Medicare or Social Security Trust Fund
actually run out of money, but if Congress were to stand by
when that happened, then hospitals would not get the payments
written down in current law. I don't know which hospitals would
get paid or which wouldn't or for which patients or what
patients would not get paid for. There is no way to know.
Mr. Garrett. So the bottom line, doctors potentially would
not be paid, hospitals potentially would not be paid, more than
potentially, and services----
Mr. Elmendorf. Hospitals would not get the full payments
that is written into current law; that is right, Congressman.
Mr. Garrett. So just delving into it a little more, also in
the report it says the Federal Government's health care
spending will grow considerably in 2014 because of changes made
by the Affordable Health Care Act. What are the growth
projections for health care spending as a result of the
Affordable Health Care Act as a percent of GDP as well?
Mr. Elmendorf. Well, Congressman, all told, the Federal
spending on these major health care programs is about 4.5
percent of GDP now, we think it will be 8 percent by 2038. And
over those 25 years, there are substantial portions of the
increase explained by the aging of the population and rising
health care costs and by the coverage expansions of the
Affordable Health Care Act.
Mr. Garrett. Okay. So spending is going to go up, services
would be going down. There was an article in the Wall Street
Journal recently about the price of the premiums that people
will be paying in my home State of New Jersey, New Jersey
premiums would increase from $162 per month to $219 per month.
I just did that, that is around 35 percent roughly increase in
premiums under the Affordable Health Care Act if we just
continue on right now. I know you guys did a look back in 2009
as far as increase of premiums. Have you done a look at what
premiums would be increasing under the Affordable Health Care
Act if the status quo is continued?
Mr. Elmendorf. So you are right, Congressman, in the fall
of 2009, we did an analysis of what the version of the
Affordable Care Act in play at the time would do to premiums.
We have not updated that. We are, of course, following the news
about premiums, and we will factor them into our next baseline
projections. We have not redone that particular analysis.
Mr. Garrett. You haven't redone it. But do you still expect
that the Affordable Health Care Act would increase premiums for
Americans purchasing in the nongroup market?
Mr. Elmendorf. Yes, Congressman. Let me explain clearly
here. We thought there were a number of factors that would
increase premiums, the most important of which in our
estimation was insurance policies will be required to cover a
larger share of the total services. That means that premiums
would be higher but out-of-pocket payments would be lower.
Mr. Garrett. Right. And that is a part of the Affordable
Health Care Act?
Mr. Elmendorf. That is because of the Affordable Care Act
setting standards for what share of medical costs have to be
covered by an insurance policy, but the increase in premiums
and reduction in out-of-pocket costs will be offsetting for the
average beneficiary. Some would pay more, some would pay less,
but offsetting on average. There are other reasons also we
think premiums would go up. As you know, those are before
subsidies, the premiums that you are referring to.
Mr. Garrett. My time is up, but I thank you for the
clarification on all that.
Mr. Elmendorf. Thank you, Congressman.
Chairman Ryan. Mr. Pascrell.
Mr. Pascrell. Thank you, Mr. Chairman.
Mr. Chairman, I am glad that you are the chairman here. I
would rather have Chris, of course, but I don't want to
believe, I really don't want to believe that this obsession
with the debt--and no one in this room denies, just looking at
the pictures, that we have a debt and we need to address it.
The question is, how do we address it? And we don't address it
by making it worse. Folks that look back to 2009 and they see
the great deficit that existed in 2009 because no business was
investing, no capital, no consumers were buying, so the
government has to do something, as they have done in 25 times
in the 20th century whenever we had a recession or a
depression.
So I like to put things in context, so I am counting on
you. So you won't allow this issue to be a stalking horse for
continued ideological struggle to slash the social safety net
and pad the pockets of other people. I am counting on it. I
can't put it any clearer than that. The--we are talking about
this budget, and we are talking about----
Chairman Ryan. Since you engaged me, can I ask you, do you
honestly think that is what we are trying to do?
Mr. Pascrell. I said I am counting on you. If you want me
to go on to the rest of the members, I can do that.
Chairman Ryan. No, but you are addressing me. I mean,
honestly, do you honestly think that is what we are trying to
do?
Mr. Pascrell. Yeah, I think that is one of the reasons that
we have the problem today.
Chairman Ryan. Well----
Mr. Pascrell. I don't think that is your motivation. Who am
I to question your motivation? But I don't think that is where
you are at. So I am counting on that. But on page 103, the very
large change between this year and last year--and correct me if
I am wrong--in the projected Federal debt stems primarily from
changes in tax law that have sharply reduced revenue, future
revenues.
Mr. Elmendorf. Yes, Congressman.
Mr. Pascrell. That is on page 103. In this report, the
largest reason for the deficit would be bigger, bigger than the
previous estimate that we have had, is that the tax deal we had
at the beginning of this year. Talk about amnesia. And that
deal is very interesting to examine.
How much bigger, Mr. Elmendorf, would the deficit have been
if we had extended the tax cuts of 2001 and 2003 for everyone,
as my friends suggested on the other side? How much bigger
would the deficit, since they are so concerned about this
deficit and debt, how much bigger would it be?
Mr. Elmendorf. It would be substantially larger,
Congressman, but I don't have a numerical estimate at hand, I
am sorry.
Mr. Pascrell. Substantially larger?
Mr. Elmendorf. Yes, Congressman.
Mr. Pascrell. And then what do we do? So, in just 1 year,
the projections for the future growth in our healthcare system
went down by almost 10 percent. I have read parts of this
report. That is what you say, correct?
Mr. Elmendorf. So we brought down the--yes, Congressman.
Mr. Pascrell. In all the other years before that since
1995, going back to 1990, those costs went up. Now maybe it
just happened by chance. Maybe it just--we woke up one morning
and said let's--insurance companies felt great and said, we
won't increase insurance, the premiums as much as we did last
year.
You know that is not how it happened, and I know that is
how it happened. I don't know if everybody in the room knows
that is how it happened.
So it is clear that we have much more to do, but this is a
very significant accomplishment because so much of this deficit
is dependent upon, as the chairman rightfully pointed out,
health care costs. The purpose of the ACA, one of its purposes,
was to bring down the health care costs.
Now, Dr. Elmendorf, on page 58 of your report, you make
some projections regarding Federal non-interest spending,
including discretionary spending.
Mr. Elmendorf. Yes.
Mr. Pascrell. Which we know is coming down. The President
lowered it by half. The reason why he lowered it by half is
someone said this morning, well, the reason--how can you say
lowered it by half when he increased it so much in 2009, put it
in context.
Chairman Ryan. Thank you.
Where are we?
Mr. McClintock.
Mr. McClintock. Thank you, Mr. Chairman.
Dr. Elmendorf, we keep hearing the proposition that in
order to reduce the deficit we either have to raise taxes or
cut spending, as if taxes and deficits are opposites. It seems
to me they are two sides of the same coin, that deficits are
taxes. They are just future taxes. The only difference between
a deficit and a tax is the timing of the tax.
Mr. Elmendorf. Well, I think, Congressman, the accumulation
in debt that comes from a deficit could be addressed later by a
tax increase or by a spending cut later. I think what a larger
deficit does is to push the question off for the future.
Mr. McClintock. But you are applying future taxes. I mean,
taxes and deficits are the only two possible ways to pay for
spending.
Mr. Elmendorf. Yes, Congressman, that is right.
Mr. McClintock. Well, so it seems to me, then, the critical
issue before us is the level of spending, since the level of
spending automatically sets the combined level of current and
future taxes, not the other way around.
Mr. Elmendorf. Well, again, I think it can affect future
spending as well. But I take your point that the only way to
pay for spending is to collect that in revenue or to borrow
that money.
Mr. McClintock. A recent article in The Wall Street Journal
noted that the European experience is that those nations that
have restrained spending increases relative to GDP overall had
higher economic growth than those that did not. Is that your
observation?
Mr. Elmendorf. Congressman, it depends on the time period
you look at and on the sets of policies. So the countries in
Europe that have had more restrained fiscal policies in the
past few years have not had good economic growth. They have had
weak economic growth.
Mr. McClintock. When you say restrained fiscal policy, that
is taxes and spending.
Mr. Elmendorf. I mean countries that have had lower
spending, Congressman, had lower spending or higher taxes----
Mr. McClintock. What The Wall Street Journal article was
referring to specifically was levels of spending relative to
GDP, and they found a remarkable correlation between restraint
in increases in spending relative to GDP and economic growth.
Mr. Elmendorf. So, Congressman, I think the way that
economists would look at that question is to look at the
effects that the tax code of a country is having on people's
behavior.
Mr. McClintock. No, no. But, again, their point is it is
the spending that seems to be directly correlated to growth.
The greater restraint in spending, the greater overall economic
growth these nations have had. You mentioned timing. I mean,
just looking at the recent history of this country. Coolidge,
Truman, Kennedy, Reagan, Clinton all cut spending relative to
GDP, Hoover, FDR, Johnson, and Bush all increased spending
relative to GDP. The economy seemed to do better under the
former policies than the latter.
Mr. Elmendorf. Well, Congressman, President Hoover, for
example, not to defend his economic policies exactly, but GDP
started to fall. Spending rose as a share of GDP because of
what happened in the economy, not what happened--not
originally----
Mr. McClintock. But just in terms of raw Federal spending,
he increased spending 60 percent during his 4 years in office,
a rather breathtaking amount.
Mr. Elmendorf. Just knowing that the ratio of spending to
GDP depends both on explicit decisions about spending----
Mr. McClintock. But even factoring that out, just in
nominal terms, 60 percent increase in Federal spending in 4
years is rather breathtaking, and it didn't seem to jump-start
the economy.
Mr. Elmendorf. Most economists think that expansionary
fiscal policy in the Depression, meaning larger deficits, was
good for the economy during the Depression. Most economists
think that the lower taxes and higher spending----
Mr. McClintock. I understand that.
Mr. Elmendorf [continuing]. During the past economic
downturn were good for the economy during the downturn. The
problem is the longer-term effects.
Mr. McClintock. I understand that. That is an example of
what I like to call McClintock's third law of political
physics, which is the more we invest in our mistakes, the less
willing we are to admit them.
But let me go on to a response that you made to the ranking
member, who asked you about the debt limit. Did I understand
you correctly to say that you see no distinction to credit
markets between the government defaulting on actual debt owed
to the public and delaying payments of routine obligations? Did
I understand that correctly.
Mr. Elmendorf. No. That is not what I said, Congressman.
Mr. McClintock. Good.
Mr. Elmendorf. I said that defaulting on any obligation of
the U.S. Government was a dangerous gamble. And I said,
Congressman----
Mr. McClintock. But do you believe that credit markets see
a distinction between defaulting on the actual debt owed to the
public and delaying payments of routine obligations?
Mr. Elmendorf. And I said, Congressman, that it might be
that the financial system or the economy would respond
differently to default on different kinds of obligations, but
that economists did not have a basis for making analytic
predictions, because we don't have experience in that.
Mr. McClintock. I want to turn to one other subject very
briefly: student loans. $1 trillion of debt owed to the Federal
Government, increasing default rates. The amount that we are
putting in seems to be driving a huge increase in tuition.
Tuition is up four times the rate of inflation over the past
decade. Health care up twice the rate of inflation, yet we talk
about affordable health prices. Are we heading toward a student
loan default bubble?
Chairman Ryan. Thank you.
Mr. Elmendorf. We haven't studied that, Congressman.
Chairman Ryan. I just want to keep everybody on time.
Ms. Castor.
Ms. Castor. Well, thank you very much, Mr. Chairman.
Good morning, Dr. Elmendorf.
Mr. Elmendorf. Good morning.
Ms. Castor. Thank you for being here, and thank you for all
of the work that went into the 2013 Long-Term Budget Outlook.
I am very concerned with the economic damage that is being
caused by the sequester. And you previously responded to
Ranking Member Van Hollen by saying--did you say if we keep the
sequester in place that that could cost our country 600,000
jobs over the next----
Mr. Elmendorf. Yes, yes. Relative to the alternative,
moving discretionary funding back up to the original BCA caps
and not having the sequester take effect.
