[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
THE CONGRESSIONAL BUDGET OFFICE'S
BUDGET AND ECONOMIC OUTLOOK
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
HEARING HELD IN WASHINGTON, DC, JANUARY 23, 2008
__________
Serial No. 110-28
__________
Printed for the use of the Committee on the Budget
Available on the Internet:
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COMMITTEE ON THE BUDGET
JOHN M. SPRATT, Jr., South Carolina, Chairman
ROSA L. DeLAURO, Connecticut, PAUL RYAN, Wisconsin,
CHET EDWARDS, Texas Ranking Minority Member
JIM COOPER, Tennessee J. GRESHAM BARRETT, South Carolina
THOMAS H. ALLEN, Maine JO BONNER, Alabama
ALLYSON Y. SCHWARTZ, Pennsylvania SCOTT GARRETT, New Jersey
MARCY KAPTUR, Ohio MARIO DIAZ-BALART, Florida
XAVIER BECERRA, California JEB HENSARLING, Texas
LLOYD DOGGETT, Texas DANIEL E. LUNGREN, California
EARL BLUMENAUER, Oregon MICHAEL K. SIMPSON, Idaho
MARION BERRY, Arkansas PATRICK T. McHENRY, North Carolina
ALLEN BOYD, Florida CONNIE MACK, Florida
JAMES P. McGOVERN, Massachusetts K. MICHAEL CONAWAY, Texas
NIKI TSONGAS, Massachusetts JOHN CAMPBELL, California
ROBERT E. ANDREWS, New Jersey PATRICK J. TIBERI, Ohio
ROBERT C. ``BOBBY'' SCOTT, Virginia JON C. PORTER, Nevada
BOB ETHERIDGE, North Carolina RODNEY ALEXANDER, Louisiana
DARLENE HOOLEY, Oregon ADRIAN SMITH, Nebraska
BRIAN BAIRD, Washington [Vacancy]
DENNIS MOORE, Kansas
TIMOTHY H. BISHOP, New York
GWEN MOORE, Wisconsin
Professional Staff
Thomas S. Kahn, Staff Director and Chief Counsel
Austin Smythe, Minority Staff Director
C O N T E N T S
Page
Hearing held in Washington, DC, January 23, 2008................. 1
Statement of:
Hon. John M. Spratt, Jr., Chairman, House Committee on the
Budget..................................................... 1
Hon. Paul Ryan, ranking minority member, House Committee on
the Budget................................................. 2
Hon. James P. McGovern, a Representative in Congress from the
State of Massachusetts, letter submitted by................ 4
Peter Orszag, Director, Congressional Budget Office.......... 7
Prepared statement of.................................... 16
THE CONGRESSIONAL BUDGET OFFICE'S BUDGET AND ECONOMIC OUTLOOK
----------
WEDNESDAY, JANUARY 23, 2008
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 10:04 a.m., in room
210, Cannon House Office Building, Hon. John M. Spratt Jr.
[chairman of the committee] presiding.
Present: Representatives Spratt, Edwards, Cooper, Schwartz,
Becerra, Doggett, Blumenauer, Berry, Boyd, McGovern, Scott,
Etheridge, Moore of Kansas, Bishop, Moore of Wisconsin, Ryan,
Barrett, Hensarling, Lungren, Conaway, Campbell, Tiberi,
Alexander and Smith.
Chairman Spratt. Let me call the hearing to order and
welcome our witness this morning.
Dr. Orszag, as always, we are glad to have you and thank
you for coming. Today you are here to lay out your latest
forecast or outlook on the budget and economy released just
this morning. We are pleased to have your perspective on recent
developments in the economy and how these changes have affected
the Federal budget and are likely to affect it further.
Given current discussions about economic stimulus proposals
in your release on that subject last week, I expect that our
members will have questions about the various roles that fiscal
policy can play in firing up our faltering economy. Your budget
and economic outlook offered some sobering projections on the
short-term and long-term fronts. For the short-term, CBO's
economic forecast has grown noticeably more pessimistic since
last August, and a number of ominous economic signs have
emerged since CBO finalized last month the forecast underlying
today's report. Unemployment has spiked in 1 month from 4.7 to
5 percent. December retail sales, all important, actually fell
by four-tenths of a percentage point from the prior month. And
yesterday the Fed felt compelled to make an uncommon if not
unprecedented cut of 75 basis points in the Fed funds rate.
Today's new economic forecast adds to the growing evidence
that the country and that the economy has weakened and that we
as policymakers must and should take action. Meanwhile, CBO
shows the deficit for fiscal 2008 is larger than the deficit
for fiscal 2007, and the '08 deficit is actually $64 billion
worse in this projection than in the projection you made last
August. Over the long term, CBO's 10-year forecast is worse and
relative to August by $850 billion on an apples-to-apples
basis.
Because yours is a baseline forecast, it does not include
the full deficit impact of all of the administration's policies
and the budget that they will send us in a few weeks. For
example, your forecast does not include the roughly $4 trillion
impact on revenues which will be occasioned by the President's
tax cut agenda or the full cost of ongoing operations in
Afghanistan and Iraq.
Under administration policies, the $5.6 trillion surplus
projected in 2001 has collapsed, vanished, been replaced by
deficits which are nearly equal in amount and which have
complicated our efforts, a response to the current slow down in
the economy. Today's report provides the latest evidence that
we should act and act now to strengthen the economy and that we
should do so in a way that is mindful however of the long-term
budget challenges, the structural deficits that we face unless
we act and act seriously.
This report reminds us also that the President's budget
policies, particularly his deficit financed tax cuts, have
significantly increased the national debt and make it harder to
address our long-term challenges.
So, Dr. Orszag, we have a lot on our plate this morning, a
lot to discuss with you, a lot of questions to ask. We look
forward to your testimony, your answers to the questions that
we will ask and follow. And before turning to you for your
testimony, however, I want to recognize Mr. Ryan for any
opening statement that he may wish to make.
Mr. Ryan.
Mr. Ryan. Thank you, Chairman Spratt.
And welcome back, Director Orszag.
Over the past few years, I think it is--we have almost come
to expect good news when it comes to our near-term deficit
projections at every one of these hearings we have had. We have
seen dramatic declines in the deficit well below projections
for each of the last 3 years. In fact, last year at this time
we found ourselves on what many describe as a glide path to
near-term balance as a result of our economy's performance. So
it is no surprise that we began taking this trend for granted.
We simply expected that our economy would keep cranking along,
creating jobs, boosting revenues and driving down deficits.
But today I understand that Director Orszag is here to tell
us otherwise. CBO is projecting the Federal deficit will
increase this year largely as a result of the economic slow
down and the drag it is going to place on revenue growth. For
the past few weeks there have been broad discussions on how
best to address the economic downturn. And there is bipartisan
consensus that the Federal Government can and should respond.
But even while the President announced that we should act
quickly to move an economic growth package, the exact contents
of that package is obviously not yet resolved. As I noted last
week, I believe there are several key principles we need to
keep in mind. First, do no harm. I am concerned that in our
rush to help we will talk ourselves into a quick feel-good hit
today that will leave us with a bigger budgetary hangover
tomorrow. Second, we need to get the fundamentals right. That
means keeping tax rates low and spending under control both in
the short and longer term. That is the best prudent recipe for
real long-term economic growth. Third, we need to understand
that we simply cannot spend our way to prosperity. I am
particularly concerned that Congress will be tempted to use the
excuse of fiscal stimulus to push through a wish list of new
spending, further worsening our budget outlook and our nation's
economic future. In short, I believe that in addressing the
current economic concerns, we have got to keep our focus on
good economic policy that lasts beyond the next few quarters.
On a final note and to be clear, this is in no way a
criticism of the CBO. While the information we receive today is
critical for drafting our budgets, we have got to recognize the
limitations of something we call the baseline. The baseline
concept, under which CBO formulates its projections, includes a
built-in double standard favoring higher spending and higher
taxes. In general, the baseline assumes that spending, even if
scheduled to expire, goes on forever while tax relief is always
temporary. As a result, extending the spending programs has no
impact on baseline deficit while extending tax relief is shown
as causing an increase in the deficit. Assuming revenues from
the AMT or the expiration of the current tax relief in 2010
simply because they are baked into something called the
baseline should not serve as an excuse to impose job-killing
tax increases on our nation's economy.
To conclude, as we look at the current economic conditions
as well as CBO's longer term forecast, we should pursue policy
that maintain low tax rates; keeps spending under control; and
works to address the long-term unsustainable growth in our
major entitlement programs. Those are the things we should keep
our eye on. And I appreciate the Chairman for his indulgence.
Chairman Spratt. Thank you, Mr. Ryan.
Dr. Orszag, the floor is yours. Before you begin, however,
let me attend to a couple of housekeeping details. First let me
say that your statement will be made in full part of the record
so you can summarize it as you see fit. But I would encourage
you, as I did earlier, to take your time and to walk us through
this as carefully and deliberately as you see fit.
Secondly, I would ask unanimous consent that all members be
allowed to submit an opening statement for the record at this
point. There is no objection; so ordered.
[A letter submitted by Mr. McGovern follows:]
Dr. Orszag, thank you again for coming. We look forward to
your testimony.
STATEMENT OF PETER P. ORSZAG, DIRECTOR, CONGRESSIONAL BUDGET
OFFICE
Mr. Orszag. Mr. Spratt, Mr. Ryan, members of the committee,
my testimony this morning will focus on the economic and budget
outlook. First, the economy has been buffeted by several
interlinked shocks, and the risk of recession is significantly
elevated relative to normal economic conditions.
As my first chart shows, there was a dramatic run-up in
housing prices during the first half of this decade, but
housing prices have started to decline, and most forecasters
expect further drops this year. The weakening of the housing
sector directly affects the economy by reducing residential
investment and indirectly affects the economy through reduced
consumer spending as a result of lower housing wealth.
Moreover, problems in the housing markets and mortgage
markets have spilled over into broader turmoil in financial
markets which poses the risk of impeding the flow of credit
essential to a modern economy.
Energy prices have also risen substantially as the next
chart shows. Although the effect of an increase in the price of
oil on the macroeconomy today is smaller than it was in the
1970s and 1980s, the rise in oil prices is still an economic
drag. The combination of these forces has not yet fully
manifested, themselves; although the unemployment rate has
ticked up. Indeed, as the next chart shows, the 3-month moving
average unemployment rate has now risen 0.4 percentage points,
almost a half a percentage point, above its level relative to
the same period last year, which as you can see from the graph
has only and always occurred in periods associated with a
recession, which are those dark bars in the graph. You can see
that the only times that we have crossed that 0.4 percentage
point horizontal line is during those dark bars, which are
recessions.
On the other hand, other measures of the labor market that
have typically accompanied such a large increase in the
unemployment rate at the onset of a recession have not behaved
as they have in the past. For example, unemployment insurance
claims typically spike up at the beginning of a recession, and
they have not done so thus far in recent experience.
Especially with the most recent and notable action by the
Federal Reserve yesterday, many professional forecasters are
projecting continued, albeit sluggish, economic growth in 2008
rather than an outright recession. And one force leading to
that conclusion has been net exports. Thus far, as the next
chart shows, the depreciation of the dollar, which is a
necessary part of the gradual adjustment of our current account
deficit, has itself been gradual, and that has helped to
stabilize and, along with growth abroad, even slightly improve
the current account deficit, which is shown in the next chart.
That force has--and rapid growth in real exports is helping to
provide a cushion or a boost to the economy.
The bottom-line is that the risk of recession is
substantially elevated, but CBO expects, along with most
professional forecasters, a period of unusually weak growth
rather than outright recession. In particular, CBO expects
growth for the year as a whole of under 2 percent, as the next
chart shows, and a rise in the unemployment rate to an average
of 5.1 percent during 2008.
A reflection of this general slowing in economic activity
can be seen in job growth. In 2005, job growth averaged 220,000
per month. It fell in half last year to an average of 110,000
per month. CBO projects that during the first half of 2008, it
will fall in half yet again to an average of 55,000 per month
during the first half of this year.
Let me now turn to the budget outlook. As a result of the
slowing economy, we have already seen some slowing of revenue
growth, as the next chart shows, especially in corporate income
taxes. And CBO expects some further slowing this year. Indeed
we expect corporate income taxes to decline in nominal terms
this fiscal year relative to last year. We now have information
for corporate tax receipts during January and project that
again in January we will have a year-over-year decline in
corporate tax receipts--the seventh month in a row in which
that occurred. This is particularly notable because a lot of
the fiscal improvement between 2003 and 2006/7 occurred because
of a very sharp rise in corporate income tax revenue.
Our baseline suggests that after 3 years of declining
deficits, a slowing economy will boost the deficit to $219
billion this year, as the next chart shows, which amounts to
1.5 percent of GDP or 1.5 percent of the economy, which is up
from 1.2 percent last year. If policymakers fund the additional
appropriations for Iraq and Afghanistan that the administration
has requested, that deficit would rise to--this year to about
$250 billion. And if policymakers adopted some fiscal stimulus
measures, the deficit this year could rise significantly above
that. And indeed, at least from the perspective of short-term
stimulus, that would be one of the objectives of providing such
stimulus. Thereafter, under our baseline, which assumes a
growing impact of the alternative minimum tax and the
expiration of the 2001 and 2003 tax legislation, the budget
moves towards balance in 2012.
