[House Hearing, 112 Congress]
[From the U.S. Government Printing Office]
THE CONGRESSIONAL BUDGET OFFICE'S
BUDGET AND ECONOMIC OUTLOOK
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
HEARING HELD IN WASHINGTON, DC, FEBRUARY 10, 2011
Serial No. 112-3
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COMMITTEE ON THE BUDGET
PAUL RYAN, Wisconsin, Chairman
SCOTT GARRETT, New Jersey CHRIS VAN HOLLEN, Maryland,
MICHAEL K. SIMPSON, Idaho Ranking Minority Member
JOHN CAMPBELL, California ALLYSON Y. SCHWARTZ, Pennsylvania
KEN CALVERT, California MARCY KAPTUR, Ohio
W. TODD AKIN, Missouri LLOYD DOGGETT, Texas
TOM COLE, Oklahoma EARL BLUMENAUER, Oregon
TOM PRICE, Georgia BETTY McCOLLUM, Minnesota
TOM McCLINTOCK, California JOHN A. YARMUTH, Kentucky
JASON CHAFFETZ, Utah BILL PASCRELL, Jr., New Jersey
MARLIN A. STUTZMAN, Indiana MICHAEL M. HONDA, California
JAMES LANKFORD, Oklahoma TIM RYAN, Ohio
DIANE BLACK, Tennessee DEBBIE WASSERMAN SCHULTZ, Florida
REID J. RIBBLE, Wisconsin GWEN MOORE, Wisconsin
BILL FLORES, Texas KATHY CASTOR, Florida
MICK MULVANEY, South Carolina HEATH SHULER, North Carolina
TIM HUELSKAMP, Kansas PAUL TONKO, New York
TODD C. YOUNG, Indiana KAREN BASS, California
JUSTIN AMASH, Michigan
TODD ROKITA, Indiana
FRANK C. GUINTA, New Hampshire
ROB WOODALL, Georgia
Austin Smythe, Staff Director
Thomas S. Kahn, Minority Staff Director
C O N T E N T S
Hearing held in Washington, DC, February 10, 2011................ 1
Hon. Paul Ryan, Chairman, Committee on the Budget............ 1
Prepared statement of.................................... 3
Hon. Chris Van Hollen, Ranking Minority Member, Committee on
the Budget................................................. 3
Prepared statement of.................................... 5
Douglas W. Elmendorf, Director, Congressional Budget Office.. 5
Prepared statement of.................................... 8
Responses to questions submitted......................... 58
Hon. Betty McCollum, a Representative in Congress from the
State of Minnesota, submission for the record:
February 9, 2011, Budget Committee hearing transcript
Hon. Michael M. Honda, a Representative in Congress from the
State of California, questions submitted for the record.... 58
THE CONGRESSIONAL BUDGET OFFICE'S BUDGET AND ECONOMIC OUTLOOK
THURSDAY, FEBRUARY 10, 2011
House of Representatives,
Committee on the Budget,
The committee met, pursuant to call, at 10:03 a.m., in room
210, Cannon House Office Building, Hon. Paul Ryan [chairman of
the committee] presiding.
Present: Representatives Ryan of Wisconsin, Campbell,
Calvert, Akin, McClintock, Stutzman, Ribble, Flores, Mulvaney,
Young, Amash, Rokita, Van Hollen, Schwartz, Kaptur, Doggett,
Blumenauer, McCollum, Honda, Ryan of Ohio, Wasserman Schultz,
Castor, Tonko, and Bass.
Chairman Ryan. The hearing will come to order.
Thank you, Dr. Elmendorf, for coming before the committee
today. It is nice to have you back and congratulations on your
reappointment for a full term.
I first wanted to start off by saying how tough a job we
know that the Congressional Budget Office and its employees
have. We are going to work you pretty hard in the year to come.
We appreciate the professionalism, the expertise that you have
brought to the job.
Everybody brings to this job a background and a perspective
and a point of view. And the best CBO Directors, whether it was
Orszag or Holtz-Eakin, check it at the door, and you have done
a very good job of doing that, of sticking down the middle of
the fairway. And I just want to commend you for that.
We will have probably differences of opinions on
methodology and things like that from time to time. But I enjoy
the rigor of our debate, and I enjoy the fact that we can have
a great exchange of ideas. And I also just want to simply start
by saying I think it is great that you do more consulting with
outside academics and outside forecasters because we don't have
all the wisdom here, and it is important that you do that
consultation. So I want to commend you for that and welcome you
to a full 4-year term.