Ms. Castor. And that would take, did you say, a half point
away from gross domestic product?
Mr. Elmendorf. About half a percent off of gross domestic
product by the end of 2014.
Ms. Castor. And, you know, back home in Florida, in my
community, the type of jobs we are talking about, I think we
have already seen some very harmful impacts. Our premier cancer
research center in Tampa is the Moffitt Cancer Center. They,
before the sequester, had 120 researchers working to find a
cure for cancer and work on treatments. They are down to 100
researchers. At the Air Force base, MacDill Air Force Base is
one of our largest community economic drivers, they are
furloughing mental health counselors, among others there.
We all agree that defense is--that part of the budget is
shrinking, but the sequester does not give us a lot of room to
maneuver on the type and where we want those cuts to take
place. Law enforcement job losses, cuts to the courts, very
significant cutbacks in education.
And then when the Republicans adopted the CR last week, it
became crystal clear, I think, that they intend to march
forward with those sequester cuts. Then I look at your report,
and it is apparent those kind of expenditures aren't the
drivers of the long-term debt. Is what America is investing
right now in innovation or infrastructure or education, are
those the drivers of the debt and deficit?
Mr. Elmendorf. No, Congresswoman. All of government
spending, except for spending for this handful of large
programs, will be a smaller percentage of GDP by the end of
this decade than it has been at any point since the 1930s. What
is growing in dollar terms and relative to the size of the
economy is spending on Social Security and Medicare and
Medicaid in particular.
And, Congresswoman, I would just add that, of nondefense
discretionary spending, historically nearly half has been in
investment of some sort. About 20 percent of that spending has
gone to physical capital, think of building highways, for
example; about 15 percent has gone to education and training,
what economists would call investment in human capital; about
10 percent has gone to research and development, like health
research. So historically nearly half of this category of
nondefense discretionary spending has been an investment of
some sort.
Ms. Castor. Well, then, we have a real mismatch here now on
what the Republicans have enacted and have set forth in debate
just last week on the CR on what the debt reduction strategy
is. You want to continue the sequester. Meanwhile the CBO's
report says the long-term drivers of the debt and deficit: an
aging population. We have proposed significant reforms in
Medicare, just look at the Affordable Care Act, a lot of those
reforms taking Medicare from fee for service to a system based
on quality, changing those models.
We really need to sit down and negotiate. The Republicans'
refusal to negotiate on the budget for the past 4 months has
led to this mismatch in policy. I talk to many of you, my
Republicans colleagues, they say, yes, I am sorry, we want the
sequester, we want these cuts. But I hope you really study the
CBO's report and understand it is not those investments in
innovation, education, infrastructure in America that are
driving the long-term debt.
I will yield back.
Chairman Ryan. Mr. Lankford.
Mr. Lankford. Thank you.
Dr. Elmendorf, thanks for being here as well. Let me just
bounce to a couple different issues if we have time. On Social
Security Disability, SSDI, what is your report on that as far
as the status of that and where it is headed in the coming
days?
Mr. Elmendorf. So the Disability Insurance Trust Fund will
be exhausted in just a few years, Congressman, I think in
2015--or 2016, I am told. We think that trust fund will be
exhausted in 2016.
Mr. Lankford. So we have 3 years.
Mr. Elmendorf. Yes, Congressman.
Mr. Lankford. What is the status at that point once that is
exhausted?
Mr. Elmendorf. Once that trust fund is exhausted, as with
the Hospital Insurance Trust Fund, then the payments can
presumably be only as large as the incoming receipts, which are
not enough to cover all the payments that the government is
committed to under current law.
Mr. Lankford. Has that changed as far of the growth of that
program in the days ahead? What has brought about that moment?
Has that date changed, 2016? Did it used to be 2020? Have you
been able to determine the history of that?
Mr. Elmendorf. Our projection of that date has moved around
over time. As you may know, Congressman, the disability
insurance rolls have increased markedly over the past few
decades, and we have done a number of reports ourselves trying
to show you what the sources of that increase are and to give
you policy options for addressing it. In the last few years it
has been pushed up in particular, I think, by people who have
some disabilities, have lost their jobs, have trouble finding
jobs, and have applied for disability insurance.
Mr. Lankford. Are you aware of Congress implementing any of
those policy options that you have recommended in the past?
Mr. Elmendorf. No, Congressman.
Mr. Lankford. Do you think it might be time for us to
implement a few of those----
Mr. Elmendorf. I hope that you find these options useful
for you as you decide what policies to follow.
Mr. Lankford. At some point, when we begin to solve some of
these issues, let's say, is that the first entitlement to reach
an insolvency level, is the disability?
Mr. Elmendorf. As you know, only a few of these benefit
programs have trust funds of this sort, and that is the first
of these benefit programs that would reach insolvency.
Mr. Lankford. If we implemented some of the policy options,
and we can discuss some of those in the days ahead, but if we
implemented any of those policy options, how many years would
it take to bring some stability to that? So what I am trying to
ask is, the clock is ticking, we have 3 years before we are
insolvent. If we implemented that policy at the end of this
year would that buy us another year depending on what it might
be or would it take several years to be able to get it into the
system to build it up?
Mr. Elmendorf. So in principle, of course, you could make
very sharp changes overnight, but in practice----
Mr. Lankford. Yeah, we could add a lot of tax dollars to
it, or deficit dollars, and say we are just going to continue
to fund it that way with deficit.
Mr. Elmendorf. Or in principle you could just cut benefits
a lot for existing beneficiaries. But I think in practice, the
point you are making is that Congress generally makes changes
that are phased in over time, and that emphasizes the
importance of deciding as soon as possible what changes you
want to make, because if you want to phase them in and you need
to forestall the exhaustion of a trust fund or you want to
forestall a given increase in debt, then it is even more
important to make decisions and start that process right away.
Mr. Lankford. Okay. On page 64 of your report you make a
pretty remarkable statement about the tax revenue is going up.
And you say that the tax revenues you project is going up
because of the growth in real income, and the interaction of
the tax system with inflation would push a greater proportion
of income into higher tax brackets, and certain tax increases
enacted in the Affordable Care Act would generate increasing
amounts of revenues relative to the size of the economy.
Is this similar to what we faced with the AMT for years,
that because it wasn't inflation adjusted we had a growing
number of people that were caught into that AMT trap?
Mr. Elmendorf. It is similar, not as traumatic as the AMT
increase would have been. The AMT was not indexed for
inflation, and moreover the Congress enacted a series of these
temporary changes----
Mr. Lankford. Correct.
Mr. Elmendorf [continuing]. So that the jump got larger and
larger, the jump under current law got larger and larger over
time.
Mr. Lankford. Is there an assumption at all in some of your
conversations that that may occur again at some point? Since it
was in your alternative fiscal scenario that there would be an
extension of the AMT, is there a discussion to build into an
alternative fiscal scenario that Congress will again not allow
more and more people to be trapped in these higher taxes in the
days ahead?
Mr. Elmendorf. Yes. Our alternative scenario, which tries
to extend policies that Congress has followed, extended in the
past, or not let certain things take effect or be sustained
that might be hard to sustain, one of the things that scenario
includes is holding tax revenue at a lower level indefinitely
rather than rising. And in the past Congress has tended to act
to cut taxes when tax revenue got to be a larger share of GDP.
Mr. Lankford. On page 88, you talk about how, if the
deficit comes down, the graph that Dr. Price had mentioned
earlier, when the deficit comes down people's real growth in
income goes up. And you made a stark statement earlier about
it, and that was that when sovereign debt is requiring more and
more of those individual dollars to come out, it is less money
that goes into capital investment, and so that slows the
economy down some and the real growth with that.
What is interesting to me about it is the assumption, then,
is private dollars going into investment has a greater increase
on the economy than government dollars taking that and, quote/
unquote, investing that into the economy.
Mr. Elmendorf. I think our view, Congressman, would be that
investment does good things for the economy. A lot of
investment, of course, most investment occurs in the private
sector. There can be government investments that pay large
dividends over time. We haven't modeled that effect
specifically in this analysis.
Chairman Ryan. Thank you.
Dr. McDermott.
Mr. McDermott. Thank you, Mr. Chairman.
It is always good to have an economist here. Welcome, Doug.
Mr. Elmendorf. Thank you, Congressman.
Mr. McDermott. I put a chart up on the screen because I
want everybody to see. It is one of your charts. And in late
2010, the fiscal commission that we have lionized, the Bowles-
Simpson, called for roughly $400 billion in healthcare savings
in their original proposal. Now, since that time, however, CBO
has reduced Medicare and Medicaid projections by roughly $1
trillion, more than twice as much as they suggested. Is that
correct?
Mr. Elmendorf. Yes, Congressman. Actually about a $1.25
trillion reduction in our projection of spending for these
programs in the last 2 years.
Mr. McDermott. So that would suggest that the chairman's
blaming of all our deficit on healthcare spending is really not
quite accurate. We are actually reducing it. And it is
certainly questionable as to whether that is going to be the
major cost of our deficit in the future, isn't it?
Mr. Elmendorf. Well, Congressman, our projections of the
growth in healthcare spending have come down. Nonetheless, as
you know, in our current projections the growth of healthcare
programs is the largest factor leading to higher spending and
wider deficits over time. And we showed in the report a
sensitivity analysis to our projection of healthcare spending
growth that shows that even if growth is a good deal lower than
we project, that the debt would still rise relative to GDP over
the next 25 years.
Mr. McDermott. So there is just too many people living too
long. Is that what you are saying?
Mr. Elmendorf. Well, I wouldn't say too many people, but
there are a lot of people living longer, and that increases the
number of beneficiaries of Medicare and of Medicaid. As you
know, a large share of the Medicaid dollars go to older
Americans, particularly for longer-term care.
Mr. McDermott. So if we cut off the spending at the Federal
level for the people who are on the program, how will their
care be paid for, or will they simply not have care?
Mr. Elmendorf. I think it depends on what you did,
Congressman. But as you know, many older Americans do not have
substantial financial resources, and if they suddenly faced a
larger burden to purchase health care, that would affect the
care they could buy or the other things, other necessities they
could buy.
Mr. McDermott. Or they would turn to their children.
Mr. Elmendorf. Yes, Congressman, that is possible, too.
Mr. McDermott. As it was before 1964 in this country, when
old people didn't have health insurance, they turned to their
kids. That is what my grandmother did. She came and lived with
us and we paid her bills. Right? That is what went on before
this program.
So what they are talking about when they want to cut
Medicare spending, they are really saying, we are going to cut
what the government will spend for old people. They can find it
wherever they want after that. They can go to their children or
they can go out and beg in the streets or not have the care. Is
that----
Mr. Elmendorf. Congressman, I can't speak to what the
``they'' in your sentence wants to do.
Mr. McDermott. Okay. I want to look at your chart on page
10. I mean, since we are blue-skying it here about 75 years. I
want to look at that chart and ask you a question that Ms.
Castor sort of moved toward, which is we are not making
investments now.
Now, if you look at the Civil War, during the Civil War
Abraham Lincoln started the land grant colleges, he did the
Homestead Act, he did the national railways. That looked like
reckless spending to me. Why would you do, when you have a big
spike?
And then you come to the Second World War, and we come out
of that and we have the GI Bill and we have FHA and we have VHA
and we had the Federal highway system under Eisenhower, all
reckless spending by our Presidents at that time.
Now, why was it the country didn't go into default or
disappear from the face of the Earth because of this reckless
spending that had been done by these Presidents? Why did it
work? You are an economist, so give us an explanation.
Mr. Elmendorf. I am less familiar with the post-Civil War
period, but after the Second World War, Congressman, the
government roughly balanced its budget and the economy grew
rapidly. So the ratio of debt to GDP fell sharply.
Mr. McDermott. Where were they getting the money to give
these scholarships to every guy who came back from the
military, practically was all men. They handed out the GI Bill
of Rights. Where did that money come from?