However, as both Mr. Spratt and Mr. Ryan have already
noted, that baseline is often viewed as being unrealistic
because policy changes that are widely viewed as likely to
occur are not incorporated into it. In particular, for example,
the baseline assumes no further relief from the alternative
minimum tax and, therefore, that the number of taxpayers on the
alternative minimum tax will rise from 4 million last year to
26 million this year and continue rising thereafter as you can
see on the chart. If, instead of making that assumption, you
assumed relief from the AMT was continued, you assume that the
2001 and 2003 tax legislation is continued past its official
expiration in 2010, that you adopt one of the scenarios we have
put together for the future war--global war on terrorism and
you assume that discretionary spending keeps pace with economic
growth and not just inflation, the next chart shows you that
you get a much different path for the projected deficit than
what the baseline shows. And indeed, under that scenario, the
cumulative deficit, instead of being a surplus of $274 billion
between 2009 and 2018 under our baseline, would show a deficit
of $6.3 trillion or about 3.5 percent of GDP.
So many of the policy changes that are under discussion
clearly have a fairly significant effect on budget projections
over the next 10 years. Even over the next 10 years,
furthermore, the nation's longer-term budget pressures begin to
manifest themselves. Caseloads on both Medicare and Social
Security are projected to rise, as the next chart shows. Social
Security beneficiaries, for example, rise from 50 million in
2008 to 64 million in 2018 as the first wave of the baby boomer
generation becomes eligible for Social Security retirement
benefits. Projected increases in caseloads, however, only
account for about 30 percent of the growth in mandatory
spending over the next decade. More fundamentally, the cost per
beneficiary in Medicare is projected to continue rising
rapidly, more rapidly than income. And you can see a
significant difference even over the next decade, as the next
chart shows, in the growth of Medicare and Medicaid spending,
which is being driven by those rising health care costs, and
the growth in Social Security, even though the increase in
beneficiary roles is similar under Medicare and Social
Security.
Those projections continue, as the next chart shows, under
our long-term budget projections that we released in December.
And the conclusion is reinforced even more dramatically that
that light blue area, Medicare and Medicaid spending in
particular, is the key to our fiscal future. And we project,
under our long-term budget projections, that Medicare and
Medicaid spending under current law would rise from about 4.5
percent of the economy today to almost 20 percent of the
economy by 2082 without a change in policy.
If you combine those spending projections with a revenue
path that takes the 2007 tax parameters and projects that
forward, you can combine them into what is called the fiscal
gap, which is the--basically the summarized difference between
projected spending and projected revenue. And as the next chart
shows you, over the next 75 years, that gap amounts to 7
percent of the economy, which is a very large number. What that
tells you is that you would need to raise taxes or cut spending
by 7 percent of GDP--and remember that both of those are about
20 percent now--in order to avoid a significant and
unsustainable increase in government debt over the next 75
years.
Most of that increase is not due to demographics, as the
next figure shows. The bottom blue bars there are the pure
effects of an aging population. And while that is important, by
far a more important factor is the rate as which health care
costs are growing. That is the single most important variable
affecting our long-term fiscal future.
Finally, given the short-term economic difficulties that we
face and the very serious long-term fiscal imbalances that I
have just highlighted, let me end briefly by discussing the
report that CBO wrote for this committee and the Senate Budget
Committee on fiscal stimulus options. In particular, when the
economy is experiencing unusual weakness, as it appears to be
today, the key constraint on economic growth is demand for the
goods and services that firms could produce with existing
resources. In most circumstances, by contrast, and certainly
over the long term, the key constraint on economic growth is
the rate at which those resources are expanded through forces
like increases in capital and workforce, labor and improvements
in productivity. When the constraint on short-term economic
growth--on growth is aggregate demand--and again, those kinds
of periods are unusual--both monetary and fiscal policy can
help by boosting spending.
On the fiscal policy side, the automatic stabilizers built
into the budget will help to attenuate any economic downturn by
providing a cushion to after-tax income. The question is
whether additional fiscal action is necessary. One way to think
about it is that fiscal stimulus can help provide insurance
against the risk and severity of a possible recession. Our
estimates suggest that stimulus of between a half and 1 percent
of GDP or so--that is roughly $75 to $150 billion or so--would
reduce the elevated risk of recession to more normal levels as
long as the stimulus is well designed.
And that brings me to design questions. The stimulus need
not be targeted at what caused the economic weakness in the
first place. Instead, the key is that it bolsters aggregate
demand and thereby helps to jump start a positive cycle of
increased demand leading to increased production until the
constraint once again becomes how much we are willing to
produce or how much we can produce rather than how much we are
willing to spend. We laid out some principles that can help
guide policymakers interested in designing a package in as cost
effective manner as possible, and it would have at least three
central principles. First, it would be delivered rapidly. You
do not want to be delivering additional stimulus to aggregate
demand after the economy is already growing rapidly because all
you would succeed in doing is stoking inflationary pressures
and you would miss the period in which economic weakness was
the key constraint on growth. Second, it would be temporary. As
I just mentioned, we face a very serious long-term fiscal
imbalance, and one would want to avoid exacerbating that long-
term fiscal gap. And finally, it would be cost effective in the
sense of boosting aggregate demand as much as possible at a
given budgetary cost. And our report to this committee and the
Senate Budget Committee evaluated various options according to
that criterion also.
Thank you very much, Mr. Chairman.
[The prepared statement of Peter R. Orszag follows:]
Chairman Spratt. Let me start with what is in the context
of what is happening right now, relatively good news, and ask
you how confident you feel about it. You are projecting, as I
understand, 1.7 percent real growth in GDP for this year. Are
you comfortable with that projection?
Mr. Orszag. For the year as a whole, yes. We have weaker
growth in the first half of the year, somewhat stronger growth
in the second half of the year. I would note that that
projection is below the most recent Blue Chip forecast. It is
below a somewhat older administration forecast. We will
continue to monitor economic conditions and adjust our thinking
as warranted. But at this point, I would not--I would not
adjust that.
Chairman Spratt. Let me also go back to where we were at
the outset of your testimony in trying to explain that this is
a baseline budget projection and read what you say on the first
page, just for reiteration: CBO's baseline budget projections
for the next 10 years are not a forecast of future outcomes;
they are based on the assumption that current laws and policies
will remain the same. The projections themselves stem from
long-standing procedures that were, until recently, made law--
part of the law.
In other words, you are saying that you are not trying to
predict the future here. You are taking the existing situation,
assuming they will be carried forward into the future at least
5 years--in some cases 10 years--and showing us the cumulative
and aggregate effects of that assumption?
Mr. Orszag. That is correct. This baseline is useful for
legislative purposes for evaluating the cost of legislative
changes relative to the baseline. But it is not a prediction of
the future because policy will change.
Chairman Spratt. Let's take the adjustments for the
alternative scenario that you referred to in your testimony and
lay out in your book. First of all, with respect to tax cuts,
if we assume that the tax cuts that were affected--enacted in
'01 and '03 were renewed and carried forward after expiring on
December 31, 2010, what is the effect on the bottom-line of
your budget?
Mr. Orszag. There is a roughly $2.2 trillion revenue effect
from those provisions, and then there is also an interaction
with the alternative minimum tax.
Chairman Spratt. Okay. We will come back to the interaction
then.
How about other extenders, not those that were enacted in
'01 but tax provisions like the revenue--the research and
development tax credit? If these are extended as they typically
are, what is the impact on revenue of extending these tax
measures--tax cut measures?
Mr. Orszag. $481 billion over the 10-year window.
Chairman Spratt. $481 billion. Now the AMT, the alternative
minimum tax, we fixed for 2 or 3 years running, and there seems
to be a consensus in both parties amongst us all that it should
not be applied to middle income taxpayers for whom it was never
intended in the first place and comes down on pretty heavily.
If we fix it to lock in place its current impact so that it
affects 4 to 5 percent of all tax filers but no more, what is
the impact on revenues of fixing the AMT in that fashion?
Mr. Orszag. Approximately $650 billion. And then, as I
mentioned before, if you did that and also extended the 2001
and 2003 tax legislation, there is an additional $550 billion
interaction effect.
Chairman Spratt. Now, there are some other things that we
are doing year to year as we try to find room in the budget for
doing permanent solutions. One is a sustainable growth rate
factor under physicians' reimbursement, under Medicare. Could
you give us a rough back-of-the-envelope estimate of what it
would cost if we were to simply dispense with that or at least
mitigate its effect so it doesn't apply in the future years?
Mr. Orszag. Yes, it is a couple hundred billion dollars.
But let me get you the exact figure in a second. Depending on
how you did it, it would be somewhere between $250 and $325
billion. And, in fact, it could be slightly larger than that if
you also held Medicare beneficiaries harmless from the increase
in their Part B premiums that would follow.
Chairman Spratt. Okay. Now, with respect to spending that
we have the most control over, which we call NDD, nondefense
discretionary spending, you have assumed, in my opinion, fairly
stringent conditions for the growth of this spending over the
next 5 to 10 years. You are assuming in your forecast that it
will grow with the rate of inflation but not with the rate of
GDP. Over 5 years, what is the impact of that on negative
cumulative NDD, nondefense discretionary spending?
Mr. Orszag. I actually have the figure for total
discretionary spending. We can get it for the split. For total
discretionary spending over 10 years, it is approximately $1.4
trillion.
Chairman Spratt. Okay. So you have already squeezed that
much spending----
Mr. Orszag. You can divide that roughly in half.
Chairman Spratt. Okay. You squeeze that much spending out
of NDD. What about the war in Iraq and Afghanistan? What
assumption do you make about its cost?
Mr. Orszag. The baseline takes whatever has been enacted as
of our projections and projects that forward. So we have $88
billion in enacted appropriations for the war on terrorism, and
that is spent out and projected forward in the baseline.
Chairman Spratt. So the administration requested in a
special supplemental $193 billion. Of that, $88 billion has
been provided and appropriated thus far. That leaves 105 to go
if the administration's full request is appropriated. You are
backing both of those out? You are leaving the 88 in for 2008--
--
Mr. Orszag. Correct.
Chairman Spratt. And assuming that the 105 will be
forthcoming?
Mr. Orszag. No, sir. If the $105 billion occurs, there
would be roughly another $30 billion in outlays that--in other
words, if you provided another roughly $100 billion this year,
about $30 billion would be spent this year with the remainder
being spent largely next year. And that was the difference
between our baseline deficit of $219 billion. If you provided
the extra $105 or roughly $100 billion that the administration
has requested, about $30 billion would spend out this year.
That would bring the deficit to about $250 billion.
Chairman Spratt. I think you have got a net sum impact of
$981 billion for your baseline assumption--your modeled
assumption about the cost of Iraq and Afghanistan?
Mr. Orszag. That is correct, sir.
Chairman Spratt. Does that involve building down
methodically to a level of about 75,000 troops in the two
theaters and then continuing along a steady and safe basis at
that level?
Mr. Orszag. No. Based on the rules that govern the
baseline, you just take what has been enacted and project that
forward. We also provide different policy scenarios that you
can compare things to, and we do provide one in which the troop
levels are reduced to 30,000 by 2010 and another in which they
are reduced to 75,000 by 2013. In the scenario in which they
are reduced to 75,000 by 2013, there would be an additional
$120 billion of increased deficit as a result relative to the
$981 billion that you pointed out.
Chairman Spratt. Let me show you our notorious eye chart.
It is back.
Could we get the eye chart on the screen? This tests your
visual acuity. That is why we call it the eye chart.
Mr. Orszag. I am glad I got new glasses.
Chairman Spratt. The main reason we do this is to show you
the number we derive here isn't coming off the seat of our
pants. We actually did some arithmetic. It may be a bit-back-
of-the-envelope-ish, but nevertheless, after doing the things
that we just ran through--assuming the renewal of the tax cuts,
assuming your assumption about modeling the cost of continuing
missions in Iraq and Afghanistan, assuming what you assume
about NDD and everything--we come up with a net addition to the
deficit of $4.7 trillion. I can't even see it myself. I think
that is the number, $4.7 trillion.
Mr. Orszag. Yes, sir. Rounds to 4.8, but okay.
Chairman Spratt. Are we in the same ballpark then?
Mr. Orszag. Yeah. The scenario that I showed was slightly
different. I think--I am not sure that you have discretionary
spending growing with GDP there. But in any case, yes, the
numbers are, you know, somewhere $4 to $6.5 trillion under
these alternative scenarios, depending on exactly what you
assume.
Chairman Spratt. If I picked up your testimony--walked in
off the street and picked up your testimony and looked at table
1, I would say that, well, the near term looks a little dire;
the bottom line is still pretty substantial, $219 billion this
year, which is worse than last year, $163 billion. But by 2012,
it appears that the budget will be in the black. But that is
based upon some assumptions that are not likely to be obtained
politically around here. And when we make those assumptions,
instead of having an $87 billion surplus, we could have a 2 or
3 or $400 billion deficit easily by that point in time if we do
indeed extend the tax cuts, extend the extenders, continue our
mission in Iraq and Afghanistan and make the other policy
decisions that are reflected in the total; is that correct?
Mr. Orszag. That is correct.
Chairman Spratt. So it is a pretty dire forecast in that
sense?
Mr. Orszag. With those set of policy changes--and even the
medium-term fiscal outlook is not pretty. And I just come back
again to, regardless of whether you use the baseline or an
adjusted set of projections for the medium term, the long-term
fiscal picture is quite dismal.
Chairman Spratt. Thank you very much, Sir.
Mr. Ryan.
Mr. Ryan. Doctor--Director Orszag, let me just go with a
couple of quick questions first and then some other maybe
lengthier ones. In your macroeconomic forecast on GDP growth, I
think--in your table 2.1, you have 3.1 percent nominal GDP
growth in the first 5 years and then 2.5. In those growth
forecasts, do you project any macroeconomic feedback from
expiring--the expiration of tax cuts and the and the imposition
of AMT?