With that, I just got your report. We got this the other
day. And it has deteriorated. Now our baseline is going in the
wrong direction. And these problems that we have, let me first
start off by saying it is not all the Democratic Party's fault
or the Republican Party's fault. Both parties are responsible
for where we are today. I would argue that in the most recent
history I think our fiscal policy went in the wrong direction.
But finger pointing doesn't solve problems. Solutions solve
problems. And we will have a difference of opinion on how to
solve problems. And we do disagree with how to solve problems,
but we don't disagree on where we want to go. We want people to
have jobs in America. We want to have prosperity. We want to
have an opportunity society. We want to leave our kids and our
grandkids with a country that is better off, with a higher
standard of living.
And what is interesting about this and previous reports
that you have been giving us is, we know that without a shadow
of doubt, we are giving the next generation a lower standard of
living. What amazes me is when you do your long-run modelling,
that your model actually ends up shutting down by the time our
kids are in our age bracket because the CBO can't conceive a
point in which the economy can continue because of the debt
burdens that are being placed upon it.
So we have a moral imperative in this committee to get this
right, to stop pointing fingers, to stop turning reforms into
political weapons to be used in the next campaign and to
actually buckle down and get this. Now, what is so important
right now is the economy, is job creation, is prosperity.
Your latest report reminds us that between June of 2009,
when the recession technically ended, and last December,
payroll employment rose by a mere six one-hundredths of 1
percent, .06 percent. You compare that to the same period of
time following past recessions, during those recoveries,
employment rose by an average of 4.4 percent.
Unemployment is too high because job growth is too low. And
job growth is too low because, in my opinion, contrary to
conventional wisdom here in Washington, we cannot tax, borrow
and spend our way to a prosperous future. The deficit is $1.5
trillion. The publicly held debt is up to 69 percent of GDP. It
was at 40 percent by the end of 2008. And if you take a look at
the alternative fiscal scenario, which I believe and most
people would argue is the more accurate reading of where we are
headed, it is down right scary.
And so we believe that the prosperity plan is real spending
controls, spending cuts and reforms along with pro-growth
economic policies for job creation. We can't create jobs in
Washington. That is what the private sector does. And if we try
to borrow and spend more money to create jobs in Washington,
that ends up taking money from the private sector, propping up
our debt, putting pressure on interest rates because current
big deficits are nothing more than tomorrow's big tax
increases. That produces more uncertainty for businesses.
So we just respectfully will probably disagree on how to
create jobs, on how to get to prosperity, but let's just make
sure that we all understand we want the same objective. We want
our constituents to work. We want our kids and our grandkids to
do better off. You are going to be overburdened with lots of
requests. We really appreciate the way in which you respond
with speed to all our requests, and we hope you do so as well
with other members. But we have to get serious about this
And hopefully we can do a fairly quick turnaround on the
President's budget, which is a little late. That is because
Jack Lew was appointed late. But hopefully you can get us a
pretty good turnaround on the President's budget. There is one
more thing I would simply say is, we will be asking you to do
some more runs on interest rate simulations, and on health care
And with that, I just want to yield to my friend, the
ranking member, Mr. Van Hollen.
[The prepared statement of Chairman Paul Ryan follows:]
Prepared Statement of Hon. Paul Ryan, Chairman, Committee on the Budget
Thank you, Dr. Elmendorf, for coming before our Committee today to
talk about the CBO's Budget and Economic Outlook.
Your testimony and this latest report remind us that, between June
of 2009, when the recession technically ended, and last December,
payroll employment rose by a mere 6 one hundredths of one percent (0.06
Compare that to the same period of time following past recessions.
During those recoveries, employment rose by an average of 4.4 percent.
Unemployment is too high because job growth is too low. And job
growth is too low because--contrary to the conventional wisdom here in
Washington--we cannot tax, borrow and spend our way to a prosperous
One of the biggest threats to the economy is the rapid and
seemingly relentless growth of government spending and debt. CBO is
projecting a deficit of $1.5 trillion this year with the level of
publicly-held debt rising to 69 percent of GDP by the end of the year,
up from 40 percent at the end of 2008.
In a few short years, the CBO projects government spending to drive
our debt to crisis levels, overwhelming the entire economy and drowning
the next generation in red ink.