Mr. Elmendorf. The Federal Government raised tax revenue
roughly equal----
Mr. McDermott. Raised tax revenue?
Mr. Elmendorf [continuing]. Roughly equal to the spending
that it was doing.
Mr. McDermott. Well, they raised the tax revenue and did
that? They were investing in the people? Is that what created
the greatest generation, you think?
Mr. Elmendorf. Well, I think the government investments
played some role, Congressman, but I don't know how important
they were relative to other factors, I really don't.
Mr. McDermott. Where did they get the money for the highway
system?
Chairman Ryan. Thank you.
Mr. Flores.
Mr. Flores. Thank you, Mr. Chairman.
Director Elmendorf, thank you for joining us again today.
Mr. Elmendorf. Congressman.
Mr. Flores. There were a couple of comments that came from
the other side that we need to correct. They just don't need to
hang out there. I would remind Ms. Castor that the sequester
was the President's idea. If she doesn't like it, I can give
her a phone number to take care of, to call.
Ms. Castor. Will the gentleman yield?
Mr. Flores. The next thing has to do with some of the
comments from our ranking member----
Ms. Castor. He has offered a replacement plan eight times.
Mr. Flores. Ma'am, this is my time. I didn't interrupt you.
The other comments had to with Mr. Van Hollen. He said that
we have done nothing about the sequester, but unfortunately he
is incorrect. We have tried in the House to replace the
sequester more than once.
The other comments about shutting----
Mr. Van Hollen. Will the gentleman yield on that? Because
that is not what I said.
Mr. Flores. Yes, you did.
Mr. Van Hollen. I said you hadn't taken action this
Congress.
Mr. Flores. And the other thing I would like to say is that
the comments about Republicans talking about shutting down
government are incorrect. You have not heard one comment on
this side of the aisle about shutting down the government.
Those are irresponsible and reckless comments.
One of the things we have heard is that we need to raise
taxes. And I would refer you to page 80 of your report, and it
says that increases of marginal tax rates on labor and capital
income would reduce output and income relative to what would be
the case with lower rates, all else being held equal. For
example, a higher marginal tax rate on capital income decreases
the after-tax rate return on savings, weakening people's
incentive to save. Less saving implies less investment, a
smaller capital stock, and lower output and income.
So, I mean, you stand by those comments, don't you?
Mr. Elmendorf. Yes, Congressman.
Mr. Flores. Okay. Well, I just would like to remind the
other side of the aisle that for all this furor about wanting
to raise tax revenues, that they could damage the economy in
doing that.
Let's kind of move to the real world for a minute, let's
talk about central Texas for a second. If the government has a
policy or a law that increases healthcare premiums by 15 to 20
percent per year, is that good or bad for employment and
economic growth?
Mr. Elmendorf. Congressman, I think it depends on the
policy.
Mr. Flores. Okay.
Mr. Elmendorf. I really don't think there is a standard
answer to that question.
Mr. Flores. Well, let me tell you what the answer is,
because the employers in my district are telling me it is bad
and they tell me about what has happened to their past head
counts and what is going to happen to their future head counts.
What if we had a policy or a law that causes employers to
reduce the number of full-time employees by reducing maximum
weekly hours to something less than 30 hours per week? Is that
good for employment and GDP growth or bad for employment and
GDP growth?
Mr. Elmendorf. So, Congressman, the Affordable Care Act
does include some incentives, as you know, for employers to
move toward more part-time employment.
Mr. Flores. Well, let me give you the real world answer.
Mr. Elmendorf. Whether that affects the total amount of
labor is not clear.
Mr. Flores. That is, our employers in our district say that
it is bad for employment.
How about Federal regulations that cause the price of
energy to skyrocket? Is that good for the economy and GDP
growth and employment or is that bad for it?
Mr. Elmendorf. Higher energy prices tend to slow the
economy, all else equal, Congressman.
Mr. Flores. Thank you. Mr. Chairman, I yield back.
Chairman Ryan. Oh, wow.
Ms. Lee.
Ms. Lee. Thank you very much, Mr. Chairman.
Good to see you again, Director.
Mr. Elmendorf. Thank you, Congresswoman.
Ms. Lee. Let me ask you a couple questions. I will go right
to them.
First of all, last week, as we all know, House Republicans
cut, I think, about $40 billion from the SNAP funding. Many of
us believe this is morally wrong and deeply troubling,
especially considering nearly one in five children in America
suffer from food insecurity and nearly half of all SNAP
recipients are children. $40 billion in cuts means 6 million
families will be cut off from this vital economic lifeline, and
at a time when so many are already struggling to stay afloat.
This is for me very mind-boggling, it is unconscionable,
and it is wrong. There is certainly no rationale for throwing
hungry children, families, and seniors off of SNAP, and I can't
conceive of any compelling economic rationale either, given
that for every $1 in SNAP benefits, I believe it is $1.70
generated in economic activity.
So I just have to ask you, in terms of the economic
benefits to SNAP spending, does CBO estimate the current
economic impacts of these types of cuts in basic nutrition on
the healthcare costs in the future? That is my first question.
And then secondly has to do with the public option. I
believe that--I think it was 2011--CBO and the Joint Committee
on Taxation estimated that a public option would reduce the
deficit by about $88 billion between 2012 and 2021. Given that
the Affordable Care Act at passage saved about, I think, $140
billion and now it would cost about $109 billion to repeal,
what do you think from a fiscal point of view a public option
would achieve in terms of--had we included them in the
exchanges, what would be the downsides or upsides fiscally of
the public option?
Mr. Elmendorf. So, Congresswoman, on your first question
about SNAP, our estimate of the legislation that passed the
House was that it would reduce the number of people receiving
SNAP benefits by about 4 million in 2014 and about 2 million in
2023. And we have said a number of times in the past that
people receiving SNAP benefits or other benefits of this sort
have a high propensity to consume, to spend the money they
receive, and thus that providing them with more money tends to
be a short-term boost for the economy and taking money away
from them would tend to be a short-term drag on the economy. We
have not done the economic analysis of this particular piece of
legislation.
On your second question about a public option, as you were
reporting correctly our estimate from our last volume of--set
of budget options, and we think that including a public option
in the insurance exchanges would bring down Federal spending.
That estimate was, as you say, about $90 billion over 10 years.
We have not updated that estimate since that point, but we have
no reason to think that it would be markedly different today.
Ms. Lee. Thank you very much, Mr. Chairman. I yield the
balance of my time.
Chairman Ryan. All right. Mr. Rigell here? No.
Mr. Rokita.
Mr. Rokita. Thank you, Mr. Chairman.
Thank you, Director. Good to see you again.
Mr. Elmendorf. Congressman, good to see you.
Mr. Rokita. I want to go down and unpack this idea that the
sequester is hurting the economy and killing jobs and so forth.
Do government jobs better the economy?
Mr. Elmendorf. Yes, Congressman.
Mr. Rokita. How?
Mr. Elmendorf. Because if the government pays people for
working, they then earn money they spend by buying
refrigerators and cars and clothes and other things, and then
those people have jobs.
Mr. Rokita. Point taken. Where does the government get the
money to pay that initial person?
Mr. Elmendorf. Well, under----
Mr. Rokita. Where does the government get the money to pay
you and me?
Mr. Elmendorf. So under current circumstances, as you know,
any extra spending comes from--if you just raise spending, the
government would borrow that money.
Mr. Rokita. No, no, no, no. Where does the government get
the money to pay you, me, and the hundreds of thousands of
other workers that you say if were laid off would hurt the
economy?
Mr. Elmendorf. So it raises some of that money through tax
revenue and it borrows some of it.
Mr. Rokita. Okay. So it confiscates that money from people
in the private sector, correct?
Mr. Elmendorf. It raises some of the money through tax
revenue.
Mr. Rokita. Which is a confiscation of property, correct?
Mr. Elmendorf. Those have to be your words, Congressman.
They are not budget terms.
Mr. Rokita. Okay. Fine. We take money from the private
sector to fund the jobs of the government like you and me,
right?
Mr. Elmendorf. You raise tax revenue and you borrow.
Mr. Rokita. Right. Now we are borrowing, too. About 40
percent of our Federal budget is borrowed, of course, from
people that don't yet exist, so it is a tax on them whenever we
pay that debt.
Mr. Elmendorf. Well, it is borrowed from people who
certainly do exist and provide the cash.
Mr. Rokita. Well, the debt created by that is eventually
paid back by people who are around when you and I are dead.
Mr. Elmendorf. That may be. It depends what policies are
pursued.
Mr. Rokita. Well, you probably run a lot more in the
morning than I do, so maybe you will live longer. But the point
is, is that to run the government, to pay people who work these
government jobs, we take from somewhere else. We take from the
private sector. So that is less property, less money, right,
that they have to grow the economy. So you obviously don't
agree with me.
Mr. Elmendorf. Right.
Mr. Rokita. How much does the economy grow by paying all
these people in government jobs?
Mr. Elmendorf. So, Congressman----
Mr. Rokita. You say that government jobs help the economy.
Mr. Elmendorf. Yes.
Mr. Rokita. To what extent, what percentage?
Mr. Elmendorf. So I am not sure what the policy experiment
that you had in mind is. Is the alternative of no government or
is it a reduction----
Mr. Rokita. No, no, no. I am asking you the questions.
Mr. Elmendorf. Well, I can't answer if I don't understand
the question.
Mr. Rokita. How we started this off was you said that the
economy grows with government jobs. To what extent? How much?
How do you quantify that?
Mr. Elmendorf. So it depends on the economic circumstances.
In an economy where there is sufficient demand for goods and
services, that essentially all of the productive capacity is at
work, which was true in this country in 2007, for example, then
an additional government job is likely to come out of a job in
the private sector.
However, if the demand for goods and services is less than
the productive capacity of the economy, which has been the case
in 2009, 2010, 2011, 2012 and 2013, then additional government
borrowing that is then spent to hire government employees or to
provide benefits will increase the output and employment in the
economy.
Mr. Rokita. Okay.
Mr. Elmendorf. And that is a very widely held view among
economists.
Mr. Rokita. If that is the case, why don't we just tax
everyone 100 percent and borrow more so that we can grow the
economy? That would be a surefire way to make sure GDP
increases, right?
Mr. Elmendorf. So, Congressman, it is not true at every tax
rate. I am speaking about the economic situation in the country
today, the tax system we have in the country today. Given where
we are now----
Mr. Rokita [continuing]. Temporarily 100 percent, borrow
more temporarily, and then----
Mr. Elmendorf. Well, Congressman, tax rates of 100 percent,
as you well know, would drive down private activity.
Mr. Rokita. Well, I don't believe that when you confiscate
property from the private sector to fund government jobs that
you actually grow the economy. So we have already established
that you and I have a difference of opinion. So, yeah, I don't
well know. But you well know that, because of what you said,
that you grow the economy with all these government jobs, and I
am trying to quantify that, what you mean, and understand why
we shouldn't do more of this borrowing, more of this
confiscation of the people's property in the form of taxes to
better ourselves, to just get ourselves right out of this hole.
Mr. Elmendorf. So two thoughts, Congressman. One, on behalf
of my opinion, there was a survey of economists conducted by a
group at the University of Chicago, conducted of economists,
leading economists across the country, about whether the
Recovery Act had made output and employment higher than it
otherwise would have been, and 88 percent of the respondents
said yes, 4 percent said no. So my opinion is widely shared.
On the second point----
Mr. Rokita. By Keynesians.
Mr. Elmendorf. This was a survey of economists,
Congressman, leading economists across the country.
Mr. Rokita. I see that I am out of time. Thank you.
Mr. Elmendorf. On the second point, Congressman, the best
quantification I can give you is the one I started with in
response to Congressman Van Hollen's question, which was an
estimate of the effects of continuing versus not continuing
with the sequestration for 2014.
Mr. Rokita. Mr. Chairman, I would simply say that sequester
is not the problem.
Chairman Ryan. Thank you.
Mr. Jeffries.
Mr. Jeffries. Dr. Elmendorf, under the 8 years of the
Clinton administration the so-called confiscation tax rate was
39.6 percent. Is that correct?