Mr. Orszag. There is, especially after the expiration of
the 2001 and 2003 tax legislation, some incorporation of the
effects on labor supply.
Mr. Ryan. On labor supply?
Mr. Orszag. 2011, 2012.
Mr. Ryan. How does that effect growth, nominal GDP growth
projections? Will it increase it or decrease it by much, if
any?
Mr. Orszag. It has a relatively small effect because there
are two offsetting things: Reduced marginal tax rates help to
encourage work and that boosts GDP. On the other hand----
Mr. Ryan. So you are saying your GDP numbers don't reflect
much change in your projection of economic growth based on the
expiration of these tax cuts?
Mr. Orszag. They reflect our best estimates of the economic
effects, which are small.
Mr. Ryan. Okay. So if we had the largest tax increase in
the history of earth, largest tax increase in the history of
our country, we don't think it is going to do much to change
the economy?
Mr. Orszag. Again, there are two offsetting effects. There
is the one that you are thinking about.
Mr. Ryan. The practical result, you are saying----
Mr. Orszag. On net. At least after--you know, after the
system is sort of--after a few years, I would not expect a
major--and I want to be clear about what we are comparing. We
are comparing a world with larger deficits and tax--a lower
level of taxes to a world with smaller deficits but higher
revenue.
Mr. Ryan. But in the current law world, which current law
says we are going to have about a $4.5 trillion tax increase
for 10 years starting in 2010, in that current law world, you
don't think it does much to affect the growth of the economy?
Mr. Orszag. That is our estimate, yes.
Mr. Ryan. Okay. Thank you. Your forecast on war
supplemental spending--and I know you have to just basically
peg this. You take--I am trying to understand what this year's
baseline is. It is $88 billion in war spending, which is the
last bridge fund; is that correct?
Mr. Orszag. Yes.
Mr. Ryan. And you carry that out for 10 years and have an
inflation adjuster in it as well?
Mr. Orszag. Right.
Mr. Ryan. So you are projecting that we are going to spend
$88 billion carried out through 2018 with inflation?
Mr. Orszag. Well, technically there is--we also have the
spend-out of previous appropriations that have not yet resulted
in outlays. But conceptually, yes. That is correct.
Mr. Ryan. Does that figure include some of the one-time
things like MRAD purchases? You know, we are not going to
continually buy, you know, $8 billion of MRADs every year. Does
that include these sort of one-time purchases in that figure?
Mr. Orszag. Yes. Whatever has been appropriated is
included; and whatever hasn't, is not.
Mr. Ryan. Okay. Let me turn to this--the talk about a
stimulus package. You are hearing a kind of a consensus emerge
it seems on both sides of the aisle, both from the
administration and leaders of both parties, that it ought to be
timely, targeted and temporary, the three Ts. I think that is
what--I think former Secretary Summers was the guy who coined
that phrase. Is transportation and infrastructure good stimulus
based on the three Ts?
Mr. Orszag. We ranked infrastructure spending in general as
small cost effectiveness, i.e., not good stimulus, because in
general those projects do not spend out very rapidly.
Mr. Ryan. What about State fiscal assistance, such as money
through a Medicaid program or things like that? Does that--how
does that rank in the three Ts?
Mr. Orszag. We rank that as medium in terms of cost
effectiveness. And the reason is, it depends on what States do
with the money. To the extent that providing a dollar to a
State causes a State not to raise taxes or not to cut spending,
that can turn out to be effective stimulus. But the States
currently are in much different fiscal positions. And so to
boost the cost effectiveness of State fiscal relief, you would
have to target the States experiencing the most fiscal
difficulty. And just a general program of fiscal relief would
not really do that.
Mr. Ryan. Okay. What about food stamps? Some have advocated
food stamp increases are necessary to spur the economy. Won't
there be a temptation to make the food stamp increase permanent
since that is kind of how we typically treat spending around
here? And can it really be designed to be temporary? And is
that, in your opinion, a great injection of timely, temporary
economic growth?
Mr. Orszag. Let me answer that in two different ways. The
first is, in terms of short-term stimulus, food stamp benefit
increases are relatively cost effective because you can get the
money out the door fast and the money will be spent.
You are raising a different set of considerations which are
for you and not for me, which is whether it is plausible that
having done that you would then reduce the benefit levels back
down to their previous levels. My understanding is that that
may be somewhat more plausible if it were done at the time when
the benefit levels are adjusted each year so that you just
don't increase them, for example. But I would have to defer to
you on whether that is, from a political economy perspective,
is viable.
Mr. Ryan. What about LIHEAP? Is that a good mechanism for
fiscal stimulus?
Mr. Orszag. In general, no. And the reason is that it is
difficult to significantly expand the program rapidly,
especially where we are in the winter season. I have seen some
proposals that very substantially expand it, and it seemed like
they are almost off by a decimal point.
Mr. Ryan. Unemployment assistance, your report notes that
extending unemployment assistance--assistance can keep
unemployment levels high. Is this an effective way--putting
aside the moral component of extending unemployment assistance
from the economic standpoint, is this an effective way to
address one of our major concerns in a weak economy, high
unemployment? Is that a good way to create jobs?
Mr. Orszag. From the perspective of short-term stimulus,
extending unemployment benefits or raising their level is
relatively effective, again, because it gets cash to people who
will spend the money quickly. There is a tension, though, as I
tried to highlight, between what is good short-term stimulus
and what is good long-term economic policy. And those kinds of
proposals may illustrate that point clearly because--especially
during periods of economic strength, extending unemployment
benefits or raising their level does increase the level of
unemployment. It is not so clear that that effect holds during
periods of economic weakness to the same degree. But that
illustrates the tension, something that might be good in terms
of boosting an economy when it is weak and getting money out
the door and having it spent rapidly may not be what you want
to do over the long term.
Mr. Ryan. And then one last thing. The baseline--I am
trying to get through the baseline. There is something that I
want to get at. The baseline--last month, we passed a--the
discretionary spending. We had the omnibus bill. And through
yesterday, you--it was scored as the top line being $933
billion. So I think most of us who voted for the omnibus
appropriations bill--I am not saying--I actually didn't vote
for it. But those of us who watched this process occur believe
that we spent $933 billion. However, my understanding is that
your baseline report shows an FY 2008 regular nonemergency
discretionary top line of $941 billion in budget authority, a
difference in $8 billion. And then you inflate off this higher
number in making out-year projections. Can you explain why
there is an $8 billion difference between the $933 billion
number CBO scored for FY 2008 appropriations and the amount you
are now showing in your baseline?
Mr. Orszag. The difference has to do with changes in
mandatory programs that are attached to appropriations bills.
In 2008, those changes in mandatory programs, or what is called
CHIMPS, totalled $7.8 billion. And that offset the
discretionary spending amounts. The gross discretionary
spending amounts, even the ones that were offset by those
CHIMPS are projected out in our baseline, and they do increase
our discretionary outlays over the next decade by about $85
billion.
Mr. Ryan. One of those bigger CHIMPS is highway authority;
correct?
Mr. Orszag. That is correct.
Mr. Ryan. And when we expire highway authority, is there
actually real cash savings to the government when that occurs?
Mr. Orszag. The savings are in the scoring process. They
show up in the scoring process. But because that activity is
actually governed by obligation limits, the practical impact is
unclear.
Mr. Ryan. Well, I think I have been liberal with my time. I
appreciate your indulgence, Chairman. But I think this is
something we ought to look at here in the committee. I think we
are plowing some hollow savings into this baseline and
inflating from there on out. I understand you have rules that
govern the way you do this. But I think this is something that
this committee ought to be cognizant of.
Thank you. I yield.
Chairman Spratt. Mr. Edwards.
Mr. Edwards. Thank you.
Dr. Orszag. I know your presentation today is focused on
long-term economic and fiscal policy and budgets. But with the
nation's eyes attuned to the present economic challenges we
face, let me just be clear that--do you basically agree with
Chairman Bernanke's testimony before this committee last week
that a tax stimulus in the range of $100 to $150 billion could
have a significant impact on minimizing or reducing the
economic downturn or perhaps even preventing a recession? Is it
large enough in a $14 trillion economy to have a significant
impact?
Mr. Orszag. As I mentioned--I should say, it need not just
be tax stimulus, but stimulus in general of about that
magnitude, if well designed according to our estimates, would
reduce the risk of recession from its elevated levels now to
somewhat more normal levels. So in terms of recession
insurance, that kind of magnitude, if that is what you wanted
to do, would be appropriate.
Mr. Edwards. It could be significant. Okay.
Let me adjust to long-term policy. In 1981, the country was
told during the Reagan administration we could have it all: We
could have tax cuts, defense buildup and balanced budgets. At
least David Stockman was honest enough, the architect of that
budget proposal, to admit later in a book that he knew that was
a dishonest promise to the American people. So what we got were
tax cuts, defense buildup, which was positive, but a
quadrupling of the national debt, I believe, in just over a
decade.
Fast forward two decades later, the country is told
essentially the same thing again: We can have massive tax cuts,
a balanced budget and even fight a war in Iraq and Afghanistan
as we have balanced budgets. The consequence is very similar to
what we saw 20 years ago. We fought a war. We had tax cuts, and
the promises of balanced budgets were so far off in their mark
it is--it is not even a close call.
Let me get the facts on the table. During the Bush
administration, this Bush administration, how much has the
national debt been increased?
Mr. Orszag. The national--the publicly held debt at the end
of 2007 was $5.0 trillion; at the end of fiscal year 2000 was
$3.4 trillion.
Mr. Edwards. So the publicly held debt is $1.6 trillion
increased during this administration. And the debt held to the
government is a legal debt; isn't it? What is the gross debt
today? Is it over $9 trillion?
Mr. Orszag. The gross debt is substantially higher, yes.
Mr. Edwards. What was--the gross debt today is $9 trillion.
When President Bush was sworn in, in 2001, what was the gross
national debt of the country?
Mr. Orszag. I don't know that I have that number. We will
get it to you in a moment.
Mr. Edwards. So probably a $2 trillion-plus increase; is
that correct?
Mr. Orszag. A significant increase, yes.
Mr. Edwards. All right. Let me assume it is approximately
$2 trillion. What is the average interest on our national debt
today? Is it 3 percent, 4 percent? What do we have to pay in
interest----
Mr. Orszag. Somewhere between 3 and 4.
Mr. Edwards. So if we said 4 percent, if my math is
correct, 4 percent times 2 trillion is an $80 billion a year
cost in interest payments just on the national debt that has
been accumulated by the economic promises and policies of the
last 7 years.
For the record, Mr. Chairman, I think that is more than we
spend on all student loan, Pell grant, public education
programs. And now, as a result of these economic policies of
the last 7 years, we now face a massive interest payment on the
debt. And I think--am I correct that interest payments on the
debt are some of the largest expenditures of our Federal
Government, out of thousands of Federal programs?
Mr. Orszag. They amount to more than $200 billion a year.
Mr. Edwards. Now, let me ask you finally, with not much
time left, some of those who were the architects of the
economic policies that led to--despite their predictions of
balanced budgets--a $2 trillion increase of the national debt
over the last 7 years, they are saying we ought to make
permanent all of the Bush 43 tax cuts. I want to ask your
opinion. If we made--Congress today made permanent all of those
tax cuts that are presently temporary and they were paid for by
borrowing, what would be CBO's projection on what the impact
would be on the national deficits and on the future economic
growth of the country?
Mr. Orszag. As I told Mr. Spratt earlier, the revenue
effect from extending the 2001 and 2003 tax legislation over
the next 10 years is a reduction of about $2.2 trillion. And
then, in addition to that, there is an interactive effect with
AMT. So you are looking at, say, $2.5 trillion or so in terms
of reduced revenue.
Mr. Edwards. Thank you.
Chairman Spratt. Mr. Barrett of South Carolina.
Mr. Barrett. Thank you, Mr. Chairman.
Dr. Orszag, thank you for being here today. Very sobering
information, but we greatly appreciate it.
I know you talked a little bit about the design of the
relief we are talking about--rapid, temporary, cost effective.
Ranking Member Ryan talked about targeted, timely and
temporary. And you really didn't mention anything specific, but
you talked in general terms. If there was a way we could
probably do some tax credits to stimulate immediately some,
long-term tax policies, some fiscal stuff and also address
spending in one package, does that make sense to address all of
these areas in some type of stimulus package?
Mr. Orszag. Yes, if it is feasible. I think an important
factor, though, is that we--we have seen significant reductions
in the Federal funds rate and in interest rates with a lag that
will start to affect the economy. In the meanwhile, there may
be a bit of an air pocket. And the question is whether there
can be an intervention that is timely in the meanwhile. So a
grand package is desirable. And as I have mentioned, our long-
term fiscal picture is not pretty. But there is a question of
timing that is also involved.
Mr. Barrett. I understand. But to address the long-term
fiscal soundness of the United States, all three of those need
to be addressed; correct?
Mr. Orszag. Yes. And, in fact, it would be desirable to do
them all together if that were possible.
Mr. Barrett. Gotcha. Thank you. You talked about health
care spending. And one assumption that you and many people talk
about is that policy will not change; the United States
Government will always provide current levels of Medicare and
Medicaid. And when you look at entitlement spending, it is one
of the fasting growing. Do you have any thoughts about the
relationship between government involvement in the health care
system, i.e., a federalized program or anything like that, and
the rapid inflating rate of the health care process?