The President has asked us to raise the debt limit to accommodate
all of this spending and borrowing. But the recent experience of Europe
teaches us that we cannot keep making unaffordable promises without
eventually hitting a real debt limit--a limit on our borrowing imposed
by credit markets in a state of panic.
Endless borrowing is not a strategy. Spending restraint must come
first. Federal Reserve Chairman Bernanke counseled us yesterday that
the Congress needs to begin taking credible steps to reduce our looming
longer-term structural budget deficits in order to grow the economy
We must restore the foundations of economic growth--low taxes,
reasonable regulations, sound money, and spending restraint. We must
apply our timeless principles to the challenges of the day.
If we act soon, and if we act responsibly, we can gradually phase
in reforms to our major entitlement programs to save them from
bankruptcy and ensure that people in and near retirement will be
Federal health care spending is at the heart of our budget
problems. Some have suggested that I am critical of CBO for its budget
score of the new health care legislation. That is not correct.
The nonpartisan professionals at CBO must score the legislative
language that is put in front of them.
This is not in any way a dispute with CBO. It is a dispute with the
authors of the new health care law--and with their use of budget
gimmicks, deceptive accounting, and highly dubious offsets.
We cannot begin to meet our fiscal challenges unless we have an
honest debate about health care costs. As Chairman Bernanke reminded us
yesterday, federal health care spending is driving our unsustainable
deficits and debt, and the new law has done nothing to significantly
reduce the strain that exploding health care costs are putting on the
Hiding spending to justify the creation of a new unaffordable
entitlement doesn't get us any closer to solving the problem. We need
to advance fiscally responsible, patient-centered reforms that actually
reduce costs and expand coverage.
I look forward to your testimony today, Dr. Elmendorf. I hope we
can learn more today about the budget and economic outlook and begin to
put in place policies that lead to a permanent increase in jobs and put
America on path of a more prosperous future.
With that, I will yield to Ranking Member Van Hollen for an opening
Mr. Van Hollen. Thank you, Chairman Ryan.
And I want to join my friend and colleague Paul Ryan in
congratulating you, Dr. Elmendorf, on being reappointed.
As the chairman indicated, there are some times we like the
CBO numbers and projections on one side or the other, sometimes
we don't. But the reality is I think we agree that you and your
team have been an incredibly professional organization. You
call them as you see them. And I do believe, and I think we
would agree on this, that when it comes to the budget process
here in Congress, at the end of the day, we have to have some
common measure of where we are on these different indicators
and that if we were to throw out the CBO numbers, whether we
sometimes agree with them or not, it would be a recipe for
budget and fiscal chaos.
Let me just talk about some of those numbers because, as
the chairman indicated, we probably do have different
perspectives on how exactly we got here, but I think we do
share a common interest--I know we share a common interest in
trying to find a way out towards a fiscally sustainable future
for this country.
But I do think it is important in light of the projections
you have got just to remind the members of the committee that 2
years ago, the economy was in free fall. I mean, that is what
the facts state. We were losing--we were at a negative 6
percent growth rate, losing 700,000 jobs a month. Yesterday in
his testimony, Dr. Bernanke indicated that a combination of
factors, including the recovery bill, actions by the Federal
Reserve and efforts to rescue the financial system helped
prevent a second great depression.
And your own CBO numbers confirm that the Recovery Act was
a key ingredient in stopping the free fall and was responsible
by your numbers of creating or saving between 1.3 and 3.4
million jobs. I think we all recognize that despite the fact
that the economy has stabilized somewhat, the fact that
millions of Americans remain out of work is absolutely
And what this report makes clear is that we do have to work
together on a bipartisan basis to put our country on a fiscally
sustainable path. I believe that the President's bipartisan
commission that the chairman and others served on provided a
lot of ideas that we should discuss and debate within this
committee. They deserve a full vetting, and I would point out
that the commission recognized the balance between acting now
on a long-term plan and the dangers and risks of taking
immediate deep cuts and the impact that could have on the
economy and back--they said and I quote, in order to avoid
shocking the fragile economy, the commission recommends waiting
until 2012 to begin acting programmatic and spending cuts. We
are going to have that debate.
And I think we should also recognize, and we do, that
focusing on just one sliver of the budget, domestic
discretionary cuts, will not get us out of this hole. That is
very clear from your report, and we are going to have to look
at all of the components of this problem.