Mr. Elmendorf. That was the top tax bracket, Congressman,
yes.
Mr. Jeffries. All right. And under this confiscation rate,
approximately 20 million jobs were created in America. Is that
correct?
Mr. Elmendorf. I don't remember the number, Congressman,
but it was quite a few. It was a tremendous economic boom.
Mr. Jeffries. Okay. And now during the 8 years of the Bush
administration, which immediately followed the Clinton
administration, am I correct that the so-called top
confiscation rate was dropped to 35 percent? Is that right?
Mr. Elmendorf. Yes, Congressman.
Mr. Jeffries. And we lost approximately 600,000 jobs during
that 8-year period. Is that right?
Mr. Elmendorf. I don't remember the exact number.
Mr. Jeffries. Okay. Now, as it relates to a statement that
was made earlier by one of our colleagues, suggested that the
American people looking at this hearing might come to the
conclusion or be perplexed at our inability to move forward
with a resolution, because I think we all agree that there is a
long-term deficit and debt problem that we need to confront.
I would certainly agree with the ranking member in his
observation that perhaps the problem is that we have breached
the procedural integrity of the budget process, that the House
has passed a budget, the Senate has passed a budget, and the
next step in that process is to move forward with conference
committees. Because the math that we should really be paying
attention to preliminarily is the electoral math, and the
electoral math says that we are in a divided government context
and that there are 54 Democrats and independents in the Senate,
which constitute a majority; that Barack Obama did win
reelection with 51 percent of the vote, only the second
President since Eisenhower, I believe, with two consecutive
popular vote margins to exceed 51 percent.
We are in a divided government context. We should move
forward with the integrity of the process, which is conference
committee, so we can work it out and perhaps try and find
common ground to move things forward.
Now, you stated, I think, in your testimony that the
consequences of default on the debt would be large, lasting,
and very damaging. Is that correct?
Mr. Elmendorf. I said that economists are unsure, but they
could be large, lasting, and very damaging, and that is why I
think it is a dangerous gamble to default on an obligation.
Mr. Jeffries. Right. I think you said it was a risky
strategy to stop paying what the United States government owes.
True?
Mr. Elmendorf. Yes, Congressman.
Mr. Jeffries. Now, part of the problem with a default on
the debt is that it would erode the confidence of investors in
the belief that the United States has the ability to manage its
economic affairs. Is that right?
Mr. Elmendorf. Yes, Congressman.
Mr. Jeffries. And one of the reasons why Greece and some of
the other European countries, which many of our colleagues love
to allude to, find themselves in the situation that they are in
right now is because there was an erosion in confidence in the
ability for those countries, like Greece, to manage their
economic affairs, correct?
Mr. Elmendorf. Yes, Congressman.
Mr. Jeffries. And one of the consequences of that erosion
of confidence is that the rates on our debt moving forward
would increase, perhaps quite significantly. Is that right?
Mr. Elmendorf. They could, Congressman, yes.
Mr. Jeffries. And so an erosion of confidence then leads to
an increase quite possibly in our debt burden, and an increase
in our debt burden worsens our long-term budget outlook. Is
that right?
Mr. Elmendorf. Yes, Congressman.
Mr. Jeffries. And that is part of the reason why I think it
would be irresponsible to simply attempt to hold hostage the
full faith and credit of the United States of America in the
context of us paying our bills as we confront the need to raise
our debt ceiling. And I hope that this Congress will come
together and stop playing partisan politics as it relates to
this very serious issue.
One last question in the remaining time that I have. Would
it be fair to say that an increase in the minimum wage largely
benefits low-wage workers?
Mr. Elmendorf. Yes, Congressman.
Mr. Jeffries. And low-wage workers are most likely to
immediately spend the increased income. Is that right?
Mr. Elmendorf. I think that is right, Congressman. But
people who work and receive a higher wage would have higher
income that they would be likely to spend. As you know, a
higher minimum wage can also reduce the number of people who
have jobs.
Mr. Jeffries. Right. Now, an increased spending, an
increased consumer demand would ultimately lead to economic
growth. Is that correct?
Mr. Elmendorf. Under the current economic conditions, an
increase in the demand for goods and services would boost
output and boost the number of jobs.
Mr. Jeffries. Okay. Thanks. I yield back.
Chairman Ryan. Thank you.
Mr. Ribble.
Mr. Ribble. Thank you, Mr. Chairman.
Good morning.
Mr. Elmendorf. Good morning, Congressman.
Mr. Ribble. Thanks for being here.
I want to change the direction a little bit to Social
Security. Your report I think shows the Social Security trust
fund actually going insolvent in 2031 now? Is that correct?
Mr. Elmendorf. Becoming exhausted in 2031, yes.
Mr. Ribble. In 2031. It seems that in the 3 years that I
have been here that window keeps getting shorter and shorter.
Some would say that we should wait till we get to 2031 and
then address it, because Congress seems to react better to
crises than to fiscal management. Is it more expensive to
address it then or is it more expensive to address it now? I
mean, is there a cost to waiting?
Mr. Elmendorf. There is certainly a cost to waiting,
Congressman.
Mr. Ribble. In what regard?
Mr. Elmendorf. So the longer one waits to make changes, the
larger the changes need to be and the more abruptly they would
need to take effect. For Social Security right now, the age for
full retirement benefits is working its way up as part of an
agreement that Congress and the President reached in the early
1980s, and that agreement was to do various things, including
phasing in an increase in retirement age over a long period.
But the longer one waits to address the imbalance in Social
Security and in the Federal budget as a whole, the less time
one would have to phase in any changes that you and your
colleagues agreed to.
Mr. Ribble. When you started kind of your first run or
first stint over at CBO, I think it was back in the early
1990s, 1993, 1994, something like that, were they talking about
Social Security then, because that was post those reforms? Were
they also seeing this trend then?
Mr. Elmendorf. Yes. It was very much on the radar of
analysts. And, in fact, later in the 1990s there was a lot of
discussion among policymakers. This aging of the U.S.
population has been predicted for decades now. I recall Alice
Rivlin, the first Director of CBO, giving a talk that I saw in
the 1990s talking about how it wasn't really that far away, but
nonetheless a number of years have now passed with no changes.
Mr. Ribble. So now we are 20 years past that date and still
no fix in sight. I am assuming that the fixes, at least in the
3 years that I have been looking at this since I came to
Congress, the fixes seem to we relatively well known. CBO has
spoken of them and other Members of Congress have spoken. Would
you agree with that?
Mr. Elmendorf. So we published a report a few years ago
that had a long list of changes, with estimates of their
budgetary effect, the effect on people of different
generations, different income levels. I think the menu of
possibilities is well known, but people have not chosen off the
menu collectively. Individuals have chosen off the menu.
Mr. Ribble. At some point we are going to need to do that.
We are either going to be forced into doing it in a crisis or
we are going to do it thoughtfully and ahead of time and do it
that way.
Now, since to a certain degree economists are professional
speculators--I say that with a little bit of tongue in cheek--I
would like you to speculate a little bit on how you might see
the financial markets, the ratings agencies, and even the
American people responding to a Congress that with forethought
and thoughtfulness actually reformed these programs to save and
protect them. How would they respond?
Mr. Elmendorf. I think that if a Federal budget were to be
put on a sustainable path, it could have a very positive effect
on the confidence of businesses and households in a way that
could provide a substantial economic boost. And I don't know
how to quantify that effect, but I think people now are very
uncertain of what Federal policy will be, very skeptical of
whether those problems will be addressed in a timely way. And I
think if they were, it would come as a very welcome surprise to
a lot of people in a way that would be very good for the
economy.
Mr. Ribble. And if it is very good for the economy and good
for the American people, it is probably good for politicians, I
would guess. And I would really encourage this body, both of
us, Republicans and Democrats alike, to actually get serious
about doing these things, because my sense is that political
dysfunction is also a drag on the economy. Would you agree to
that?
Mr. Elmendorf. Yes, Congressman. We think that the
uncertainty about where Federal policies are going is one of
the factors that has led to slow growth in the past few years,
not the principal factor, but a factor.
Mr. Ribble. All right. Thank you very much for being here.
I yield back.
Mr. Elmendorf. Thank you, Congressman.
Chairman Ryan. Mr. Pocan.
Mr. Pocan. Thank you, Mr. Chairman.
And thank you, Dr. Elmendorf, for being here. It is a
little bit ironic. I am glad that we are having this
conversation, but it is a little bit ironic that we are having
it at a time this body hasn't had a national budget, our
country hasn't for the last 4 years. We are going to talk about
long term, but we can't deal with the immediate. We have got
the GOP-induced sequester that is having a drag on the economy,
as you pointed out, we are dealing with.
Instead of being back in our districts this week, we are
kind of held hostage back here on a Don Quixote mission to get
rid of the Affordable Care Act one more time and to put us on
the cusp of a government shutdown that, while we can't seem to
do anything in the immediate, we are going to have a real good
conversation about the long-term. It just seems a little
ironic, but that is the position we are in.
But if I could ask you a couple questions specifically
about the long-term and the Affordable Care Act and a couple
about how you do some of the projections in the future.
So specifically on the Affordable Care Act, you know,
taking the coverage provisions and other provisions of the
Affordable Care Act together with the Medicare provisions and
other revenue provisions, what is your estimate of the effect
of the entire Affordable Care Act on the deficit and what would
be the impact if we repealed the Affordable Care Act on the
deficit?
Mr. Elmendorf. We estimated that the Affordable Care Act
reduced budget deficits and that repeal of the Affordable Care
Act would increase budget deficits.
Mr. Pocan. And what kind of levels are we talking about?
Mr. Elmendorf. Over the next 10 years, on the order of $100
billion, and then beyond the next 10 years a fraction of a
percent of GDP.
Mr. Pocan. Got you. And then two specific questions
specifically to how you determine some of the projections. You
said that healthcare costs are growing much more slowly in the
last 5 years, and just since the last report, you have got that
projection in there. I am just wondering how many years, how
much frequency do you need to see in reduction of the
healthcare costs before you change the per capita income, the
growth estimates? Just trying to get a picture of what it takes
for you to change that course a little bit so we can look at
different numbers maybe in the future.
Mr. Elmendorf. So we have already changed course to a
significant extent. Relative to our projections in 2010, actual
spending for Medicare and Medicaid have now fallen about 5
percent below what we thought they would be, and we have
lowered our projected growth rate over the rest of this decade
so that by 2020 projected Medicare and Medicaid spending are 15
percent roughly below what we projected a few years ago.
So we have in fact extrapolated some of the slow growth
rates--we have seen into slow growth rates going forward. And
we think that is appropriate because the slowdown in health
cost growth has been very broad across different sectors of the
healthcare world and has now lasted for half a dozen years or
more.
But at the same time, past episodes of slow health cost
growth have been followed by pickups in health cost growth, and
the underlying driver of a lot of health cost growth is the
development of new procedures and techniques and technologies,
and that is continuing. So we don't think it is appropriate to
take the last half dozen years and then just extrapolate those
low growth rates out for decades to come.
So what we have done is to bring down the long-term growth
rate a little bit in response to the data we have received, but
mostly you should think of this as lower growth for a number of
years and then a return close to previous growth rates, but for
a significantly lower level of Federal healthcare spending than
we projected a few years ago.
Mr. Pocan. So would it be more significant if you saw a
decade of reduced spending, would that have a different impact?
Mr. Elmendorf. Yes. I think the longer that this periods
lasts and the more that we and others can learn about it. We
did a very detailed analysis of the slowdown in Medicare cost
growth, released a lengthy paper a month ago. And one of the
conclusions from that analysis was that the weak economy does
not seem to have been a factor in holding down Medicare growth,
spending growth, and thus that an improvement in the economy
won't necessarily undo the slower spending growth. As we and
others do this kind of research that affects our estimates as
well.