Mr. Orszag. Rising health care costs are a problem in
general. And if you look over the past several decades, the
rate at which health care costs have grown in, say, Medicare
has been roughly the same as in the rest of the health care
system. I think a lot of the problems that face the public
programs, including skewed incentives for providers and for
beneficiaries and a lack of information, are also present in
the private part of our health system. And the two are kind of
interlinked in many ways.
Mr. Barrett. But is it possible that granting Americans
access to all of these could potentially give the demise of
these programs, though?
Mr. Orszag. We are on an unsustainable path. So something
is going to have to give. I don't know what it is. But
something has to change.
Mr. Barrett. Okay. Another assumption CBO makes in its
baseline is that the expiration of the tax--of the Bush tax
cuts in 2010. And again I know you said this about the taxes,
but is it your contention that in order to balance the budget,
the only viable solution is to raise taxes at this time?
Mr. Orszag. No, sir, I didn't say that, and I think, you
know, mathematically, spending is above revenue and you need to
bring them back--or projected to be significantly above
revenue. You need to bring them back in line. There are many
people on the outside who believe that--many analysts who
believe that movement on both sides will be necessary. But that
is a choice for you to make. And mathematically it can occur on
either side.
Mr. Barrett. So I guess, you know--and my last question is,
I just feel like when we talk about the government, we try to
be everything to everybody. And spending has to be reined in,
in some degree, to bring some fiscal sanity. When you look at
all the issues that we are looking with, Dr. Orszag, would you
say that the one issue that is probably the most important is
the amount of money that we spend as a Congress collectively?
Mr. Orszag. For our long-term----
Mr. Barrett. Long-term fiscal sanity so to speak.
Mr. Orszag. Yes. Or--and I would focus it even more
specifically on what we spend on health care, how much we are
getting in exchange for that and the rate at which that is
rising. That really dominates all else over the long term.
Mr. Barrett. Mandatory spending is what you are saying?
Mr. Orszag. Medicare and Medicaid in particular.
Mr. Barrett. Absolutely.
Thank you, Mr. Chairman.
Chairman Spratt. Mr. Cooper.
Mr. Cooper. Thank you, Mr. Chairman.
Dr. Orszag, first the short term, as I understand it from
your testimony, you are not forecasting a recession or a
negative rate of growth; you are forecasting slow growth;
right?
Mr. Orszag. Again, I would say the risk of recession is
significantly elevated, but our central forecast is for weak
growth. And I also would note I don't know that it matters that
much in terms of thinking about policy whether growth in the
first half of the year is plus .5 or minus .5 may not matter
that much. I mean, it matters obviously for households, and it
matters for other things. But in terms of thinking about policy
responses, it may not be a material difference.
Mr. Cooper. In terms of using fiscal policy to try to fine
tune the economy so that we will remain in a growth phase of
the economy, one of the key variables is how quickly we can get
money in people's pockets so that they can spend it. And as I
understand it, the IRS is saying we can't possibly get the
money there until June or July, and that would mean the money
couldn't be spent probably for a couple of months after that.
So that is a very remarkable policy lag in terms of
implementing any policy; isn't it?
Mr. Orszag. Yeah. And let me just pause for a moment on
this because I think some people look at the 2001 tax rebate
experience and how quickly money went out the door there and
conclude things about the current situation which may not work.
In particular, at that time, the IRS was basically done with or
was done with processing tax returns. It is currently in the
middle of processing 2007 tax returns, the same IT system and
the same people who process rebates are working on that. So,
basically, until the 2007 tax season is closed, the IRS really
can't turn in any significant way to processing rebates. That
means you are talking about mid-May to early June at the
earliest for checks to start going out, and then it takes 8 to
10 weeks to actually mail them.
Mr. Cooper. But that is using the government. Is there
another way to do it? For example, what if we were to look at
MasterCard or Visa or other credit cards? They have monthly
contact with their card holders.
Mr. Orszag. I guess one can imagine different approaches.
To the extent you are going to rely on tax information, which
has been central to many of the proposals that I have seen, the
IRS obviously then needs to be involved.
Mr. Cooper. How about the issue of offsetting? Does it make
sense to try to pay for the stimulus package, or should we add
it to our long-term deficit problems.
Mr. Orszag. As I noted, the Nation's long-term fiscal
imbalance is large and serious, and one should be very careful
to avoid exacerbating that. So, from that perspective,
offsetting any short-term stimulus, especially if it were done
out in year 5, 6, 7, what have you, would be desirable.
I would note, though, that if you are going to do a
stimulus, it makes sense to do it as fast as possible. So if
the cost of delay is offsetting $100 billion or $150 billion,
that may not be worth the benefit to the long-term fiscal
outlook to forgo a short-term economic opportunity.
Mr. Cooper. Shifting to the long term, you have described
our long-term outlook as, I think you used the word ``dismal.''
That is a pretty severe judgment. Many people in Congress have
been critical of the rating agencies, as they did not
anticipate the problems with the subprime lending crisis. But
last Friday, Moody's joined Standard & Poor's, which had done
this a year earlier in projecting that the U.S. Treasury bond
itself, not any CDO or minor instrument, but the most important
financial instrument in the world, might lose its AAA credit
rating.
So these rating agencies now are projecting dire
consequences, and now we are not wanting to pay attention so we
fault them for being too lax. Now we are not paying attention
when they are trying to focus our attention on our real, long-
term fiscal problems, as you noted in your excellent slides,
for example, focusing on the fiscal gap.
You point out that, as severe as the aging problem is, it
is not our major problem. The uncontrolled rise in health care
costs is a much larger component of our future problem. And, to
my knowledge, no committee in Congress is working on that
issue. None. You know, to the extent we are focusing on issues
like Medicare, we are talking about increasing spending, not
decreasing spending.
I know that you are emphasizing the CBO work in helping us
focus on these important issues so that we can go into the
health care sector and restrain this uncontrolled growth; but
as I think you have correctly pointed out in your testimony,
that is the central problem that we face, and this committee
should be focused not only on the short-term, but on these
dire, long-term issues. And it worries me when our good ranking
member says that deficits have dramatically declined--you know,
happy talk as if, hey, everything is fine for the time being,
when it is clearly not either in the short run or in the long
run.
And if my colleagues would focus on Director Orszag's
excellent charts. For example, on page 2, if you look at our
deficit, including the Social Security surplus that has been
borrowed, you will see that the deficits are in fact not $163
billion or $219 billion, but more like $344 billion and $414
billion. And my colleagues need to remember that this is using
cash accounting, too. This is not using the real accounting
that we require everyone else in America to use, private
business, State and local government, but that we have exempted
the Federal Government from.
So I would hope that our colleagues could focus on the
dismal situation that the Budget Director has described.
I see, Mr. Chairman, that my time has expired.
Mr. Orszag. Mr. Chairman, could I just quickly respond to
an earlier question, and get back to Mr. Edwards that the
increase in gross Federal debt--not public debt, but gross
Federal debt--between the end of 2000 and the end of 2007 was
$3.3 trillion.
Mr. Spratt. Mr. Lungren.
Mr. Lungren. Thank you very much, Mr. Chairman. I will try
and respect the admonition of Mr. Cooper to avoid happy talk.
I must take some small exception to Mr. Edwards' comment
about the dishonesty of those of us who were here 20 years ago
and working on an effort. As a matter of fact, the Reagan
administration at that time attempted to have some structural
changes with respect to mandatory spending, which were defeated
in the House of Representatives. Virtually every single budget
that was brought forth by that administration was exceeded by
the Democratically controlled house.
So we were not being dishonest; we were working in earnest
to try and solve the problems at that time. And I am not sure
that kind of language helps at all.
Mr. Orszag, here is my question. I think the United States
was established with a skepticism toward government so long as
it is not cynicism. So I will try to be skeptical without being
cynical.
Mr. Orszag. Okay.
Mr. Lungren. My question is this. If you have said that it
is the position of our office that we are going to have
sluggish growth and define that as 1.7 percent growth in GDP--
and you say the other outsiders are talking about 2 percent--if
in those instances it is necessary for us to have a stimulus
package, we are not in a recession as you suggest. Is that a
rule of thumb for the future, that when growth is only 1.7
percent to 2 percent, that we need a stimulus package?
Mr. Orszag. What I would say is that growth during the
first half of 2008 is likely to be significantly weaker than
that.
Mr. Lungren. But you said we are not going to be in a
recession. That is your best judgment. If we are not going to
be in a recession, is this establishing a new cornerstone for
us that when we have weak growth, such as you suggested short
of recession, that lays the groundwork for the necessity of a
stimulus package?
Mr. Orszag. Let's hypothetically say that growth is going
to be a half percent during the first half of 2008. That is
substantially below the potential growth rate of the economy.
It is up to you to decide whether you want to intervene in that
situation. But if that is the central estimate, the risk of a
recession is elevated relative to normal economic conditions.
I would make one other quick point, which is, it would be
desirable, given that it takes a long time to decide these
things, that if the Congress wanted to intervene in those kind
of situations, to bulk up the automatic stabilizers so that
things happen automatically, rather than requiring targeted
fiscal stimulus, even if one wanted to intervene in those kinds
of situations.
Mr. Lungren. But you are suggesting that even if we act
quickly here, the process takes so long it would really take a
while for a spendout to take place?
Mr. Orszag. There are only a limited number of options for
you to affect economic activity during the first half of 2008.
Mr. Lungren. Maybe we ought to put General Petraeus in
charge. He seems to get things done pretty quickly.
Mr. Orszag. There are a lot of options.
Mr. Lungren. I am trying to figure out where we are going
with this in terms of the philosophy involved.
The suggestion that you have made is that we need to get
that money spent and spent quickly. And I have heard others on
the other side of the aisle to suggest that means that it ought
to be in the hands of those who are in the lower economic
sector rather than the upper sector, because they are more
likely to spend the money rather than to save it.
And so I am trying to figure out, what is a stimulus
package based on tax rebates that you think would be most
effective in the short term?
Mr. Orszag. Again, if the objective is to boost aggregate
demand--by the way, I should say, the experience with the 2001
rebates was actually more auspicious than previous studies
would have suggested; that is, they resulted in a larger kick
to short-term economic activity than I think we would have
expected based on the experience with earlier rebates.
The evidence from that experience, though, also does
suggest, which is in line with economic theory, that as you
move down the income distribution of recipients, the share of
the rebate that was spent went up. And among recipients who
were more credit constrained, who had exhausted more of their
credit card limits or had lower credit card limits, spending
was also a higher percentage of the rebate.
Mr. Lungren. Now, let me ask you a question, just
specifically economically. If I were to present you a plan to
say, let's keep the current tax rates, marginal rates, at 10
and 15 percent, where they are, but adjust the 25 percent rate
to 28 percent, the 28 percent rate to 31 percent, the 33
percent rate to 36 percent, and the 35 percent marginal rate to
39.6, would you call that a tax increase if I were to present
that to you as a plan?
Mr. Orszag. That would be an increase relative to the
alternative scenario that you were presenting.
Mr. Lungren. So, yes, that is a tax increase?
Mr. Orszag. Do you really want to drag me into this
semantic game?
Mr. Lungren. Well, no. But I am trying to figure out--to
me, that sounds like a tax increase. To the average person, it
does. I want to know what an economist says.
Mr. Orszag. If you are comparing two scenarios, one with a
35 percent marginal tax rate and one with a 39.6 percent
marginal tax rate, the 39.6 percent marginal tax rate is
higher.
Mr. Lungren. Thank you.
Mr. Spratt. Ms. Schwartz.
Ms. Schwartz. Thank you, Mr. Chairman.
I wanted to follow up on, actually my colleague here, Mr.
Cooper, some of his questions and comments about health care
costs. And we have obviously had this discussion here in the
Budget Committee with you a number of times. And I wanted to
say that, clearly, I think many of us are concerned about, long
term, the cost particularly of Medicare.
And I would just take a little bit of exception in the fact
that we haven't done anything. Certainly, on Ways and Means, we
did look to--it did not get done by the Senate yet, but we did
look to try to take what we considered overpayments under
Medicare Advantage to Medicare HMOs and redirect that in ways
we thought would be smarter spending, prevention, and obviously
some payment to physicians.
You don't need to comment on that, but I just wanted to say
that we are certainly well aware of the need to tackle the
rising costs and are having serious discussions about
comparative effectiveness and ways that we can contain costs
without limiting access to needed health services for our
seniors. I would like to see us move in that direction, if we
could; and there are some ideas, like electronic medical
records and e-prescribing, that we know not only save lives but
save money.
So I would hope that together we can work on some of those
issues so that we can contain costs but still get quality care
to people. But I did want to follow up on some of the concerns
about health care.
Certainly, in the economic downturn--and I hear from
families all the time in my district about the rising cost of
health care to them, the fact that they are seeing a greater
share of the premium that they have to pay, even in employer-
sponsored health care. I certainly hear from businesses that
are saying that they can't increase wages because of the costs
of health benefits. We do know that we have seen employees have
to pay almost $1,500 in their share when they are covered by
the employers. And, of course, most recently, we have seen a
report that says 700,000 to 1 million children could be
uninsured as a consequence of the economic downturn that we are
now in.
So given that you have, and certainly Ben Bernanke, the Fed
Chairman, did last week make it very clear that what we ought
to be doing if we do a short-term stimulus--not a long term
now, but a short-term stimulus--is to put dollars in the pocket
of low- and middle-income folks who will then spend it, as a
short-term spending and increase in demand.