And I hope that we will all come to the table with a sense
of seriousness that we do need to look at the full picture
Let me just end with this because it has been much
discussed in the news lately. We are coming up upon some key
decision points. We have to extend the CR. And then, of course,
there is the debt ceiling limit. I think it was very clear from
the testimony of Dr. Bernanke yesterday that we should not be
playing political games with the full faith and credit of the
United States, that we should not be, in his words, using that
as a, quote, bargaining chip, that that would risk putting the
economy in a total tailspin and putting even more Americans out
With that, Mr. Chairman, thank you very much.
[The prepared statement of Chris Van Hollen follows:]
Prepared Statement of Hon. Chris Van Hollen, Ranking Minority Member,
Committee on the Budget
Thank you, Dr. Elmendorf, for joining us today to discuss CBO's
latest economic and budget projections that highlight the very real
fiscal challenges we face.
Before we begin today's discussion on the CBO's outlook, it's
important to remember the economic situation that President Obama
confronted when he took office in 2009. Two years ago, we were losing
jobs at the rate of over 700,000 a month. We have now had a year of
continuous private sector job gains, totaling nearly 1.3 million jobs
Yesterday, Federal Reserve Chairman Ben Bernanke testified that
President Obama's American Recovery and Reinvestment Act, as well as
measures taken to prevent the collapse of the financial sector and
actions by the Federal Reserve, helped save the economy from a total
CBO's own analysis confirms that the Recovery Act was a key
ingredient in stopping the free fall, and that the legislation was
responsible for saving and creating between 1.3 and 3.4 million jobs.
But despite these gains, millions of Americans remain out of work and
the unemployment rate is unacceptably high--it is clear there is more
work to be done.
With that in mind, we're here today to talk about the CBO's Budget
and Economic Outlook. This report makes it clear that Democrats and
Republicans must work together now to put our nation on a fiscally
sustainable path, and we stand ready to do that. The President's
Bipartisan Fiscal Commission, which was charged with reducing the
deficit, has put many important ideas on the table that we should
review. One thing is clear--a strong economy is essential to both
putting more Americans back to work and reducing our deficits. That is
why the Commission said that 'in order to avoid shocking the fragile
economy, the Commission recommends waiting until 2012 to begin enacting
programmatic spending cuts.'
Immediate, deep cuts will not create a single job. A broad range of
economists, including Mark Zandi, have determined that such cuts will
actually hurt job growth. Additionally, Chairman Bernanke stressed that
the most important thing we can do as a country is to put together a
credible, long-term plan for fiscal sustainability, rather than focus
on deep cuts in domestic discretionary spending over the next eight
months. This long-term plan should include a discussion on reforming
the tax system to make it more efficient--but we should not be
extending unpaid-for tax cuts for the wealthiest 2 percent of Americans
Unfortunately, during its first 30 days, the new Republican
majority has passed measures that fly in the face of promises to tackle
the deficit. First came the vote to get rid of the responsible House
pay-as-you-go rule and replace it with a one sided rule that pretends
that tax cuts for the wealthy don't add to the deficit. Next came the
vote to eliminate important patient protections by repealing the health
care reform bill and add a staggering $1.3 trillion to the national
debt--as estimated by CBO--over the next 20 years. Just yesterday we
saw a whole new budget gimmick on the House floor in an effort to
eliminate funds that don't even exist--not surprisingly, CBO indicated
that it wouldn't save the taxpayer one dime. And now there is talk of
gambling with the full faith and credit of the United States
government, which Chairman Bernanke yesterday indicated would lead to
So, Mr. Chairman, we welcome a serious debate about developing a
credible, long-term deficit reduction plan that reflects our national
values and priorities. We hope that our colleagues on the other side of
the aisle will join us in a robust discussion on the best way to move
our nation forward.
Chairman Ryan. Dr. Elmendorf, the floor is yours.
STATEMENT OF DOUGLAS W. ELMENDORF, DIRECTOR, CONGRESSIONAL
Mr. Elmendorf. Thank you.
Mr. Chairman and Congressman Van Hollen, I want to start by
saying I am honored and delighted to have the opportunity to
stay at CBO for 4 more years. And I appreciate both of your
support in that.
And on behalf of myself and all of my colleagues, I want to
say to you and all the members of the committee that we look
forward to working with you, providing the information,
analysis on the country's economic and budgetary challenges
that would help you in wrestling with those challenges.