Mr. Pocan. If I can just get one more question in, I have
got about a minute left. On the Social Security deficit, you
know, I know that increased life expectancy, can you break down
the projected shortfall due to people who are 50 and over
versus, you know, their children and grandchildren? I think a
lot of people make certain assumptions, but if we're going to
have that continued projection in the future, is there a
breakdown that you----
Mr. Elmendorf. We have not broken down the shortfall by
generation per se, but we do have a figure in the report that
shows the taxes and benefits for people born in different
decades. And for most people born, on average, across the
1940s, 1950s, 1960s, 1970s, and 1980s, those people have
payroll taxes over their lifetimes that are pretty comparable
to the benefits they are going to receive over their lifetimes.
But the Social Security system started by paying benefits to a
collection of people who had not paid into the system, because
the system wasn't there when they were working, and that has
created essentially an ongoing debt, in a way, and that is
really what the future generations will have to deal with.
Mr. Pocan. Thank you.
Chairman Ryan. Mr. Williams.
Mr. Williams. Thank you, Doctor, for being here today.
Appreciate it.
I am a small-business owner, 73-year family business,
myself 42 years, and I have been a borrower all my life. And
you know where I am going with this. I can tell you Main Street
America is not back. Some of our friends say the economy has
come back, it is doing well. It is not doing well, as evidenced
by the high unemployment rate that we still continue to have,
underemployment, and so forth. Because people like me are
concerned, where are we on taxes? You know, where are we on
health care? We are all playing defense, afraid to hire
anybody, afraid to put capital at risk because we don't know
what kind of return we would get.
But all that being said, I am of the age that I borrowed
money in 1980 at 20 percent and now I am able to borrow it
almost in many cases zero percent. And, of course, we know
which is better than the other. But I can tell you that there
is a lot of industries that have seen costs go up six times or
seven times since 1980. And, you know, rates back then were, as
I say, 20 percent. And in my lifetime, a 6 percent rate has
been a pretty good rate. We have been able to do well with
that.
But the problem is with the costs being up so much, you
know, 6 percent of, say, $60,000 right now would be more than,
say, 20 percent of $10,000. There is a problem there
developing, and I think it is a real concern. And the rates can
kill small growth in business, it can kill. And nobody is
really thinking about it, and I know you have talked about
rates are going to go up because of this mismanagement of our,
in many cases, of our debts and the huge deficit we continue to
run up and not wanting to cut costs by some people.
I think, and I hope you would agree, that the answer is
lower rates. You know, lower rates generate cash to grow and
spend. If you have a lower rate, you just have more cash. And
businesses don't save money, they spend money and they invest.
I believe tax cuts are revenue permanently. We hear the
other side talks about revenue, but then they always talk about
tax increases being revenue. Tax increases will eventually
burden small business to where they don't exist anymore or they
just have to, again, as I said, play defense.
We have tried zero percent, we have tried stimulus, none of
that works. The last thing are tax cuts. And tax cuts are real
revenue, whereas tax increases, I think, are temporary revenue,
because it puts a burden on job creators.
So do you think that the solution with higher interest
rates would be lower tax rates for all taxpayers across the
board, which I think would mean more jobs--we have seen that in
the history of our country--mean more jobs, it would reduce
unemployment, and would create less dependence on the Federal
Government.
Mr. Elmendorf. Well, Congressman, if marginal tax rates
were lowered, but the other changes were made in the tax codes,
the same amount of revenue was collected, that would be good
for the economy. But if tax rates are lowered and nothing else
is done, so that total tax revenue falls as well, which we
think it would if tax rates were reduced, then the reduction in
tax rates by itself is good for the economy, but the extra
borrowing would be bad for the economy. So our projections
here, for example, incorporate both of those sorts of effects.
So it really depends, not just on the tax rates matter, but so
does the overall amount that the government is borrowing over
time.
Mr. Williams. Well, if we reduced unemployment, we will
say, from 7.5 percent or underemployment to maybe 12 or 15, if
we reduced that down to 5 or 4 percent, let small-business
owners like me in Main Street hire people, that is more
revenue, that puts more people in the system, that is real
money.
Mr. Elmendorf. Yes. So absolutely stronger economic growth
can make a great deal of difference in the gap between spending
and revenues that we are projecting here. The question is what
policies you could implement that would spur growth. And,
again, I think that under the current economic conditions, tax
cuts or government spending increases could spur growth, but
over time then one wants to bring the budget more into balance,
keep debt from rising so rapidly in order to keep economic
growth going.
Mr. Williams. Well, we do have one of the highest tax rates
in the world right now, and it doesn't seem to be working.
Mr. Elmendorf. Well, the corporate tax rate in this country
is higher than it is in other countries.
Mr. Williams. Right.
Mr. Elmendorf. That is right, Congressman. As you know, the
total amount of tax revenue that we collect as a share of GDP
is smaller in this country than it is in most developed
countries.
Mr. Williams. Well, I just think that we need to remind
people, in my belief, that tax cuts are real revenue, tax
increases are temporary and put a burden on small business.
Mr. Chairman, I yield back.
Chairman Ryan. Mr. Schrader. No, he is not here.
Mr. Cicilline.
Mr. Cicilline. Thank you, Mr. Chairman.
Thank you, Dr. Elmendorf, for this excellent report and for
being here today.
You said in your testimony that our nondefense
discretionary spending will be at levels not seen since the
1930s. Is that correct?
Mr. Elmendorf. Yes. As a share of GDP, yes, Congressman.
Mr. Cicilline. And so the focus of your report is that
health care and Social Security and interest or debt service
are the three principal drivers of our debt.
Mr. Elmendorf. Yes, that is right.
Mr. Cicilline. And one would think that we should be
putting together a plan to protect and strengthen those
programs, be sure that they are being administered in a cost-
effective, efficient way, and also plan on how to pay for them.
And that would be done in the context of the development of a
budget. Right?
Mr. Elmendorf. Yes, it could be, Congressman.
Mr. Cicilline. And it be helpful, of course, if we had a
budget conference committee charged with doing that. And this
report really underscores the urgency of adopting a budget and
addressing these issues. And I hope you will mail a copy of
this to the Speaker of the House with a note that appointing
conferees to a conference committee is the next step, because
we can't do a budget conference without him.
But I want to specifically ask you about two issues that
you focus on in the report, and the first is that, as you know,
we passed a continuing resolution that would partially defund,
and now there is some effort to pass a resolution to completely
defund the Affordable Care Act. And it will also, the
continuing resolution also doubles down on sequestration.
And as I looked through your report, what really struck me
in your testimony again today, affirmed it, you continually
cite the rising cost of health care as one of the single
biggest drivers of our long-term debt, and you go on to say,
though, that the rate of increase in health care has declined
and that you expect that isn't a flash in the pan, this is
going to continue for some time. Correct?
Mr. Elmendorf. Yes, Congressman.
Mr. Cicilline. And so it is sort of hard to understand, if
the Affordable Care Act is contributing to deficit reduction,
why the strategy is being advanced by my good friends on the
other side of the aisle to repeal this deficit reduction tool
called the Affordable Care Act in an effort to reduce the
deficit. Am I missing something?
Mr. Elmendorf. I can't and won't speak to the motivations
of you and your colleagues, Congressman.
Mr. Cicilline. Okay. But there is no question, the
Affordable Care Act, if it were repealed, would substantially
add to the deficit.
Mr. Elmendorf. We estimate that repeal of the Affordable
Care Act would increase the deficit over the next decade and in
the longer term.
Mr. Cicilline. And that is because there is built into it a
whole series of payment reforms and demonstration projects and
competition that is going to create additional pressure to
lower costs. Correct?
Mr. Elmendorf. Because the spending cuts and tax increases
in the legislation as it was enacted slightly outweighed the
costs of the coverage expansions, and those factors would run
in reverse if the law were repealed.
Mr. Cicilline. And so with respect to the sequestration,
you have already testified and your report confirms that the
maintenance of sequestration will result in substantial job
losses both in the current year and in the next fiscal year.
Mr. Elmendorf. Yes. Compared with a policy that relaxed
that restraint on spending.
Mr. Cicilline. And restored spending back to the pre-
sequestration levels. And what is the impact of that on the
deficit, both in the short term and the long term?
Mr. Elmendorf. Well, so stronger economic growth would
reduce the deficit, but I don't want to leave the impression
that we think that relaxing the sequestration would pay for
itself. Like cuts in tax rates, that can be good for the
economy, but not so good that the extra revenue offsets the
initial cost of the tax cut.
Mr. Cicilline. But your report reveals that in the long
term the replacement of sequestration with a balanced approach
will lead to a stronger economy and a reduction ultimately of
the deficit?
Mr. Elmendorf. So if the extra costs of relaxing
sequestration were offset entirely by other policies that at
some point in the future would raise taxes or cut spending, and
if those other policies were actually adhered to, then one
could have stronger growth in the near term with no worse or
better economic conditions in the long term.
Mr. Cicilline. And a reduction in the deficit.
Mr. Elmendorf. And a reduction in the deficit.
Mr. Cicilline. So these two sort of policies that we have
heard so much from our friends on the other side of the aisle,
you know, maintaining sequestration or making it worse or
repealing the Affordable Care Act, both of those things taken
together in terms of the long-term impact will actually
increase the deficit.
Mr. Elmendorf. Well, I want to be careful, because I think
it depends on the combination of policies. So, again, in the
short term a little more Federal spending.
Mr. Cicilline. I am asking about the long term.
Mr. Elmendorf. So in the long-term, if the combination of
policies reduces spending or raises taxes, then that would put
the budget and the economy on a stronger path, but you have to
get to those policies. And if one doesn't do them this year or
next year, then one has to implement them in the years after
that.
Mr. Cicilline. Thank you.
Chairman Ryan. Thank you.
Mr. Nunnelee.
Mr. Nunnelee. Thank you, Mr. Chairman.
Thank you, Dr. Elmendorf, for being here.
Mr. Elmendorf. Congressman.
Mr. Nunnelee. I am going to ask questions on a couple of
graphs in your report, starting with page 2, the bottom graph.
You have already talked about how the driver of our debt is
Social Security, healthcare programs, and interest, and the
bottom graph on page 2 seems to bear that out.
My quick observation of math and that our current situation
is that if we add the lines today for Social Security, for
healthcare programs, and for net interest, both the total of
those three roughly about equals what we are spending on all
other non-interest spending.
Mr. Elmendorf. That is right, Congressman. It will be a
little higher. Yes, it is close to that, Congressman.
Mr. Nunnelee. And then when I follow the graphs out 2038, I
see that the three things that are driving our debt continue to
get worse, while other non-interest spending goes down. So,
again, my quick observation and math by 2038 is that Social
Security, healthcare programs, and interest are about double
what other non-interest spending is.
Mr. Elmendorf. Yes, Congressman. I think that is about
right.
Mr. Nunnelee. All right. And now turn over to page 10, the
graph on page 10, just showing our historical debt as a
percentage of GDP. I see five significant spikes: the
Revolutionary War debt, Civil War debt, World War I and World
War II, and then the spike that I see going out beyond 2030.
And what keeps me awake at night is to see that our debt is
growing, not to pay the cost of defending freedom, but to pay
for benefits for ourself. And the thing that keeps me awake is
seeing my grandson or my granddaughter sitting in this chair in
2038 and having a repeat of December the 7th, 1941, and we find
ourselves so much in debt we cannot afford to pay to defend
ourself. Is that a valid fear?
Mr. Elmendorf. I think that is a valid fear, Congressman.
What we say in the report and have said on a number of
occasions, one of the risks that is posed by having debt that
is so high is that you and your colleagues lose the ability to
respond to unexpected developments, economic crises or wars, in
the way you would have the ability to respond if the debt
started at a lower point.
Mr. Nunnelee. And this week, we are debating the debt
ceiling, and as I see it the debt ceiling that we place upon
ourselves is an artificial debt ceiling, and I think it is a
very valuable artificial debt ceiling that allows us to have
this debate, but the real debt ceiling that any family, that
any business or any government faces is when we get to the
point when we can no longer find people to lend us money at a
rate we can afford to repay.
Mr. Elmendorf. Yes, Congressman.