Could you comment on whether, in fact--as families are
seeing the high costs of health care, whether they spend the
dollars on, say, health care premiums, or whether they spend
the dollars to keep their health coverage if they are doing
without employer help; if they are spending it on COBRA because
they have been laid off; or if they are spending it on other
everyday needs that they have, mortgage payments, debt? Does
that make a difference versus spending it on other kinds of
goods and commodities?
Mr. Orszag. To a first approximation of what goods and
services the money is spent on doesn't matter very much. There
can be some differences. For example, one of the things we
noted in our stimulus report is, to the extent that the
additional spending disproportionately comes from imports, you
attenuate the stimulative impact on domestic production. But to
a first approximation, the mix of spending doesn't matter as
much as the aggregate amount that you induce.
Ms. Schwartz. That is good. That is exactly what Ben
Bernanke said.
So we are good. So we are on the same page there, which is
good, because I think a lot of families, actually, to the
degree we might want to suggest that they may have to pay off
credit card debt, pay mortgages, stay in their homes, be able
to pay for health care costs, it is certainly something we want
to do.
Let me just ask you for another comment, if I may, on the
broader topic. You said this in your testimony. We are very
clear--so this is something we are trying to work in a
bipartisan way--that we want to not only target these dollars,
however we get them out to families so they will use it on
spending, but we also want to do enough to have an effect on
spending in the economy in the short term. Again, this is only
short term, not long term. But we also are committed to not
adding to the debt, to the national debt.
Some of us are really quite concerned and have really
spoken out about the need to balance the budget. And as we set
an example for American families, we know that we have to pay
down our debt, we have to be able to start to have our income
match our spending, however we do that.
So might you want to talk about how much we--how far we
could go, and the fact of whether or not we have to commit to
paying for whatever economic stimulus package we put forward in
the short term.
Mr. Orszag. Well, first let me say, if you were going to do
economic stimulus, it doesn't make sense to offset the cost in
that year, because that undermines the very purpose of what you
are trying to do.
There is no reason why you couldn't, though, from a short-
term stimulus perspective, offset the costs in year 6 or 7 or 8
or 9. That does not diminish the effectiveness of the stimulus
in this year and, in fact, could under some scenarios help to
accentuate it.
I would come back, though, to say time is of the essence
here; and if you are going to act, it is important to act
quickly so that you don't miss your window. And if the price of
obtaining those offsets is a very substantial delay, that is
probably a trade-off that, from an economic perspective, is not
a good one to make.
Ms. Schwartz. And I think my time is up. But certainly I
think what has become very, very clear even as we talk about
the short-term stimulus, is that in the long term any tax cuts,
any kind of work we do on tax policy has to be paid for as
well, that that has an effect on our budget and obviously has
an effect on the economy.
Thank you, Mr. Chairman, and I yield back.
Mr. Spratt. Mr. Campbell.
Mr. Campbell. Thank you, Mr. Chairman.
Thank you, Dr. Orszag.
Looking at your projection, even with the slower economic
growth that you are showing, we are showing slower revenue
growth, but it still is revenue growth I think of 3.4 percent
year over year. Does it follow then that if total Federal
spending were held to 3.4 percent growth, that there would be
no increase in the deficit in this coming year?
Mr. Orszag. Not quite, because you are starting off with
spending higher than revenue, so it magnifies a little bit, but
not a big increase.
Mr. Campbell. Okay. If you were to hold Federal spending
growth to 3 percent or 2.9 percent, then the deficit would
decline?
Mr. Orszag. Something like that, yeah.
Mr. Campbell. And if total Federal spending were held even,
in other words, no increase over the prior year, we probably
would be in surplus?
Mr. Orszag. Yes.
Mr. Campbell. Is that correct?
Mr. Orszag. I would imagine so, yes.
Mr. Campbell. Okay. Thank you.
Now, switching to the stimulus package. If we were----
Mr. Orszag. Actually, not quite.
Mr. Campbell. Oh, not quite?
Mr. Orszag. Very close.
Mr. Campbell. You are just doing the math on the back of an
envelope?
Mr. Orszag. Yes. Very close. Not quite.
Mr. Campbell. So at zero it would be--at no increase in
Federal spending, if we held Federal spending the same as last
year, then probably no deficit, or close to even?
Mr. Orszag. Yes. Again, this is keeping net interest,
things that won't happen. But you would be certainly under $100
billion. Something like 70 or 80.
Mr. Campbell. If we were to pass--if this Congress were to
pass and the President were to sign a stimulus package that
included revenue, tax provisions or spending provisions, or
some combination thereof, in areas in which you felt they were
reasonably effective, would you then be revising this estimate
to increase GDP growth and/or lower unemployment and/or
increase nominal revenue?
Mr. Orszag. What I would say is that in periods like today,
where the economic conditions are potentially changing rapidly,
we will monitor the situation carefully. And there have been
times in the past when, during our reestimate of the
President's budget, we have updated our economic projections;
and will reach a judgment as to whether that is warranted in
this situation.
Mr. Campbell. Because I am sure you can tell where we are
going here.
If we were to pass something that is intended to stimulate
the economy, then one would presume we should project that it
was going to, in fact, stimulate the economy or we wouldn't do
it. And if it does stimulate the economy, GDP should go up,
unemployment should go down, from your projections, and revenue
from the nominal basis should be higher.
Mr. Orszag. I am sorry. Were you asking about the scoring
of the proposals?
Mr. Campbell. Yes.
Mr. Orszag. Oh, I see.
Mr. Campbell. Well, the scoring of the proposal, but
overall.
Mr. Orszag. Let's separate the scoring in which those kinds
of feedback effects would not be taken into account, and then a
subsequent evaluation by CBO, including potentially updating
our economic baseline.
Mr. Campbell. So when you score the proposal, you don't
take that into account?
Mr. Orszag. That is right. That is correct.
Mr. Campbell. But then would you then--which again, then,
basically we are assuming that the stimulative package will
have no stimulus; ``if'' is essentially what that assumes.
Mr. Orszag. In the scoring rules, that is correct.
Mr. Campbell. In the scoring rules.
So would you then revise somewhere, so we could get some
idea of what you think might happen?
Mr. Orszag. We have done dynamic analysis or basically the
macroeconomic feedback effects of major proposals. And I
suppose that if there were a major fiscal stimulus proposal and
you wanted us to evaluate what the macroeconomic impact would
likely be within some range, we could provide that information
to you.
Mr. Campbell. Okay. Then the last question I have is, there
is all this talk now about a rebate package, and there has been
a lot of discussion here this morning about how we can get
consumers to spend it quickly.
This downturn we are in was not consumer led, it is credit
led. And, arguably, you and others have said here, gee, our
saving rate isn't high enough, that sort of thing. Arguably,
you could say part of the credit leading is that some consumers
at least borrowed too much, borrowed money they couldn't afford
to pay back, et cetera, et cetera.
Why would we not want to do some stimulative package, where
we are encouraging and telling people to save and invest that
money or pay down debt on that money, because that is what
caused the crisis, not a lack of spending?
Mr. Orszag. I guess I would say two things. I think most
fundamentally there is this tension between what we need to do
over the medium and long term, which is, we need to raise our
national savings rate. And what is most appropriate where the
economy is weak and we have goods and services that could be
produced, but won't be because there is not sufficient demand
for them, that is a very unusual circumstance for the economy
to be in, or a relatively unusual circumstance. And the tension
is that what is appropriate in that kind of unusual
circumstance is often exactly the opposite of what we need to
be doing in the medium and long term.
And figuring out how you would do what might be appropriate
now and then transition to what would be appropriate in the
long term is very tricky. How do you convince households that
they should spend more now but, oh, no, you should start saving
a lot more next year and the year after, is in some sense the
ideal economic policy, but it is very difficult to do in
practice.
Mr. Spratt. Mr. Doggett.
Mr. Doggett. Thank you very much. I am impressed with the
remarkable consistency of all of the economists who have come
to testify about the stimulus; and I think that perhaps that is
the result of the fact that, as you have referenced in your
testimony, we do have substantial experience with what has an
effective stimulative effect for the economy and what does not,
and we have substantial academic studies now in that area.
First, is that correct, that there are many studies and
experience with several different attempts to stimulate the
economy?
Mr. Orszag. That is correct.
Mr. Doggett. And the first area in which every economist
who has come to this committee has agreed, and you have
reiterated it this morning, is that there is no reason we can't
have substantial stimulative effect and pay for this within the
PAYGO rules.
Mr. Orszag. That is correct.
Mr. Doggett. Indeed, you just indicated to Ms. Schwartz
that it could actually increase--or ``accentuate,'' I believe
was your term--the stimulative effect to pay for it within the
PAYGO requirements.
Mr. Orszag. That is correct also.
Mr. Doggett. And the only caveat you have offered is if we
have some people who are so wed to their borrow-and-spend
ideology that they refuse to pay for it, you say, don't let
that hold you up; go ahead and get it approved, because it is
important to act promptly if we are to get this recession
insurance.
Mr. Orszag. Correct.
Mr. Doggett. As far as the size of the stimulus, there also
seems to be some consistency in that area. The first people who
urged that we take action, the Democrats, recommended something
under $100 billion in the size of this stimulus. When I asked
Chairman Bernanke last week what he saw as being too much, too
excessive a stimulus, I think he put a cap of about $150
billion. I know the President has said about $145 billion.
If you begin to exceed $150 billion now, I am concerned
that this will balloon out of control. Will it be
counterproductive?
Mr. Orszag. It could be. And especially if you do things
that are not only expensive, but don't really kick in until
late 2008, early 2009, mid-2009.
Mr. Doggett. Too much and too late.
Mr. Orszag. Stimulus delayed is stimulus denied. You do not
want to be adding fuel to an economy that may well be growing
rapidly by 2009.
Mr. Doggett. And you have indicated in your testimony today
and yesterday--and it has cut across the parties, but that some
things that may fit an ideological framework, whether it is
building a bridge or a tax cut for the rich, they just get
there too late and they have too little stimulative effect to
make much difference.
Mr. Orszag. We went through lots of different options in
the stimulus report we prepared for this committee.
Mr. Doggett. And that report is very helpful, and just to
highlight some of its findings: Based on all of the academic
studies, if we really wanted to have the maximum bang for the
dollar and stimulative effect, this afternoon we would approve
an extension of unemployment benefits on a temporary basis and
an expansion of food stamps on a temporary basis, wouldn't we?
Isn't that what you found to be the most effective?
Mr. Orszag. Those were among the options that were ranked
with large or high bang for the buck or cost effectiveness.
Mr. Doggett. And they will get the dollars out and
stimulate the economy quicker and more effectively than any tax
rebate scheme that you have heard of.
Mr. Orszag. The administrative challenges on the tax side
for individuals are significant.
Mr. Doggett. Because even under the best scenario, those
tax dollars are not going to flow until sometime--and begin to
be spent until sometime in the middle of the summer.
Unemployment benefits, food stamps could be spent now.
Mr. Orszag. The information we are receiving is that
changes to that employment insurance system or to the food
stamp program could result in additional benefits for
households within, say, 2 months, and that is faster than a
rebate.
Mr. Doggett. If, since the President wants nothing but tax
rebates to date, that is the direction in which much of this
stimulus goes, and we adopt a very inefficient tax stimulus and
go in that direction. Chairman Bernanke said focus it on low-
and moderate-income families. Some people have forgotten what
that is and think that means buddies at $100,000, $200,000,
$300,000 a year in income. He said that $49,000 is the median
income, and perhaps you go into the mid-50s.
But do you believe, to be most effective, if you have tax
rebates, they should be focused on low- and moderate-income
families?
Mr. Orszag. That would get you more short-term demand for
any dollar you spend.
Mr. Doggett. And as far as the various corporate tax breaks
that some have advocated, who worship at the altar of tax cut
salvation, those--of all the various schemes that have been
advanced to give another tax break to corporations, which ones
appear to be the least efficient and which ones have the most
potential to stimulate?
Mr. Orszag. The least efficient options for short-term
stimulus appear to be things like a reduction in the overall
corporate tax rate, because a significant part of that is a
payoff to existing investment or existing capital as opposed to
an incentive for new capital investments.
The theory behind temporary investment incentives like
bonus depreciation or a temporary investment tax credit is
sound. It creates an incentive for firms to accelerate their
investments that they were going to make in 2 or 3 years into
the short term, and that can be beneficial.
The experience with the 2002 and 2003 bonus depreciation
provisions was somewhat disappointing relative to what we had
expected and hoped for and what we would have thought based on
that theory, so at least some caution is warranted. Basically
left with, there is a good theory and in fact you could even
supercharge the incentives by applying it only to investments
above some historical level so that it is an incremental
incentive.
But the most recent experience didn't turn out so well in
terms of encouraging more investment. It may be that the
situation now is different, and you could get more impact from
those provisions than we experienced several years ago.
Mr. Doggett. Just one clarification on that last point,
just so that it is crystal clear.
If we have to--even though it is not as effective as the
other approaches, but if we must include into this package in
order to get bipartisan support for it, some type of business
or corporate reduction, what is the best way to do it?
Mr. Orszag. The best way to do it, if it could be done
administratively quickly, would be either an investment tax
credit or bonus depreciation for new investment above some
historical threshold--I am making this up: 90 percent of the
average over the past 3 years.
The question becomes whether the benefit of doing it
incrementally is worth the administrative complexity. But
generically, temporary investment incentives, either bonus
depreciation or investment tax credit, rank among the highest
options for cost effectiveness on the corporate side.
Mr. Spratt. Mr. Hensarling.
Mr. Hensarling. Thank you, Mr. Chairman.