Indeed, the United States faces daunting economic and
budgetary challenges. The economy, as you know, has struggled
to recover from the recent recession. The pace of growth and
output has been anemic compared to that during most other
recoveries. The unemployment rate has remained quite high. The
Federal budget deficit and debt have surged in the past 2
years, owing to a combination of a severe drop in economic
activity, the policies enacted in response to the financial
crisis and recession, and an imbalance between spending and
revenues that predated the recession.
Unfortunately, it is likely that a return to normal
economic conditions will take years. And even after the economy
is fully recovered, a return to sustainable budget conditions
will require significant changes in tax and spending policies.
Let me discuss the economic outlook first and then turn to
the budget outlook. CBO expects that production and employment
will expand in the coming years, but only at a moderate pace,
leaving the economy well below its potential for some time. We
project that real GDP will increase about 3 percent this year
and again next year, reflecting continued strong growth in
business investment, improvements in both residential
investment and net exports, and modest increases in consumer
But we have a long way to go on the employment front.
Go to the first slide.
Payroll employment, which declined by nearly 9 million
between the end of 2007 and early 2010, has recovered by just a
shade over 1 million since then. The recovery in employment has
been slowed not only by the slow growth in output, but also by
structural changes in the labor market, such as a mismatch
again the requirements of available jobs and the skills of job
We estimate that the economy will add roughly 2.5 million
jobs per year over the 2011-2016 period, similar to the average
pace during the late 1990s. But even so, we expect the
unemployment rate, shown in the next slide, will be just above
9 percent in the fourth quarter of this year and still above 8
percent at the end of 2012. Only by 2016 in our forecast does
the unemployment rate reach 5.25 percent, close to our estimate
of the natural rate.
CBO projects that inflation will remain very low in 2011
and 2012, reflecting the large amount of unused resources in
the economy. And it will average no more than 2 percent a year
between 2013 and 2016.
Economic developments and the government's responses to
them have, of course, had a big impact on the budget. The next
slide shows we estimate that if current laws remain unchanged,
the budget deficit this year, the third column of that table,
will be close to $1.5 trillion or 9.8 percent of GDP. That will
follow deficits of 10 percent and 8.9 percent of GDP in the
past 2 years, representing the three largest deficits since
1945. As a result, debt held by the public will probably jump
from 40 percent of GDP by the end of fiscal year 2008 to nearly
70 percent at the end of this fiscal year in September.
If current laws remain unchanged as we assume for CBO's
baseline projections, budget deficits would drop markedly over
the next few years as a share of output. The next slide shows
the deficits would average 3.6 percent of GDP between 2012 and
2021--that is the solid line--totaling nearly $7 trillion over
the coming decade. As a result, the debt held by the public
would keep rising, reaching 77 percent of GDP in 2021.
However, that projection is based on the assumption that
spending and tax policies unfold as specified in current law.
Consequently and as the chairman noted, it understates the
budget deficits that would occur if many policies currently in
place were continued rather than allowed to expire as scheduled
in current law. For example, suppose instead that three major
aspects of current policy were continued during the coming
decade: First, that the higher 2011 exemption amount for the
alternative minimum tax is extended and along with the AMT tax
brackets is indexed for inflation; second, that the other major
provisions in the recently enacted tax legislation that
affected individual income taxes and gift taxes and estate
taxes were extended rather than allowed to expire in January
2013; and third, that Medicare's payment rates for physician
services were held constant rather than dropping sharply as
scheduled at the end of the year under current law. All of
those policies have recently been extended for 1 or 2 years. If
they were extended permanently, deficits from 2012 through 2021
would average about 6 percent of GDP, the dashed line, rather
than 3.5 percent under current law. And cumulative deficits
over the decade would total nearly $12 trillion.
The next slide shows the debt held by the public in 2021
would, under that alternative, rise to almost 100 percent of
GDP, the highest levels since 1946.
Beyond the 10-year projection period, further increases in
Federal debt relative to the Nation's output almost certainly
lie ahead if current policies remain in place. Spending on
Social Security and the government's major mandatory health
care programs, including Medicare, Medicaid, the children's
health insurance program and insurance subsidies to be provided
through exchanges, will increase from roughly 10 percent of GDP
to about 16 percent over the next 25 years.