Mr. Nunnelee. As I see that spike going to 2038, it puts us
in that position very quickly, and it certainly puts us in a
position in the event of an unplanned catastrophe, such as
December the 7th, 1941, comes upon us.
Mr. Elmendorf. Yes, Congressman, that is right. And we talk
in the report about how this sort of run-up in debt that we are
projecting doesn't have a precedent in U.S. history. We have
had run-ups before, as you noted, but they have been for
particular circumstances and have then been reversed, and this
would be unprecedented, and it reduces our ability to project
just what would happen to interest rates under those
conditions. And we note that, and we also highlight the risk
that you are referring to, that if one has a high debt and then
one hits a depression or one hits a war, then the country could
really be in a very tight box with nothing but poor options,
and that is why analysts think it is far, far better to take
action sooner rather than later.
Mr. Nunnelee. We have labeled the generation of the 1940s
as the Greatest Generation, and they did defend freedom and
earn that title. But in my opinion, an equal characteristic of
greatness is their commitment to repay the debt that was
incurred to defend freedom. And it appears that my generation
is incurring debt to fund our own excesses. And we are willing
to pass that on to our grandchildren, and that is simply not
acceptable.
Thank you.
Chairman Ryan. Thank you.
Mr. Huffman.
Mr. Huffman. Thank you, Mr. Chair.
And thank you very much, Dr. Elmendorf, it has been an
interesting discussion, and it has even been interesting that
we have had a few practitioners of political ideology
interrupting and disagreeing with and attempting to reeducate
our independent Ph.D. nonpartisan economist who Congress turns
to for answers in these situations. I think those who are
watching have had an interesting window into some of the forces
that have taken us to the brink of a government shutdown in
that discussion.
I am, of course, sobered by this mountain of debt that you
are projecting that we are grappling with. I think everyone in
this institution should be, and I know that Democrats are very
sobered by it. In fact, we may even be more dismayed because we
have gone in a pretty short period of time in 2001 when
following 8 years of the Clinton administration, your office
was projecting we would be enjoying multi-trillion dollar
surpluses at this very point in time to this mountain of debt
that you are now projecting, and we could certainly probably
have more discussion about how we got here, but it seems to me
that putting a couple of wars on the national credit card,
cutting taxes for the rich, and looking the other way while
Wall Street crashes the economy had a lot to do with it.
In any event, it also seems to me that we have four issues
that are immediately facing this House that could have either a
positive or a negative effect on this situation depending on
how we resolve them, the first of which is the sequester, and I
want to just understand your testimony. I believe you said that
continuing the sequester, which is what our Republican
colleagues are suggesting in their CR and other proposals, in
2014 would eliminate 600,000 jobs and reduce GDP by as much as
half a percent; is that correct?
Mr. Elmendorf. Those are our estimates for the end of 2014,
yes, Congressman.
Mr. Huffman. Thank you.
And then, with respect to the debt limit, I think you were
completely unequivocal in stating that a default of any kind
could have catastrophic effects on our economy and our
recovery.
Mr. Elmendorf. I said that a default on any obligations of
the Federal Government could have effects that are large,
lasting, and very damaging to our economy and our financial
system and the Federal budget.
Mr. Huffman. All right. So that is the second big issue
facing us right now in Congress.
The third is the Affordable Care Act, what will inevitably
be the 43rd proposal in the days ahead to try to repeal it.
Just to be clear, the Affordable Care Act is a net budget
saver, correct?
Mr. Elmendorf. That is our estimate, Congressman, yes.
Mr. Huffman. So repealing it would actually make things
worse?
Mr. Elmendorf. Yes, Congressman.
Mr. Huffman. And finally, we should be talking about--we
are not, but we should be talking about comprehensive
immigration reform along the lines of the bipartisan proposal
that the Senate has advanced. What would the net effect on
these fiscal challenges be if we could pass a bipartisan
comprehensive immigration reform bill like the one that came
out of the Senate?
Mr. Elmendorf. Congressman, we estimated that the proposal
that was approved in the Senate would improve the budget
balance, would improve, would increase output in the economy
over this coming decade and beyond.
Mr. Huffman. Thank you very much for your testimony.
Again, there is no dispute that we face a serious challenge
here, but rather than exchanging rhetoric about it, we have
four things that I have just highlighted that are pending
before this House that we can do to make it better or to make
it worse, and I think your testimony has been very illuminating
in that regard.
Thank you, Dr. Elmendorf.
And I yield back.
Mr. Elmendorf. Thank you, Congressman.
Chairman Ryan. Thank you.
Mr. Rice.
Mr. Rice. Thank you, Mr. Chairman.
Thank you, Mr. Elmendorf, for being here today. Your study,
and I think you said earlier that increased taxes are a drag on
GDP; is that correct?
Mr. Elmendorf. I said that higher tax rates for any given
level of revenue is a drag on GDP, but it matters, of course,
what the total revenue collected is as well.
Mr. Rice. What percentage of our economy is consumer
spending, do you know?
Mr. Elmendorf. I think, as a share of GDP, consumer
spending is about two-thirds or three-quarters.
Mr. Rice. And taxes take away from that, correct?
Mr. Elmendorf. Yes, Congressman.
Mr. Rice. All right. And what are taxes? How do you define
taxes?
Mr. Elmendorf. So----
Mr. Rice. They talked about this conversation earlier, but
it is a government exaction.
Mr. Elmendorf. So, in the Federal budget, revenues are
monies that are collected through the sovereign power of the
government.
Mr. Rice. I want to look at a little bit expanded view of
taxes to not necessarily something collected by the government,
but exactions forced by the government. So, for example, if we
have our utilities bills go up because we have a war on coal or
we refuse to use our own natural resources, does that affect
consumer spending?
Mr. Elmendorf. Yes, it does.
Mr. Rice. Negatively?
Mr. Elmendorf. Yes. Higher prices for energy have been one
of the big causes of swings in consumer spending in the past
decade.
Mr. Rice. If we require people to buy insurance and their
premiums go up, does that affect consumer spending?
Mr. Elmendorf. Well, Congressman, it depends what else
happens, and I am not trying to be coy here, but----
Mr. Rice. If they have less money in their bank account at
the end of the month----
Mr. Elmendorf. Congressman, yes, but as I noted earlier,
some of the increase in premiums under the Affordable Care Act
that we project comes from a reduction in out-of-pocket
payments, which also affects how much money people have at the
end of the month.
Mr. Rice. I just read in a Forbes article the average
woman's premium will go up 60 percent and the average man's
will go up 90 percent, I don't know. That is just what this
Forbes article said. If interest rates go up, that is another
factor because we can't get control of our budget deficit, that
is another factor that is going to take more money out of
consumers' pockets and less money in their bank account and
less consumer spending, right?
Mr. Elmendorf. Yes, Congressman, that is right.
Mr. Rice. The way I view this, really they are all taxes
disguised because they are all the result of government action.
Increased insurance premiums, increased utility bills,
increased taxes, with the fiscal cliff deal and now with the
imposition of the Obamacare taxes, and increased interest
rates, they all lead to lower bank accounts at the end of the
month and lower economic activity.
Mr. Elmendorf. But, Congressman, the problem that you and
your colleagues face is that a cut in government benefits takes
money out of consumers' budgets, and an increase in taxes takes
money out of consumers' budgets, yet in the end, the amount of
taxes that are collected and the benefits that are paid are
going to have to come into closer alignment than would be the
case under current law. So you don't really have a choice
ultimately if our projections are at all right in either
raising taxes or cutting spending.
Mr. Rice. I am curious about one thing. You said earlier
that our average tax collections projected 5 years out under
current law are going to be higher than they have been in the
past, average.
Mr. Elmendorf. Yes, that is right, Congressman.
Mr. Rice. And I just want a quick answer to this. Is there
some kind of a sweet spot, you know, where you get diminishing
returns with tax rates, you know, some kind of a Laffer curve
analysis that you shouldn't go over or you will have
substantially decreased economic activity?
Mr. Elmendorf. Well, as tax rates rise, they will have
incrementally bigger negative effects on output.
Mr. Rice. We are already at our average. Aren't we dancing
around that?
Mr. Elmendorf. Congressman, I think not. When economists
try to estimate--I mean, again, each increase in tax rates will
have some negative, more negative effect on the economy, but
still total tax revenue will go up until those tax rates are a
good deal higher than they are right now.
Mr. Rice. I hate to cut you off, but I am running out of
time, but, you know, we are taxing with taxes, we are taxing
with increased insurance, we are taxing with increased utility
bills, we are taxing with increased interest rates. It seems
like we are going to wring people dry.
The second thing, you talk about, you have analyzed the
effect of sequester on jobs. Have you analyzed the effect of
Obamacare on jobs and how many jobs that is killing and costing
and hurting?
Mr. Elmendorf. We did an analysis of this in 2010,
Congressman, and our estimate at the time was that the
Affordable Care Act would reduce the level of employment in the
country by about half a percent by the point at which the law
was fully phased in, and that was worth, equivalent to about
800,000 full-time equivalent jobs.
Mr. Rice. Okay. So which one is the biggest job killer,
Obamacare or sequester?
Mr. Elmendorf. So the effects of the Affordable Care Act on
employment in 2018 or so, so about 800,000 full-time equivalent
jobs, the effects of the sequester for this coming year we
think is about 600,000 jobs.
Mr. Rice. Okay, I want to tell you, I am getting hundreds
of calls in my office, and they are not about sequester; they
are about Obamacare. Thank you.
Chairman Ryan. Thank you.
Mr. Cardenas.
Mr. Cardenas. Yeah, I think one of the reasons why so many
people are getting calls about Obamacare is because there is
millions upon millions of dollars being spent on attacking
Obamacare, and it hasn't even been fully implemented yet, so I
think that people, Americans are just reacting to the airwaves
and what they are hearing because they are getting scared into
believing that Obamacare is something that they should be
afraid of.
Well, one of the things I would like to point out is that,
you know, before I got involved in being an elected official, I
was a former business owner, and I know what it is like to be a
business taxpayer but also a domestic employer as well, and one
of the things that I would like to point out for the record as
well, Congressman Rokita made a statement about increasing
taxes up to 100 percent of income basically is what he was
describing, and there was no Democrat to second that as a
motion, so I think that we showed a lot of restraint there.
That was a joke. Anyway.
At least somebody laughed. Thank you very much.
So when it comes to immigration reform, my colleague
Congressman Huffman just touched on that, but I would like to
expand on that. Immigration reform, will it benefit domestic
American employers if a comprehensive immigration reform, for
example, we have one on the table that the Senate passed, that
version, would it benefit domestic employers?
Mr. Elmendorf. We didn't study the effect on employers per
se, Congressman. We looked at the effects on employment and on
output and so on.
Mr. Cardenas. But people get employed by employers
eventually at the end of the day.
Mr. Elmendorf. So we concluded that relative to the current
law, enacting the Senate bill would increase the size of the
labor force and employment, would increase average wages in
2025, and later than that would boost the amount of capital
investment, raise productivity.
Mr. Cardenas. Now, is that in just one corner of America,
or would that be pretty much in many, many, many, many parts of
America?
Mr. Elmendorf. It would be disproportionately in places
that the additional immigrants would come to live and to work,
but we didn't try to do an analysis at a regional or
metropolitan level.
Mr. Cardenas. So, for example, it would have a net positive
effect based on your numbers in California?
Mr. Elmendorf. Again, we didn't do estimates for particular
States, but it would tend to have--the larger effects would be
in places that attracted more immigrants.
Mr. Cardenas. Well, when you look at the tech industry
being large in California and the ag industry being large in
California, I think that your numbers probably, the conclusion
of your numbers came from by and large communities like that.
But to my next point, I think a lot of Americans think that
a comprehensive immigration reform would only benefit foreign-
born individuals should we pass something, for example, like
the Senate bill that already passed the Senate but is not
getting a hearing in this House. Would it benefit just foreign-
born people in this country or would it benefit American-born
individuals economically and foreign-born individuals?