One of the most renowned economists of our time, Nobel
Laureate winner, Dr. Milton Friedman, in his writings, spoke of
a permanent income hypothesis. And I see your head nodding; I
assume you are familiar with the hypothesis, which essentially
said that consumers do not fundamentally change their spending
habits based upon small differentials in their income. In
short, you cannot convince people they are richer than they
are.
As I look at the histories of the 2001 tax rebate plan,
which I believe was most important in helping consumers pay
their bill--and I always champion the cause of giving taxpayers
more of their tax money, but isn't it true that almost 2 years
after that rebate plan, that the economy was still losing jobs,
that the stock market had plummeted and business investment had
still not turned around?
Mr. Orszag. Unemployment peaked in 2003.
Mr. Hensarling. Wasn't it also true--my reading of the
history is that it wasn't until the 2003 tax relief that
signaled to the economy, that signaled to businesses, small
businesses, entrepreneurs, that we actually cut rates, which
was different from a temporary tax rebate?
We cut tax rates, we cut marginal tax rates, capital gains,
dividends; and then what we saw was almost 5.3 million new jobs
created within 18 months of those reductions, and a stock
market leap of 32 percent.
I mean, doesn't the evidence suggest that you cannot fool
enough people into thinking they are richer than they are, and
that if you truly measure economic growth by, first, keeping
your job and then, second of all, having even greater job
opportunities with greater upside potential, that we need to
signal to those who create jobs that they can count on lower
tax relief as opposed to the threatened tax increases that we
see today?
Mr. Orszag. Let me come back first to the 2001 rebate. We
need to remember that the aggregate size of the rebate was
under $40 billion, and the evidence does suggest that that $40
billion or so did cause a spike in economic activity. And on
the permanent income hypothesis, one of the reasons, in fact,
one of the leading----
Mr. Hensarling. I am sorry, Dr. Orszag, but let me
interrupt you on that point, because what I did, when I viewed
the statistics, I saw that consumer spending did rise
temporarily with the rebates.
But my reading is--is that capital investment spending fell
by roughly a corresponding amount, leaving no net infusion into
our economy. Do you have a different reading?
Mr. Orszag. Yes. My reading would be that there was this
very substantial capital overhang that we went into 2000 and
2001 with, and that investment was going to be relatively weak
and that the partial effect of the rebate was to boost economic
activity.
And I want to just briefly mention, on the permanent income
hypothesis, one of the reasons--in fact, the leading reason--
why people believe, or economists believe, that targeting
credit-constrained households is the most effective way of
targeting a temporary tax change is precisely that for those
households, the permanent income hypothesis doesn't apply
because they can't borrow against their expected future income.
And so changes in temporary income do result in changes in
their spending pattern, more so than for permanent income
hypothesis households.
Mr. Ryan. Would the gentleman yield?
Mr. Hensarling. Yes. I would be happy to yield.
Mr. Ryan. Director Orszag, isn't it the case that in 2001
that was not a temporary increase?
Mr. Orszag. Yes.
Mr. Ryan. The rebates were forward; on permanent or long-
term reductions in marginal income tax rates, you simply got
the reduction of the tax rate forwarded. So it is kind of an
apples-to-oranges comparison to today's proposals of temporary,
one-shot rebates to 2001's lower permanent reduction, correct?
Mr. Orszag. Yes.
Mr. Ryan. So people more adequately thought their take-home
pay would be higher, given they were going to experience lower
tax rates going forward than what we are discussing today,
correct?
Mr. Orszag. As we noted in the stimulus report we prepared,
the experience with the 2001 rebate seems different from the
studies of earlier rebates; and one reason may be that, as you
note, it wasn't a purely temporary thing. It was basically an
advance payment on tax changes that were scheduled to occur.
Mr. Hensarling. I yield back. Thank you, Dr. Orszag.
Mr. Spratt. Mr. Blumenauer.
Mr. Blumenauer. Thank you, Mr. Chairman.
I appreciate, Mr. Orszag, your description about the
tension between the short-term stimulus and some of the long-
term structural problems that the economy faces, one of which
is clearly an entitlement deficit that we are concerned about.
There are other deficits that actually have severe
consequences. A deficit in terms of infrastructure investment,
where we probably have a gap as large as any in the world with
our international competitors in China, Japan, European Union.
We are also looking at some fundamental weaknesses, and this
has come out in the hearings; I appreciate your help in sort of
guiding us through.
But one of the things that concerns me is a fundamental
weakness now because of what is happening with this spreading
housing crisis, where we had regulatory sleepwalking, people
asleep at the switch where housing in this frothy market was
used as an ATM to drive spending. Gone now. Housing values are
lower. They are likely to be lower still next year at this
time, and we are going to have hundreds of thousands of people
losing their homes.
I think it is appropriate that we do move forward with some
stimulus activity, and I am mindful of what you said about that
tension between the short-term and our long-term needs. In that
connection, I guess I would like to put two items on the table
for you to react to for us.
There is an emerging industry in this country where we are
trying to--in alternative energy, wind energy for instance, we
have a production tax credit scheduled to expire this year; and
because it is scheduled to expire and we haven't renewed it,
people are cutting, starting to cut back now on investments.
And if you talk to the industry, they are basically going to
shut down in the next 2 months because they can't make those
long-term investments on the possibility that we are going to
renew the production tax credit.
We are looking at, for the first time in history, a deficit
in the highway fund--never happened before. There is no
borrowing authority, so that means real reduction. And because
of the slow payout rate, that means, say, a $5 billion
reduction in the Highway Trust Fund, translates into maybe $20
billion in contract authority. Both of these can have
significant ripple effects for the economy, are going to have
significant ripple effects.
I am wondering about your assessment of whether we could
include something like extending that production tax credit,
which we are likely going to do before the year ends anyway, to
avoid the slowdown in the economy. It would be in that window
that you talked about, within 2 months and--the potential of an
infusion in the highway fund to make sure that we don't have
disruption of that engine machine in terms of infrastructure.
Could you comment on either of those: The impact that we
are likely to see further economic downturn because of the
uncertainty, and the potential of investments that could help
strengthen what happens in the next 6 months?
Mr. Orszag. I guess, first, let me just say in general on
the tax incentives side, trying to target the tax incentives to
particular types of investments in the short term probably is
not ideal from a short-term stimulus perspective. You may well
have longer-term objectives that one could meet, but in terms
of overall effectiveness, trying to pick out particular
industries that you are going to try to encourage in the short
term is probably not as wise as just providing a broad-based
and, ideally, incremental, if it can be done administratively,
investment incentive.
On infrastructure spending and especially on some highway
spending, infrastructure spending, as I said before, in
general, spends out very slowly and so is not an ideal short-
term stimulus. There are some subcomponents of infrastructure
spending, for example, road resurfacing, where the spendout
rates tend to be higher. The challenge is whether you can pick
out those specific projects or those specific types of spending
quickly and get the money out the door quickly. And I think
there is at least some skepticism among budget analysts in
general about whether that can be done in a timely and
effective manner.
Mr. Blumenauer. Mr. Chairman, I would like to work with
your staff and Mr. Orszag to be able to zero in on the
consequences of these items that I raised in terms of the
depletion of the Highway Trust Fund and the disappearance of
something like this production tax credit, in terms of what the
economic impact is going to be if they are not remedied.
Mr. Spratt. We will do that particularly in conjunction
with the budget resolution, which is on a fast track this year.
Mr. Blumenauer. Thank you, sir.
Mr. Spratt. Thank you.
Mr. Tiberi.
Mr. Tiberi. Thank you, Director. Mr. Cooper brought up
Medicare, and you have talked about the costs associated with
that, with Medicare and with health care. And this is not a
``gotcha'' question.
Today we are discussing SCHIP on the floor of the House. I
have supported that bill, the Democrat bill.
A physician lectured me back in Ohio about Medicare and us
not tackling Medicare; and that we were making matters worse
with this SCHIP bill in the way that we were paying for it with
tobacco taxes, and rather than solving problems in the health
care area on costs, we were adding to our long-term fiscal
problems on the health care side.
What is your view of that? I haven't heard you talk about
SCHIP related to Medicare related to the costs.
Mr. Orszag. I guess I am a little bit confused. The
assertion was that a higher tobacco tax exacerbates our----
Mr. Tiberi. Well, a higher tobacco tax is a revenue source
that has been and will continue to deplete as there are fewer
and fewer smokers in America, which is a good thing----
Mr. Orszag. Right. The Joint Committee on Taxation, when it
does the revenue estimates, tries to take that into account, so
the revenue streams that are associated with a change in policy
include the behavioral response of people smoking less as a
result.
Mr. Tiberi. But a broader picture, Dr. Orszag. You concur
that we have not--as a society, as a government, as a health
care industry--got our arms around the increasing costs of
health care. Whoever is paying for those benefits, whether it
is government, whether it is business, it continues to rise
exponentially. And you continue to say--I don't want to put
words in your mouth--but that will continue to occur in the
future. And so if we struggle as policymakers here with that
issue, and it complicates the future of Medicare funding, how
does it complicate the future of Medicaid and SCHIP funding if
we pass this bill, which I support?
Mr. Orszag. The legislation would raise SCHIP funding. I
mean, I guess that is in some sense the objective.
Mr. Tiberi. How does that contribute to our long-term
fiscal and--when the Federal Government is taking the largest
responsibility for paying for that program?
Mr. Orszag. I guess I would say, at least officially, that
that legislation is scored as having a net budget impact of
roughly zero. There are questions that have been raised about
the----
Mr. Tiberi. Long-term?
Mr. Orszag. The time profile in the outyears of the assumed
SCHIP funding. In general, we are spending as--the policy
community is spending a lot more time focused on covered
questions in health care than on cost containment or trying to
bend that curve; and ultimately, we are going to have to bend
the curve.
Mr. Tiberi. You do think we will have to bend the curve?
Mr. Orszag. Something that can't go on forever won't.
Mr. Tiberi. Thank you.
With the issue of scoring, if you could clear this point up
for me from your perspective, the question is, does CBO have a
bias toward a pro-spending budget? An example, if you can
answer this question, is in this document that you have.
You assume that the expiration of the tax cuts will occur,
and it occurs. Yet, on the spending side, the Reconciliation
Act that was passed last year dealing with Pell Grants expires
in 2017, but you assume that that expiration will not occur,
that it continues.
Why, on a program area, do you assume it will continue, but
on a tax area, you assume it will not continue?
Mr. Orszag. Let me first say that in general I think a lot
of the commentary about the imbalance between how revenue and
spending is treated misses the observation that there is an
integrity between the baseline and the scoring process.
However, the example that you cite is a good example of an
imbalance. When you adopt a new program or a change in a
program and that, even if it expires within the budget window,
it is assumed to be extended. When the window rolls forward,
that additional year of expenditure, to the extent it's
included in the baseline, has not been part of the scoring
process, but winds up in the baseline; and that does not occur
on the revenue side, and that is an inconsistency in the rules
that govern the scoring process.
That particular decision was made after consultation with
the Budget Committees, and so I obviously leave up to your own
internal deliberations how you decide the guidance that you
give us on those particular cases where it is ambiguous what
should happen.
Mr. Tiberi. And, in America, I assume that is a pro-
spending bias?
Mr. Orszag. In that particular case, that spending program
was treated more favorably than most revenue things would. I
would note, though, there are things on the tax side that are
treated similarly. In particular, taxes that are dedicated to
trust funds have a similar type of system associated with them.
Mr. Tiberi. Thank you, Director.
Mr. Spratt. Mr. Scott.
Mr. Scott. Thank you, Mr. Chairman.
Thank you, Dr. Orszag, for being with us. I just want to
make a couple of observations to put things in historical
perspective.
In 2001, we had a surplus that exceeded Social Security,
and we were talking about a lock box to keep Social Security
surplus for Social Security. This year, you have listed the
deficit as $219 billion so far. Does that include spending
almost $200 billion of Social Security surplus?
Mr. Orszag. Yes.
Mr. Scott. And then you go additionally another $219
billion in the hole?
Mr. Orszag. That is correct.
Mr. Scott. Now, in 2001, it looked like we were going to be
able to pay off the entire national debt held by the public by
2008, and all debt paid off by 2013. Is that your recollection?
Mr. Orszag. Something like that, yes.
Mr. Scott. And that would mean we would be paying zero
interest on the national debt by 2013. By 2013. You say we are
starting off with about $200 billion a year in interest right
now?
Mr. Orszag. A little bit above that. Yes, 230.
Mr. Scott. Okay. And if we continue, the Bush agenda would
add almost $100 billion more interest on the national debt by
2013?
Mr. Orszag. It would add, I am sorry, how much?
Mr. Scott. 94. An additional $94 billion?
Mr. Orszag. That sounds plausible to me. I believe that is
off Mr. Spratt's scenario. Yes. That includes a variety of
policy changes beyond extending the tax legislation.
Mr. Scott. Right, but the expected agenda, you would add
another--so that would be almost $300 billion in interest on
the national debt by 2013 rather than zero?
Mr. Orszag. In our--you are comparing now to the 2001
projections? Okay, yes.
Mr. Scott. At $300 billion, how many people can you hire at
$30,000 each? Is that about 10 million?
Mr. Orszag. Yes.
Mr. Scott. How many people are unemployed today?
Mr. Orszag. The unemployment rate is about 5 percent. So
something--7.5 million.
Mr. Scott. Seven and a half million unemployed at $30,000
each. With the interest on the national debt, we can hire 10
million people, just putting the numbers kind of into
perspective.
Mr. Orszag. But of course, that wouldn't actually occur.