To prevent debt from becoming unsupportable, the Congress
will have to substantially restrain the growth of spending,
raise revenues significantly above their historical share of
GDP, or pursue some combination of those two approaches. The
longer the necessary adjustments are delayed, the greater will
be the negative consequences of the mounting debt, the more
uncertain individuals and businesses will be about future
government policies, and the more drastic the ultimate policy
changes will need to be.
However, changes of the magnitude that will ultimately be
required could be disruptive. Therefore, Congress may wish to
implement them gradually so as to avoid a sudden negative
impact on the economy, particularly as it recovers from the
severe recession and so as to give families, businesses and
State and local governments time to plan and adjust. Allowing
for such gradual implementation would mean, however, that
remedying the Nation's fiscal imbalance would take longer and
therefore that major policy changes would need to be enacted
sooner to limit the further increase in Federal debt. Thank
you. I am happy to take your questions.
[The prepared statement of Douglas W. Elmendorf follows:]
Chairman Ryan. I thought you were going to go through the
whole PowerPoint. I have about 40 pages here.
Mr. Elmendorf. I should say all of the figures from the
Outlook are in the collection of slides.
Chairman Ryan. Is your whole PowerPoint that you handed us
Jose, can you bring up Page 16 on his PowerPoint, Figure 2-
You have--I am very interested in your comparisons,
recovery and real gross domestic product and employment, the
current cycle and the average cycle since 1948, where you look
at months before the trough, months after the trough.
That, yes, there. Thank you.
Give me an explanation as to why you think this is
occurring? What this is showing us is our economy is not
growing nearly as fast as it typically does coming out of a
deep recession, and jobs are not being created anywhere close
to what they are typically created coming out of a recession.
If you take a look at past recessions, post-World War II,
typically--and correct me if I am wrong--the deeper the
recession, the bigger the bounce coming out of it. What is
different this time? Why is this happening? What is your take
Mr. Elmendorf. First, a quick factual point, which is that
there were revisions to employment data recently released since
we completed the outlook that actually make the latest cycle
look a little worse still on the employment front. We have not
yet regained all of the jobs that were lost by the time----
Chairman Ryan. But this methodology is what we have always
been using in the past, correct?
Mr. Elmendorf. Oh, it is the same methodology. It is just
that they have updated the data just a bit.
We think the principal reason why the employment recovery
has been so weak is that the output recovery has been so weak.
Output grew much more rapidly following the very severe
recession in the early 1980s, for example, than it has
following this recession.
This pattern, although unusual for U.S. post-war history,
is unfortunately not unusual by the standards of other
countries that have experienced recessions following financial
crises. Those crises tend to come from an overbuilding of some
aspect of the economy--in our case, particularly from housing--
and have come when there have been excesses in the financial
system that have been broken down in a way that takes time to
rebuild. So we are watching our banks try to rebuild their
capital. We are watching households and businesses try to
rebuild their own balance sheets.
Those kind of recoveries tend to be slow. And we think that
is the principal reason why this recovery is slow, is the
severity but also the nature of the----
Chairman Ryan. Okay. So you are basically saying it is the
kind of recession we had, a financial crisis driven recession,
is why we have such lackluster recovery?
Mr. Elmendorf. I think that is the principal reason, yes.
Chairman Ryan. Let me ask you this, then. Do you agree with
the general conclusions of the Reinhart-Rogoff study, which
more or less says financial crashes, recessions result in big
debt increases and deficit increases, which gets us in a
vicious cycle, which once our debt starts hitting these
troubled levels, we really start tapering off our economy?
Would you generally agree with the takings of that?
Mr. Elmendorf. Yes, I would. Carmen Reinhart is one of the
members of our Panel of Economic Advisors. Of course, we read
their work. And I think the point they have highlighted about
how these crises lead to rapid buildups of debt is exactly what
we are seeing right now in the United States.
Chairman Ryan. So their rule of thumb, 90 percent of GDP
debt, do you agree with that general rule of thumb? Once you
start hitting 90 percent of GDP, that is when your economy
really starts slowing down; would you more or less agree with
Mr. Elmendorf. I want to be careful not to suggest that
Chairman Ryan. I know there is not a magic----
Mr. Elmendorf. There is a tipping point.
Their study looked, first, as you know, at gross debt; for
the United States, a larger number than debt held by the
Chairman Ryan. We are already up at that number, then, if
we are looking----
Mr. Elmendorf. I think that is correct. We think for a
variety of reasons that debt held by the public is a better
measure of the government's current fiscal position.