Mr. Elmendorf. So it would only----
Mr. Cardenas. It is not exclusive to foreign-born
individuals?
Mr. Elmendorf. It is not exclusive to foreign-born
individuals. It would benefit some people who would live in
this country anyway. We have not done the full analysis,
divided among foreign-born individuals and native-born
individuals, but the effects would spill over. Some of the
effects are negative. As we noted, the unemployment rate would
be slightly higher over the next, through 2020, but in the
longer run and on average, we think it would be good for
people, but the specific effects will differ depending on
people's situations.
Mr. Cardenas. So let me ask the question, then, a little
bit more specifically. A comprehensive immigration reform law,
like the one that the Senate passed, which I would assume has
been analyzed by you and your people, that would only benefit
foreign-born individuals in this country?
Mr. Elmendorf. No.
Mr. Cardenas. Or it would benefit both foreign born and
American born?
Mr. Elmendorf. It would benefit at least some American,
native-born individuals.
Mr. Cardenas. So the answer is both----
Mr. Elmendorf. Both groups----
Mr. Cardenas [continuing]. By and large will benefit.
Mr. Elmendorf. Both groups will benefit over time,
Congressman.
Mr. Cardenas. Got it. And the reason why I ask that
question because I think a lot of people in this country
believe that the debate on immigration reform has no net
economic effect to Americans, and that is just simply not true.
Another thing that I would like to point out is when it
comes to American corporations that have much of their
employment overseas, does that have, tend to have a direct
benefit to households with incomes of blue collar workers in
this country?
Mr. Elmendorf. Congressman, that is a very hard question.
It depends on what the companies do.
Mr. Cardenas. That is why I said direct. Not indirect,
direct.
Mr. Elmendorf. In some cases--I know, but a full answer
from an economist needs to take account of the indirect
effects.
Mr. Cardenas. When an American corporation hires people
domestically in this country, does that have a net positive
effect on that household that got employed?
Mr. Elmendorf. Yes, Congressman.
Mr. Cardenas. Okay, that is my point. Thank you very much.
I yield back my time.
Chairman Ryan. Mr. Woodall.
Mr. Woodall. Thank you, Mr. Chairman.
I appreciate my colleague's discussion about the
immigration. I would say if we reframe that debate instead of
asking what is good for immigrants, asking what is good for
America, we may end up with the same conclusion either way. I
appreciate what Dr. Elmendorf had to say. I am glad the House
is doing it in a step-by-step approach. I applaud what the
Judiciary Committee is doing, but the question should always be
what is good for America, and the answer has always been that a
robust immigration policy is good for America.
Mr. Cardenas. I agree.
Mr. Woodall. It was mentioned in passing, Dr. Elmendorf,
your July 2010 report on about 30 different options for
rescuing Social Security from bankruptcy. If we went back and
looked at that--I know you may not be prepared to talk about
that today--have economic conditions changed in the last 2
years such that that report would need to be updated, or are
those numbers still as reliable today as they were 2 years ago?
Mr. Elmendorf. If we did new estimates today, they would be
somewhat different, but I think the broad conclusions, the
comparison across estimates, across policy options in that
report would still be valid for you.
Mr. Woodall. What you showed there is not only what the
size of that problem is but how absolutely doable it would be
by pulling on somewhere between one and four levers that we
have to pull on to make those changes today that would take
this off the table as a worry for generations to come. They
took a big step in a bipartisan way in 1983 to do that. I feel
like we have the opportunity in divided government today to do
that, and I appreciate the foundational work that you all have
done there.
Folks ask me why we are talking about health care in the
time of budget deficits and budget crisis, what that connection
is. I think of Federal health care costs as being one of the
largest drivers of Federal spending long term. Is that the
CBO's conclusion?
Mr. Elmendorf. Yes, that is right. Absolutely, Congressman,
yes.
Mr. Woodall. When we talk about whether the Affordable Care
Act is helping or hurting, you have said several times it is a
net positive on budget deficits, but I am looking here on page
25 of your report. You may not have it handy, but it is a chart
that talks about projected growth in Federal health care
spending, and I am looking out over the next 10 years, and you
divide major growth into three different categories. You talk
about the aging of the population. Obviously, as we get older,
we have programs that cover the elderly, that is going to drive
health care costs. You talk about excess cost growth. I think
that is one of, an economic term for when inflation is higher
than ordinary inflation, and what that does to divide----
Mr. Elmendorf. Spending on health care per person outpaces
the growth in spending of GDP.
Mr. Woodall. But then you talk about the Medicaid expansion
and exchange subsidies, and if I am reading this chart right,
you are saying that over the next 10 years, health care is
already one of the largest drivers of spending in this country,
Federal spending, and you are saying that the Medicaid
expansion and exchange subsidies are going to be responsible
for 53 percent of the increase over the next 10 years. Am I
reading this right?
Mr. Elmendorf. That is right, Congressman.
Mr. Woodall. So the connection between budgets and the
Affordable Care Act is not only have we identified Federal
health care spending as the single largest driver of debt and
deficits as we look out over the horizon, but 53 percent, well,
actually no, 53 percent of total costs, you are saying that the
Affordable Care Act alone is going to double growth in Federal
health care programs over the next 10 years?
Mr. Elmendorf. So, Congressman, this role of this table
refers to the insurance coverage expansions of the Affordable
Care Act. The Affordable Care Act also includes, as you know,
cuts in spending in Medicare and some other programs and
increases in tax revenue, so my statements about the overall
effect of the Affordable Care Act take account of the coverage
expansions and the Medicare spending cuts and the tax
increases.
Mr. Woodall. Absolutely.
Mr. Elmendorf. This row just has the coverage expansions.
The Medicare spending cuts actually place some role on the
excess cost growth line but not in a way that we can break out
at this point.
Mr. Woodall. But am I reading that right that if 53 percent
of your total projected costs over the next 10 years is
associated with the Affordable Care Act, that means in the
absence of the Affordable Care Act, Federal health care costs
would be half, the growth would be half?
Mr. Elmendorf. In the absence of the insurance coverage
provisions of the Affordable Care Act, but maintaining the
Medicare spending reductions in that act, then Federal health
care spending would be a great deal----
Mr. Woodall. So when you talk about the Affordable Care Act
as reducing deficits, you are not saying that the laws in the
Affordable Care Act, the health care changes are reducing
deficits. You are saying because the Affordable Care Act cuts
$600 billion out of Medicare, you are saying because the
Affordable Care Act raises over a trillion dollars in taxes,
you are saying because of all the non- insurance-related things
that the Affordable Care Act does, that is why it has an
effect, and if we were to do all of those same things
irrespective of their merits, we would just bank all of that
for deficit reduction rather than spending it on new programs?
I know that is not an economist's question, that is more of
a rhetorical question, but I very much appreciate what you have
done here, and again your work on Social Security is the
foundation that really does offer an opportunity for success in
a bipartisan way. I thank you.
Mr. Elmendorf. Thank you, Congressman.
Chairman Ryan. Mr. Ryan.
Mr. Ryan of Ohio. Thank you, Chairman Ryan, and I
appreciate the opportunity here. The chairman has not had lunch
yet, and he is getting a little cranky, so I will try to make
this as brief as I can.
Prior to Obamacare--and thank you, sir, for all your great
work. Prior to Obamacare, what were our health care costs going
up, what percent?
Mr. Elmendorf. So health care costs have risen, health care
costs per person have risen faster than GDP per person for
decades in this country. That growth rate has slowed over the
past half dozen years or so across the Federal programs and in
the private sector as well. The role of the Affordable Care Act
in the slowdown we have observed so far is not clear to us. As
you know, the Affordable Care Act includes a number of
provisions that will slow health cost growth over time.
Mr. Ryan of Ohio. Right.
Mr. Elmendorf. Medicare payments, other changes in
Medicare, a tax on high-cost insurance, but whether those
provisions have mattered a lot so far is hard for us to
analyze.
Mr. Ryan of Ohio. I remember running for Congress in 2002,
and the number one issue for businesses and families was health
care. Health care costs. I don't know what it is going to be.
It keeps going up. This is a major problem. So, you know, we
had a problem to solve, and we ended up solving it alone. We
didn't have much help from the other side, although we did
adopt several of their positions, like the individual mandate.
So my question really was to get everybody to recognize that
this has been a big problem, and we are now seeing things
starting to slow down, and a lot of people who had preexisting
conditions and could not get health care are now able to do
that. If you had a young kid with cancer, they would not meet
their lifetime cap and then get thrown out. They will now be
able to get that care. So we have--and look forward to
improving this as we go. I don't think it is a perfect health
care bill.
I would like to make a couple comments here in the last few
minutes. We had one gentleman make a statement about all these
huge debt issues, Civil War, World War II, and another point in
history, but then forgot to mention the two wars that we put on
the credit card that our friends on the other side primarily
initiated, a prescription drug bill not paid for, no
negotiations in trying to drive down prices. So I just think it
is important as we have this discussion to say, well, we have
these points in history where the debt ran up and then all of a
sudden President Obama got in and, oh, there is this other debt
that just came, not looking back into the past decade, and my
friend Mr. Rokita, who is a friend, and I like him a lot, was
talking about public investments. We can't--the problem we are
having today is the whole narrative in Washington, D.C. is
every single dollar the government spends is bad, it is bad, it
is coming out of the pockets of the private sector, it is
stealing, it is confiscating money from private citizens. That
fails to recognize over the course of our history as a country
the significant public investments that have been made that led
to economic growth, and as I was listening to him make his
argument, I am thinking about local politics. I am thinking of
the City of Youngstown, the City of Akron when they put public
money into an industrial park. Public sewers, public roads,
public sidewalks, invest in, create an industrial park; private
sector comes in, takes risks, makes the investment. But for the
investment by the public to say this is where we want to go,
that private investment wouldn't have had a chance to grow, and
then those businesses grow over time; same with the interstate
highway system, same with NASA. Those huge investments we made
in NASA that many people thought were foolish led to
telecommunications revolutions and all kinds of other things.
Defense spending, you know, the oil coming in and out of the
United States ports guarded by a public investment in the
United States Navy, hundreds and hundreds of billions of
dollars. I mean, these are investments that we make,
investments in research and development, like my friend Mr.
Yarmuth was talking about, that eventually will lead to growth,
and look at what is going on in Silicon Valley because of the
investments on the public side.
So I just--I know we have got deficits, you know we have
got deficits. We both know we need to curb these in the long
term, but we can't sacrifice investments, and right now, we
were lucky enough to get President Obama's first additive
manufacturing initiative. We have got to continue to invest in
that, public-private partnerships, we have got to make sure our
schools have three-dimensional printers in them, so that these
kids--and Legos and robotics so kids get jazzed up about
engineering over the long--public investment, not the be-all-
end-all, but this blend, this mix recognizing the complexities
of our economy.
Chairman Ryan. Thank you.
Mrs. Blackburn.
Mrs. Blackburn. Thank you, sir.
I know you want to say save the best for last, and we women
are accustomed to that around here.
Ms. Lujan Grisham. So, thank you.
Mrs. Blackburn. Absolutely.
Mr. Ryan of Ohio. I just want to say I finally have found
an agreement with the gentlelady from Tennessee.
Mrs. Blackburn. We were at the same briefing that we
stepped out of this committee for, and I told her it was a long
queue. I want to go back, Mr. Elmendorf--first, thank you,
thank you for the report, and I enjoyed glancing through this
and looking at the impact that you have on health care
expenditures, and I didn't--in looking at your footnotes, I
don't see where you pulled data from any domestic programs that
may have yielded a window and some insight into what we are up
against. You have got TennCare in my State of Tennessee. You
have got Guaranteed Issue in New Jersey. You have got
RomneyCare in Massachusetts. And did you look at TennCare and
the escalation of the cost of that program, the administrative
and the beneficiary cost of that program, because it is the
closest thing we have got to what Obamacare is? And just for
the committee, TennCare was the test case for Hillary Clinton
health care back in the mid 1990s in Tennessee, and eventually
it became 35.3 percent of the State's budget. It quadrupled in
cost after 5 years of implementation, and our Governor, a
Democrat Governor, excellent Governor, did a good job, he had
to come in and remove 300,000 people from the program and
reshape the 1115 waiver program from CMS in order to address
this. So did you all pull any evaluated data from that?