Mr. Scott. That's right. Okay, but just to put the numbers
in perspective.
Mr. Orszag. Okay.
Mr. Scott. Now, you exhibited a little reluctance to get
into semantics about whether or not you cut taxes and then
restore the taxes right back to where they were, whether or not
the restoration would count as an increase.
How about if you lose 2 million jobs and then people get
their jobs back, whether or not that counts as a creation of 2
million jobs?
Has any administration done worse in job creation since
Herbert Hoover than this administration?
Mr. Orszag. Economists don't normally measure job growth by
administration. Job growth has been relatively weak over the
past few years for this stage of the business cycle.
Mr. Scott. Now, we heard about this robust stock market. If
the stock market collapses and then comes right back to where
it was, is that a robust stock market?
Mr. Orszag. I think I am just going to probably stay away
from this whole line of questioning.
Mr. Scott. The Iraq war, if the surge is working and we
actually need 150,000 troops to be there, would your
alternative scenario be actually worse than it is?
Mr. Orszag. If you needed 150,000 troops in perpetuity for
a significant period of time, like over the 10-year window,
yes.
Mr. Scott. The chart would be worse than it is?
Mr. Orszag. That is correct, sir.
Mr. Scott. If the stock market doesn't do better than it
has done in the last couple of days, what would that do to the
capital gains part of your revenue projections?
Mr. Orszag. I can get you that number.
Mr. Scott. And you mentioned accelerated depreciation as
part of a possible corporate tax. If it is incremental and
actually--people actually buy things, would it pay itself back,
short term?
Mr. Orszag. Most of the 1-year budget effect of things like
accelerated depreciation are offset, or made up, if you will,
in the remaining 9 years of the 10-year window.
Mr. Scott. So the cost is only time, value of money, in
effect?
Mr. Orszag. Although the only part is exactly why firms are
responding to the incentive. But, yes.
Mr. Scott. Your scoring of public projects scores that as
weak because it is long term. If the public projects were
required to be ready to go--that is, you don't have the
planning, land acquisition, environmental studies. If the
governor can represent that the project is ready to go, they
can start laying asphalt as soon as they get the check, would
your analysis change?
Mr. Orszag. It really depends on what you mean by ``ready
to go.'' There are many assertions that things are ready to go.
The delays involved in the process are often longer than one
would imagine.
But if there are literally projects that are on hold
because funding is inadequate and then projects could get
restarted immediately, yes, that money could spend out quickly.
The challenge is isolating those things in an overall pot of
infrastructure projects that might not have that.
Mr. Scott. One of the proposals is to fund projects that
are ready to go, then that would be different than an overall
public works project, significantly different in terms of
stimulus effect?
Mr. Orszag. Yes. But it all comes down to defining ``ready
to go'' and who decides that.
Mr. Scott. Mr. Chairman, just very quickly.
Summer jobs for teenagers and winterization programs and
labor intensive, that could be--people could be on the job by
this summer. Would that not qualify for timely, targeted and
temporary?
Mr. Orszag. I think the question becomes whether--if you
are talking about a new program, whether the various apparatus
that need to be put in place in order to get that moving can
actually be accomplished fast enough.
Mr. Scott. If the apparatus is there and the teenagers, all
they need is a check to hire teenagers, that would be timely,
targeted and temporary?
Mr. Orszag. It would. I would just caution that the more
targeting you try to do in terms of specific programs, the less
timely things may turn out to be.
Mr. Spratt. Thank you, Mr. Scott.
Mr. Etheridge.
Mr. Etheridge. Thank you, Mr. Chairman. And thank you for
the hearing.
Dr. Orszag, thank you for being here again. And I guess we
wouldn't be doing this today if it weren't a confidence factor.
I mean, it is about the economy, but it is really about a
confidence factor.
Last week, when the Chairman of the Federal Reserve was
here--things changed a lot since he left, and they made
significant changes in the discount rate early in the week.
My question--and I want to follow my colleagues' line here
just a minute because I really believe it is a confidence
issue. I agree, it is a whole lot different than when we would
have had a stimulus in the 1960s or even in the 1970s, because
today we are more a service-oriented economy than we were 30
years ago. Then, we looked to create jobs in manufacturing and
move things; today, the manufacturing piece is a little bit
harder to get our arms around than it was earlier.
So my question is, you talked a little bit about the short-
term effect, the three Ts. And the three Ts have sort of been--
well, I guess we got here because housing is--not only the
financial markets get hit, but we are starting to see the real
ripple effect on Main Street versus Wall Street when these
people have lost their jobs who were building the houses and
the people who were selling the houses lost them. So it is
affecting Main Street a whole lot more today than it was even 3
months ago.
So, today, it really is about getting it into people's
hands. But it is also about jobs. Simply put, people need jobs,
to go to work so they can buy things to keep it going. So I
want to get back a little bit to this issue of those things
that you can put in place.
We have talked about roads and infrastructure, and I think
it is important, but I want to expand it just a bit; and I
would appreciate your comment on it.
If you can't fit this stimulus package, how important is it
for the economic viability and I think the long-term
consequences for this country of our overall infrastructure,
because today we see movement of populations at a rate that we
haven't seen in a long time. Schools are bursting at the seams.
Communities are unable to cope with the growth patterns, and we
have a bill in we have been trying to move for a long time.
With plans on the shelf, ready to go, if we could just get
some money into people's hands, we can put a lot of people to
work across this country and a whole lot of infrastructural
pieces. You commented on it sort of generally, and I would
appreciate your comments even beyond this, because Chairman
Rangel and several of us, about 216, are on a piece of
legislation to do just that.
And I would appreciate your comment in the short term and
in the long term in terms of sustainability of the economy.
Mr. Orszag. Well, let me clearly delineate and separate
those two.
In the short term, again the concern with infrastructure
spending in general is that the spendout rates tend to be very
slow. So you get very little of the aggregate amount that you
would appropriate actually spending out during the short term
or during the first 6 months or first year during a period of
economic weakness.
It may be possible to improve upon that general conclusion
by targeting particular kinds of infrastructure, but the
challenge then is how you choose to rapidly and target those
things.
Over the long term, infrastructure is one of the things
that leads to economic growth. It is a component of our
physical capital which improves productivity and improves
economic performance, and I think there are concerns that have
been raised not only about the level of investment in that kind
of public infrastructure, but perhaps as importantly, or maybe
even more importantly, how we allocate it and how we price it,
whether we are using what we put in place as efficiently as we
could.
Mr. Etheridge. Thank you. And I do happen to believe we
have got to do something about schools to put something in
place. Last week, Dr. Bernanke said when he was seated there
that--I raised a question on $3 a gasoline as high, and it has
been sustained now for a good period of time, is having an
impact on people, on the average person, just trying to get to
work. And I have noted when I go to the station, a lot of them
will buy $2, $3, $5 worth, just enough to get to work and back.
His point was, and I wonder if you would agree, he said
apparently at $3-plus, it is taking about a half a point off
our gross domestic growth in this country. Would you agree with
that number, because of the additional cost for petroleum?
Mr. Orszag. Each $10 increase in the cost of a barrel of
oil, which is what I have in my head, imposes a drag on the
economy of perhaps $50 billion or so per year.
Mr. Etheridge. Thank you, Mr. Chairman.
Mr. Orszag. So that is a little under half a percentage.
Mr. Spratt. We have a vote at 12:00, so we would like to
move ahead with dispatch so we can finish and adjourn by the
time the bell rings, or at least by the time the vote is
imminent.
We will move next to Mr. Berry of Arkansas.
Mr. Berry. Thank you, Mr. Chairman. Thank you for having
this hearing.
And, Dr. Orszag, we appreciate you and your great knowledge
of this subject. I don't know how you keep up with all of this
stuff. I continue to be amazed. I have noticed, and this is--
you are the only Director of CBO that I have ever dealt with
because I just came on this committee when you came--became
Director of the CBO. But----
Mr. Orszag. We are both doing all right so far, huh?
Mr. Berry. Sir?
Mr. Orszag. We are both doing okay so far.
Mr. Berry. Well, I guess--we are still here.
Mr. Orszag. Yeah, we are still here.
Mr. Berry. I notice that when you refer to the debt, that
you always refer to the publicly held debt, and you don't
include the debt that we owe ourselves basically. Is there a
reason for that or----
Mr. Orszag. Yes, there is. And the reason for it is that
the publicly held debt is a better measure of the interactions
between the government and the rest of the economy. When the
publicly held debt goes up, that is really the measure of the
credit that the government needs to draw upon from other
sources. The debt that is owed from one part of the government
to another is very important for programmatic purposes, but
does not have the same macroeconomic consequences as debt held
by the public, which is why I focus on debt held by the public.
Mr. Berry. I guess my exception to that would be that by
what I consider to be understating the amount of debt that we
owe, it makes the American people think that we don't owe as
much as--that the future may be a little bit better than it
actually is would be my impression of that.
Mr. Orszag. That is not the intention. And obviously I
would say not only is our long-term fiscal imbalance severe,
but $5 trillion, which is the level of publicly held debt, is
still a significant sum.
Mr. Berry. Yeah, I think so, too. In Arkansas we completely
agree with that.
My other question to you is this. I remember back in '01,
the administration was saying that if we just cut taxes and
stimulated the economy, that things would be so good that we
would pay off all of the debt, and that we wouldn't even have
any government bonds to invest in, we wouldn't be worried about
the--about the rating of the bonds; there just wouldn't be any,
we would be so rich.
And I remember a little fellow named Mitch Daniels coming
to the Blue Dogs and explaining to us--because we didn't
understand it, and we still don't--that if we just vote for
these tax cuts, that there would just be money running in the
streets, and the only danger would be the--that we wouldn't
have any national debt. And then again we--in '03, we heard
these same arguments. And then I have heard my colleagues from
across the aisle today talking about what a wonderful thing
that was, and all the good that it has done, and what we need
to do is more of it. If that is the case--and like I say, I
still don't understand that. I missed it somewhere. If all of
those things were such a wonderful idea and such great economic
policy for this country, how come we are in the mess we are in
today? It seems--would you agree we are in a mess? That may be
a little bit too ``one horse store'' for you. But I----
Mr. Orszag. I would say that our fiscal--our long-term
fiscal condition is undesirable, and short-term economic
conditions are also problematic.
Mr. Berry. If these tax cuts stem--work all this magic that
we hear about, I just--I am mystified as to why we have got
these problems. And that is all I will say about that.
Mr. Orszag. Okay, then.
Mr. Berry. Thank you, Mr. Chairman.
Chairman Spratt. Thank you, Mr. Berry.
Mr. Becerra.
Mr. Becerra. Thank you, Mr. Chairman.
Dr. Orszag, good to see you again. Thank you very much for
your testimony.
Actually let me ask us to step back for just a second and
consider this conversation. I think it is actually stunning, it
is breathtaking to think that here you are today. Last week we
had Chairman Bernanke of the Federal Reserve talking to us
about how we better do something because this economy is diving
into the tank. And so I am assuming that you will agree that it
is fair to say that the best of times of this economic period
of growth--or this period of economic growth--the so-called
good times are now behind us.
Mr. Orszag. We are in a period of significant economic
difficulty during the short term.
Mr. Becerra. I love the way economists say that. So the
best of times in this period of economic growth are gone, and
tomorrow the horizon for the economy and for the American
people is not as bright. Some would say it is dim as compared
to what it was in previous years.
Yet today after this period of economic boom, we have more
Americans who have lost their health insurance coverage today.
Forty-seven million Americans today don't have health insurance
coverage. Six hundred million--600,000 more children became
uninsured back in 2006. And in 2006, that number had reached
almost 8.7 million kids. I suspect after 2007, the numbers will
increase.
Poverty in America increased so that today one in eight
Americans, some 36\1/2\ million Americans, live in poverty; one
in every six American children lives in poverty today. That is
some 13 million kids. And that is after the best of economic
times.
But hold your breath, because the rest of the story was
reported in the L.A. Times about a week or so ago--less than a
week ago--when in an article they mentioned that Wall Street
brokers made records amount of money.
Just some quick lines from the article: Wall Street's five
largest investment firms paid record amounts of compensation in
2007 despite the fact that three of the five firms posted
quarterly losses as a result of the souring investments in
subprime mortgages. These five brokerage firms shelled out
$65.6 billion in compensation and benefits last year. Sixty
percent of those $65\1/2\ billion came in the form of year-end
bonuses at the time that we saw things tanking. Merrill Lynch,
which just reported a quarterly loss of $9.8 billion and in 1
year lost 43 percent of its value, is paying its top executives
major bonuses. These bonuses--these numbers are based on
calculations for about 186,000 employees in the Big Five firms.
The average payout was $211,000 per executive. That is about
four times the average household income in the U.S. That was
just the bonus. Total compensation for these 185,000 employees
averaged $353,000.
By the way, they make a little note here in another
paragraph. These payouts they are talking about don't include
the pays for the top executives of these firms, which have yet
to be calculated. These are the middle managers, sales force
guys that are making that kind of money.
It seems kind of strange that now that we are talking about
difficult times, we forget that there are a lot of folks that
never got to take advantage of this, and there were some folks
that took drastic advantage of the good times. And so I think
it is worth it for us to step back.
I wanted to also mention as we talk about--I keep hearing
my colleagues on the Republican side talk about these tax cuts
that are going to expire and how there will be a tax increase.
And I appreciate that you are trying to be an economist in
responding to questions about it, the so-called tax increase in
2011 and 2012. I think my Republican colleagues should remember
that they are the ones that imposed this formulation that
required these tax cuts to expire. So this Republican tax
increase, if you want to call it a tax increase, should be
called what it is. It was an automatic, prearranged return to
the tax rates that we had before, any tax increases due to the
Republican measures that gave us these tax cuts to begin with.
By the way, unless you disagree with this number, my
understanding is that over the next 17 or so years, the cost of
these tax cuts, were we to extend them forward beyond 2011 to,
say, 2017, would cost us about $7.2 trillion. That is more than
it would cost us to make sure that we take care of any
shortfall in Social Security for the next 75 years. And so I
think if we put it all in context, we get a sense of where we
are.
And a final comment and perhaps a quick question is if we
have a budget fight last year in December where we differed
with the President to the tune of $22 billion--we wanted to
give more money for NIH, for cops on the street, education--how
does that compare to the amount of money that we may see now
put out without paying for it in a stimulus package of
somewhere between 100- to $150 billion.
Mr. Orszag. It is a lot smaller.
I would just note quickly on the other point you made, I am
not sure about the 17-year figure, but a lot of the comparisons
that I have seen that do that sort of thing compare nominal
dollars to a present-value figure for Social Security, which
would not be something I would want to do.
Mr. Becerra. And just to make it clear for clarification,
the present value of the shortfall in Social Security would be
about 4.7 trillion, I am told. And the present value of the tax
cuts extended for about 17 years would be about $7.2 trillion.
And if it is incorrect, please--I appreciate----
Mr. Orszag. That sounds high to me. If extended over 75
years, you may get a figure of approximately that large. But
17, I don't think so.
Mr. Becerra. Okay. Or perhaps that means it is the
extension over--for a permanent period of time. Either way it
is more than what it would cost us to stabilize Social
Security.
Mr. Orszag. The present value of the Social Security
imbalance over the next 75 years is somewhere--it depends on
whose numbers you use, but it is well under 1 percent of GDP.
The tax legislation, if it is not eroded over time by the
alternative minimum tax, amounts to about 2 percent of GDP.
Mr. Becerra. Thank you. So about twice as much it would
cost for the Social Security shortfall to be taken care of?
Mr. Orszag. In present value.
Mr. Becerra. Thank you, Dr. Orszag.
Chairman Spratt. Ms. Moore of Wisconsin, who only 2 days
ago was in Marion, South Carolina, where she appeared in Mount
Pisgah Baptist Church out of nowhere like a swirling dervish.
Welcome back to Washington from Marion, South Carolina. Ms.
Moore, the floor is yours.
Ms. Moore. Thank you so much, Mr. Chairman.
And thank you, Dr. Orszag.
Before I ask my question, I just wanted some
clarifications. When Congresswoman Schwartz was talking to you
about--about what would be an economic stimulus, you made a
statement that it didn't matter where people spent the money.
And I thought I heard an exchange where there was a suggestion
that paying off credit card debt would be a stimulus. But I
thought--and--that--I just want to clarify that that would not,
Mr. Orszag. By ``spend the money,'' I did not mean paying
off credit card debt.
Ms. Moore. Right.
Mr. Orszag. I meant spend the money on--whether you buy
food or you buy clothing----
Ms. Moore. She also talked about paying a health care
premium. Do you--is that a--is that a stimulus? She seemed to
try to elicit that response from you. But I didn't----
Mr. Orszag. No, not really. When you purchase health care--
yes, when you purchase health care----
Ms. Moore. Well, people go to Target, Target and Payless
Shoes and so on. Okay. Good clarification.
Now, Mr. Becerra and others--in your papers it really
seemed to lay it out that the lower the income family, the
greater the stimulus effect because they are bound to spend it
right away. If you give it to--if I were to get one of these
rebates, for example, I know I would pay off credit card debt,
not an economic stimulus. Others might say that.
Do you--don't you find it ironic as you heard Mr. Becerra
and others mention that really the lowest, lowest, lowest-
income families really are not going to benefit by any of the
strategies that are currently on the table? For example,
unemployment insurance--the unemployment rate is 5.2 percent,
but in my district, for example, those discouraged workers--we
have 17 percent unemployment among white men, 22 percent
unemployment among Hispanic men and 48 percent unemployment
among black men. These are people who are not going to be
eligible for unemployment insurance if they haven't been in the
system.
Same thing with--like you talked about the 13 million poor
children. These 13 million poor children are in families
probably headed by women who, under the old system, AFDC--
perhaps you could get some sort of check for them. They won't
be eligible for the EITC. They are probably off TANF because it
is time-limited, sanctioned off.
Don't you find it ironic that the people who could
stimulate the economy most probably are outside of the reach of
our targeting and timeliness?
Mr. Orszag. It is true that the unemployment insurance
system has holes in it, especially for part-time and some
lower-income workers. Food stamps tend to do somewhat better in
reaching the very bottom of the income distribution.
Ms. Moore. But the food stamps are very underutilized.
Wouldn't you agree with that? I mean, if someone is on
disability insurance, for example, they get $10 a month SSI. I
mean, people don't even bother to show up and stand in line for
the $10 a month.
So my question before I run out of time is, is--there is no
definition in your book on automatic stabilizers, so I don't
know what that means. But do you think that, given the economy
moves in certain cycles, that it would be worth it for us to
build some sort of infrastructure for identifying these poorest
of the poor? Because there is all kinds of codewords within
this Congress about who we want to help, workers and middle-
class families, and help businesses trickle down, but there is
no strategy for getting the money into the hands of the people
who, in fact, would stimulate the economy the most.
Mr. Orszag. What I would say is in periods of economic
weakness, which are again unusual, the normal tension between
being warm-hearted and cool-headed evaporates because you can
be both warm-hearted and cool-headed at the same time, the more
money you can get to low- and moderate-income households. And
you are right, that many of those households don't qualify for
unemployment insurance under current eligibility, and there
are, you know, various other imperfections in the existing
system.
Ms. Moore. So this economic stimulus--I mean, there are
millions and millions of people--I guess I am calling them the
want-to-be worker class, people who are eligible for work. We
have basically put our children in a situation where if their
parents don't work, they can't get any economic support by
having ended the Aid to Families With Dependent Children
program.
So this is a class of people that would spend the money. I
mean, they would be in Wal-Mart the next day with their checks
if they could get it. And I certainly hope that this Congress,
this committee will really take the advice of the economists
and try to figure out a way to get money in the hands of the
people who need it the most.
And with that, my time unfortunately has expired.
Chairman Spratt. Mr. Bishop.
Mr. Bishop. Thank you, Mr. Chairman.
And I am sure, Dr. Orszag, you are anxious to move on.
Mr. Orszag. No, no, no. I was trying to answer a question.
But, no.
Mr. Bishop. We were all talking about this mantra of
timely, targeted and temporary for the economic stimulus
package, and it just seems to me so remarkably self-evident
that two programs that fit all three of those criterions are
unemployment benefits and extension of food stamps. And my
understanding is that unemployment benefits have--are estimated
to have an economic payoff of about 2 to 1 in terms of dollars
spent, and food stamps of about 1\1/2\ to 1, and yet they are
resisted by--certainly by our friends on the other side,
resisted by the White House.
And so my question is, is there any nonideological argument
that is rooted either in economic theory or in empirical
evidence that says that those two programs would not be
stimulative? Or is the opposition purely ideological?
Mr. Orszag. I wouldn't want to characterize opposition or
support. What I would say is that from the perspective of
short-term economic stimulus in a period of--these unusual
periods of economic weakness, things like food stamps and
unemployment insurance benefits were ranked by the
Congressional Budget Office as having relatively high bang for
the buck precisely because they can get money out the door fast
to people who will spend most of it.
Mr. Bishop. And infrastructure exists to handle the
program.
The same question for providing tax rebates to those who
pay payroll taxes, but do not pay Federal income tax. Is there
any, again, argument rooted in economic theory that says that
that would not be stimulative?
Mr. Orszag. The more that you target those types of
households who tend to be lower income, the bigger bang for the
buck you generally get.
Mr. Bishop. And what would our mechanism be if the person
does not pay Federal income tax? What would our mechanism be to
give them a rebate? Would it be a rebate on payroll taxes?
Would it be an extension of the Earned Income Tax Credit?
Mr. Orszag. There are a variety of ways in which it could
be done. The vast majority--in fact, almost all people who have
wage income file a tax return even if they don't owe income tax
liability. And indeed if you were going to make a rebate
refundable, you would probably want--and base it on 2007 tax
information, you would probably want to limit it to those with
wage income, because if not, you could get a very substantial
increase in filing among people who don't have wage income in
order to get a rebate. What you could do is--again using--once
the IRS is done processing the 2007 tax returns, take anyone
who reports--who files a tax return and has reported wage
income, design whatever structure you want and basically mail
them a check.
Mr. Bishop. Okay. Thank you, Mr. Chairman.
Ms. Moore. Would you yield some of your time to me?
Mr. Bishop. Of course. I would be happy to.
Ms. Moore. Did you just tell him that--you just said that
you would want to limit it to people who had wage income,
otherwise you would have all these other people filing.
Wouldn't that help? I mean, if people filed, and they didn't
have any wage income or very little, wouldn't that help reach
the lowest of the low-income?
Mr. Orszag. Those nonfilers tend disproportionately to be
elderly households.
Ms. Moore. Why wouldn't we want to help them?
Mr. Orszag. Let me answer it in two ways. It is not that
you wouldn't want to help them, but two answers. First, as I
have already noted, there is a very substantial concern about
timing involved here. If you had a massive increase in filing
during the 2007 tax return season, I don't know that the IRS
would be able to wrap it up even on time, and that would delay
the sending of all of the checks.
The second thing is for whatever it is worth, and the
evidence is not great on this, but for whatever the evidence is
worth, at any given level of income, it appears that, if
anything, elderly households have a lower marginal propensity
to consume than nonelderly households. So all else being equal
at the same level of income, sending the dollar to an elderly
household may not have quite as much kick to it as a nonelderly
household. But that is obviously--you may want to do it for
other reasons anyway. I would, though, be very cautious about
overloading the IRS system at this point if you want to get
checks out in a timely fashion.
Ms. Moore. Well, it would help primarily the elderly. But
that other class that I just described to you of those people
who just recently were kicked off TANF, for example, it would
help those households tremendously to be able to file an income
tax. I mean, there are a lot--I mean, I think your paper even
described that there are many more households in that
situation.
With 3 seconds left, let me ask this question. Is there
any--in the long term, in the long run, don't you think we need
to reform our unemployment metric system so that we can find a
way to measure those people who are eligible for the workforce,
but are not working? Because, you know, this 5.2 unemployment
rate, I can tell you--I can look out the window of my home and
know that that is not correct.
Mr. Orszag. Well, we actually have a system in place. We
just don't tend to use those measures as much. But, for
example, if you examine the ratio of employed people to the
population rather than the number of unemployed people to the
labor force, the labor market over the past few years looks
much weaker. We basically have had a significant--we haven't
yet had the employment population ratio rise back up to--or the
share of the population working would be the simplest way of
putting it--rise back up to the levels that we saw in the late
1990s, and that may be a better indication for many purposes of
the overall state of the labor market than the official
unemployment data which require that people be actively
searching for a job in order to be counted.
Ms. Moore. I just think it is worthless at a time like
this, you know, if the economy were to get weaker than it is,
if we were to actually move into a depression or a recession,
we would actually be totally incompetent at delivering money to
those people who are starving. Thank you.
Chairman Spratt. Thank you.
And one final housekeeping term, the issue of--let me ask
unanimous consent that all Members who did not have an
opportunity to ask questions to submit the questions for the
record.
Dr. Orszag, thank you for your clear and forthright and
expert testimony. You have helped us tremendously. Let me thank
you and CBO also for a fine piece of work on the budget and
economic outlook for the forthcoming period. We look forward to
working with you towards sensible budget policies, and we very
much appreciate your help.
Can I ask one final question?
Mr. Orszag. Sure.
Chairman Spratt. You have put three graphs on the front
page. They have displaced the health care graph that we have
been accustomed to seeing as your logo almost. The very top one
indicates the percentage of mortgage delinquencies by different
adjustable-rate mortgages.
Mr. Orszag. Yes.
Chairman Spratt. One is subprime, and the others are
conforming or prime----
Mr. Orszag. Right.
Chairman Spratt [continuing]. ARM mortgages. If you look at
that, it appears that as recently as '98, '99, 2000, 2001, the
percentage of adjustable-rate mortgages which were subprime and
delinquent was well above 15 percent, whereas the prime
adjustable-rate mortgages were significantly below 5 percent.
So for some time now, ARMs, subprime ARMs, have been three
times--delinquencies have been three times as much or as
frequent as under prime ARMs. How do you account for the fact
that we are now just seeing the markets get spooked by subprime
mortgages when this problem has been with us for several years?
Mr. Orszag. One significant change is the volume of
subprime ARM activity. So this is the share of the outstanding
subprime ARMs. But the level of activity in subprime ARMs
skyrocketed over the past several years, and so the aggregate
amount went up substantially relative to, say, the late 1990s.
Chairman Spratt. I know from the experience of running a
small bank that the examiners would chew you out when your
loans get more than 1 percent delinquent. And I don't know why
it took us so long to get around to recognizing what was
happening in the subprime market.
Mr. Orszag. And, Mr. Spratt, if I could just join you
quickly in thanking the CBO staff not only for the work on the
outlook, but also for that stimulus options report that was
undertaken in a very compressed time schedule.
Chairman Spratt. Thank you very much indeed. That concludes
our hearing.
[Whereupon, at 12:18 p.m., the committee was adjourned.]