Mr. Elmendorf. So, Congresswoman, I am not personally very
knowledgeable about the experience in Tennessee, but when we
have done our estimates over the past several years of the
Affordable Care Act, we have drawn on the experience that
States have had and that private insurers have had, we have
drawn on a very large research literature----
Mrs. Blackburn. So you did look at that?
Mr. Elmendorf [continuing]. In forming our estimates. Yes,
Congresswoman.
Mrs. Blackburn. Okay. So then that does lead me to believe,
as did Mr. Woodall's point, that you are looking at the
additional taxes and components, the revenue side to try to
make that an affordable program that on its own, it would end
up doing what TennCare and other programs did, which is kind of
collapse under its own weight.
Mr. Elmendorf. Well----
Mrs. Blackburn. Let me ask you another question. You know,
I have two grandsons, a 5-year-old and a 4-year-old, and it is
just really painful to me to look at what is happening with our
Nation's debt, and the closer we get to that 100 percent of
GDP, and I had looked at France's public debt. They are at 91--
95.1 percent of their GDP. And they are looking at a tax pause.
Have you all taken a look at what is happening with some of
these countries and looked at the steps that Congress would
have to take if at that point to return our Nation to a path of
prosperity how we back away from this debt? Are you looking and
making the expectation that the only way we could do that would
be higher taxes or increasing existing taxes?
Mr. Elmendorf. So I think, Congresswoman, that you and your
colleagues have a choice of raising taxes substantially,
cutting Federal spending substantially or some combination of
those two paths.
Mrs. Blackburn [continuing]. For cutting the spending.
Mr. Elmendorf. I understand, Congresswoman, but that is for
you to say, not for me, and we are currently producing a large
volume of budget options, that is what we do every couple of
years, and that volume would include options for both cutting
spending and raising taxes.
Mrs. Blackburn. Okay. Let's say we do what France does, and
they are looking at a 1 percent corporate tax. What kind of
effects would that have on the economy?
Mr. Elmendorf. Congresswoman, I can't do estimates of that
sort in my head, and as you know, other countries are starting
with very different economic systems, very different levels of
taxes and spending, so we would try to learn from other
countries' experiences, but it is hard to apply directly to
this country because this country is different in a variety of
ways.
Mrs. Blackburn. Okay, let's talk a minute about sequester.
I like the 2 percent across-the-board cut, do not like the cuts
on the military, I think they are harmful. However, according
to your report, if Congress reverses the sequester cuts, our
Nation's debt would reach nearly 190 percent of GDP by 2038. So
what do you think we--tell me what you think. Is it safe to say
that the sequester cuts are preventing our long-term debt from
doubling when you consider if we keep current law and we do not
make any changes that our public debt would reach 100 percent
of GDP?
Mr. Elmendorf. So, Congresswoman, the alternative fiscal
scenario that you are referring to incorporates a set of
changes relative to current law, one of which is taking away
the sequestration and going back to the original caps on
discretionary funding from the Budget Control Act, but there
are also big differences in tax policy and in other aspects of
spending policy in that alternative scenario, so I don't know
how big the effect would be if the sequester, turning off the
sequestration by itself, but certainly it is true that if
spending were increased or taxes were cut relative to the
current law that underlies these projections and no other
changes were made that offset those changes, then the debt
would be higher and the problems would be bigger and would
arrive faster.
Mrs. Blackburn. Okay.
Chairman Ryan. Thank you.
Ms. Lujan Grisham.
Ms. Lujan Grisham. Thank you, Mr. Chairman.
And thank you, Director, for being here. I am actually
going to do a couple things. I know most of the questions,
quite frankly, have been asked and most of us have been very
clear about this report and all of the information that we get
about the fiscal condition of the United States and the Federal
budget. The deficit and the debt are stark and striking and
require us to do something because they are incredibly serious,
and I think there isn't a member on this committee who wasn't
clear about that from your report and who wasn't clear about
that before this report and isn't looking forward to the kind
of budget options that we need to undertake.
But I would like to go to two other, two balancing issues,
and I am actually, with all due respect to my colleague, Mrs.
Blackburn, she is very correct about how she talked about
TennCare and its model as States looked at ways to do something
different about their Medicaid programs and their populations.
The trick for States in that regard is that they did it alone,
all right? So there were no, they had no way to impact
Medicare. They had no way to impact CMS rules on hospitals and
hospital reimbursement. And the problem then is that it can be
unsustainable. And so quickly--and there was no partnership on
the Medicaid side from the Federal Government to be as robust
as it is today to really deal with the growing uninsured
population. And so they don't work, or they haven't worked very
successfully.
So let's start with that, and actually Tennessee, some of
their hospital corporations are in New Mexico and are big
supporters of the ACA and Medicaid expansion because those
rural hospitals will go belly up in the current path that we
are on in health care. So I just want to reassess and make sure
that I am getting this right, that the Affordable Care Act
expanded coverage has raised some revenue and reduced spending
for Medicare.
Mr. Elmendorf. Yes, Congresswoman.
Ms. Lujan Grisham. And I want to know what that impact of
continuing that kind of a balanced approach, where you are
reducing and you are raising, has on the Federal deficit over
the next 25 years.
Mr. Elmendorf. All those provisions taken together in the
Affordable Care Act, in our estimate, reduced deficits over the
next 10 years and beyond in the second decade relative to what
would have happened under current, under prior law.
Ms. Lujan Grisham. Perfect. So, given that scenario, and in
my State, that has been hugely helpful, and we are expanding
Medicaid, we have a Republican Governor, who is doing that. We
have the SHOP exchange. We are doing our own State exchange. We
have some Federal partnerships, recognizing that that is the
kind of balanced approach that we want to a fledgling State
budget, an economy arguably that is one of the worst economies
in the country with negative job growth. We understand that
there is going to have to be some balanced approaches to
resolving this problem both in the short term and the long term
so that we are affecting the debt and growing the economy so
that we can manage those things effectively.
And here, as we are, as many have said, colliding into the
debt ceiling and recognizing that we have got a short-term
issue that we have got to address, what is the impact on our
economy if we weren't to address that and make sure that the
full faith and credit of the United States--and I know that you
have addressed this several times today, but since it is the
issue of the hour, what happens to our economy again if we
fail?
Mr. Elmendorf. So we think that defaulting on any
obligation of the U.S. Government will be a dangerous gamble.
Economists can't predict exactly what would happen because,
fortunately, we don't have a lot of experience with that in
this country, but the confidence in the Federal Government
paying its bills on a timely basis is the bedrock of our
economy and our financial system, meaning both the economy and
financial system in this country and the economy and financial
system around the world. And if that confidence were broken,
then the consequences could be very harmful, and for the
financial system, for the flow of credit, for the payments
mechanism, for the economy and ultimately for the Federal
budget. If interest rates on Federal debt were to be pushed up
higher than we think they would rise anyway because of a loss
of confidence, that would raise interest payments. And the debt
is so large now, and in our projections remains large for
indefinitely, then the increased interest rates, given the size
of that debt, can be very costly. So if interest rates were
about a percentage point higher than we project over the next
decade, that would raise interest payments by the Federal
Government by about a trillion dollars over the decade.
Ms. Lujan Grisham. And that is also going to have, I would
assume, the same kind of effect on small business. And also
listening to the sequester comments, I share those, that while
we have an obligation and have been cutting the Federal budget
and being very clear about our obligation to do that, this
sequester then leads to, particularly in the military, an
inability to do that innovation and research and have that
translate to economic growth in the economy. That
predictability, that stability has certainly continued to crush
New Mexico and particularly my district in Albuquerque, and I
would assume that that is the same issue without a balanced
approach.
Mr. Elmendorf. Congresswoman, as I mentioned a little
earlier, nearly half of Federal nondefense discretionary
spending represents investments in physical things like
highways, in education and training of people, and in research
and development. And if the path of overall discretionary
spending and of the defense and nondefense pieces remains as it
is in current law, then that will--and that the composition of
that spending remains about the same as it has been
historically, then Federal investments will decline as a share
of GDP in a significant way over the coming decade.
Ms. Lujan Grisham. Thank you.
And thank you, Mr. Chairman, for your latitude. I yield
back.
Chairman Ryan. Thank you very much.
Dr. Elmendorf, thank you very much for your testimony.
Thank you for this report, for the premium support report, and
we will see you this weekend.
Mr. Elmendorf. Thank you, Mr. Chairman.
Chairman Ryan. Hearing adjourned.
[Question submitted for the record and the response
follows:]
Question Submitted for the Record From Hon. Allyson Y. Schwartz, a
Representative in Congress From the State of Pennsylvania
potential to reduce health care costs through delivery system reform
Republicans and Democrats across the ideological spectrum agree
that the current Medicare payment system must be repealed and that the
rate of growth in health care spending in the United States is
unsustainable. Fixing the Sustainable Growth Rate (SGR), the flawed
formula that dictates payments to Medicare providers, is essential to
containing the growth of health costs. The long-term fiscal challenges
facing our nation cannot be solved without acknowledging and addressing
this threat to the sustainability of Medicare.
In March, I reintroduced the bipartisan Medicare Physician Payment
Innovation Act (H.R. 574) with Rep. Joe Heck, DO (R-Nev.). This
legislation fully repeals the SGR and implements new delivery systems
and payment reforms to ensure long-term stability in the Medicare
physician payment system, while containing the rising growth in health
care costs. My legislation employs the Center for Medicare and Medicaid
Innovation (CMMI) in the development of cost-effective payment models
that ensure quality patient care.
The House Energy and Commerce Committee advanced its own bipartisan
SGR repeal legislation (H.R. 2810) in July. This bill also took steps
to advance payment reforms but established a new entity to conduct the
testing and evaluation of payment models. CBO scored the House Energy
and Commerce proposal at $175 billion over 10 years, which is over $40
billion more than the $139 billion score for permanently freezing
physicians' reimbursements at current levels. In the report, CBO notes
that ``the structure specified by H.R. 2810 would replicate the process
being followed by CMMI in many ways * * * [and] would lead to smaller
savings.''
Dr. Elmendorf, can you explain how taking advantage of the work the
Center for Medicare and Medicaid Innovation is already doing in the
area of delivery system reform could reduce the cost of an SGR fix?
CBO's Response to Questions Submitted for the Record
Q. Dr. Elmendorf, can you explain how taking advantage of the work
the Center for Medicare and Medicaid Innovation is already doing in the
area of delivery system reform could reduce the cost of an SGR fix?
A. The Center for Medicare and Medicaid Innovation is charged with
testing models that modify rules in the Medicare, Medicaid, and CHIP
programs--such as changing Medicare's payment methodologies or
expanding the set of services that are covered--to identify and refine
models that will reduce program spending without harming the quality of
care or improve quality without increasing program spending. The
Secretary is authorized to expand models that prove to be successful in
achieving those objectives.
Under current law, CBO expects that, in general, the Secretary will
use that authority to expand successful models. CBO incorporates the
expected savings from the development and expansion of those models in
its baseline projections of federal spending for Medicare and the other
health care programs. Compared to projections from before the CMMI
provisions were enacted, those expected savings have contributed both
to reductions in the projected rate of growth in Medicare spending and
to lowering the estimated cost of proposals to replace the Sustainable
Growth Rate (SGR) mechanism. However, because the budgetary effects of
testing and expanding those models will occur under current law, those
effects are not available to be used as offsets to new spending--such
as an SGR ``fix''--in proposed legislation.
It is possible that the Secretary will decline to expand some CMMI
models that reduce program spending and improve quality, despite the
expectation that those models could be successfully replicated. In such
cases, a provision of legislation requiring expansion of a successful
model might offset some or all of the cost of other provisions that
increase direct spending.
[Whereupon, at 12:40 p.m., the committee was adjourned.]