Also, they just divided countries into buckets if you will.
They picked a point of 90 percent.
But we don't in any sense doubt the conclusion that higher
levels of debt lead to worse economic performance over the
medium and long run.
Chairman Ryan. What is the debt held by the GDP at the end
of the 10-year window in the alternative fiscal scenario?
Mr. Elmendorf. So that particular label we applied to the
long-run scenario that we did, but if you take the thing we
have done in this outlook, where we have extended this
particular set of policies that I mentioned, debt is pushing
100 percent of GDP by the end of the 10-year window.
Chairman Ryan. And gross debt, I guess gross debt would
Mr. Elmendorf. Would be significantly larger. I don't know
This is unfamiliar territory for the United States and also
for other developed countries. If one looks at the set of
countries in the OECD, developed countries, one does not find a
lot of countries that have debt at or above 100 percent of GDP
for any length of time. So we are definitely, especially if
those policies are continued, moving into territory where we
don't know what will happen exactly.
Chairman Ryan. I want to be judicious with my time. I think
that there is a good argument to be made that interest rates
are not going to be low for a long time. I think there is a
good--it is worth our while to make different interest rate
You have done this for us in the past, and we have asked
for this from you currently. What we have asked is, give us the
blue chip average, the average of the 1990s, the average of the
1980s. If there are other worthwhile simulations run that we
are not thinking of, let us know.
But also, can you carry this out in your long-run model for
us as well? You can give us the 10-year numbers I know, and I
know how difficult this gets, and you do your long report in
the summer, but I think it would be extremely helpful to know
different simulations and how it really carries out beyond the
The other question is--so that is just a request. Health
care take-up rates in the exchanges, how many people do you
project will be in the health care exchange within the 10-year
Mr. Elmendorf. That is a good question. You might think I
would remember the answer to that.
Chairman Ryan. I think 19 million is what I have off the
top of my head. I am not sure about that.
Mr. Elmendorf. There are some people who are in the
exchanges because their employers choose to get insurance
coverage for them through the exchanges. So there are some
different numbers depending on exactly what concept one has in
mind. But I think you are in the right ballpark.
Chairman Ryan. So other actuaries, private-sector
actuaries, have made much, much different projections about the
amount of which employers will drop health insurance for their
employees and dump them into the exchange. I think it would be
worth our while to have run some simulations on those
projections as well. So how about if we shoot you projections
from other actuaries who believe--I will give you one example.
I have met with an employer in my district who nationwide
employs 7,000 people. It is a privately-held company who has
very low-margin business, who has two publicly-held traded
competitors. Their competitors have basically said, we are
putting our people in the exchanges as soon as we can. With a
$2,000 penalty indexed to inflation per employee and they can
go get health care there subsidized by the government versus
$17,000 rising in health care costs, we are dumping them.
And I know you have a firewall assumption that leads to low
take-up rates. But from my experience from talking to
employers, I don't think that is going to happen. I don't think
that firewall is going to hold. And I think tens of millions of
people--this is my personal opinion, but it is informed by
anecdotal conversations with employers over the State of
Wisconsin and outside expert actuarial witnesses that think we
are going to have tens and tens of millions of people dumped
into these exchanges.
So I think it is worth our effort to run simulations to see
what kind of fiscal hit we would get under this law with that.
The last question is this. And that is not a question. That
is a request. The last question is, it has been argued and was
argued here yesterday with the chairman, that the new health
care law will create jobs and increase labor force
participation. But if I recall from your analysis, it was quite
the opposite. Is that not the case?
Mr. Elmendorf. Yes.
Chairman Ryan. Okay. Thank you.
Again, I could go on and on, but I will turn it over to Mr.
Mr. Elmendorf. I am sorry. But could I use just a minute to
just quickly respond to a few aspects of that, Mr. Chairman?
Chairman Ryan. Yeah. Sure.
Mr. Elmendorf. So one thing to say is that we do show in
the back of our outlook the effects of alternative economic
assumptions on budget outcomes. One of the alternatives that we
show is the effect of interest rates being 1 percentage point
higher for the entire next decade. Under that alternative,
extra interest costs for the Federal Government would be about
$1.25 trillion. And if interest rates were lower by a
percentage point, then they would be $1.25 trillion less in
interest payments. We can certainly look at alternative----
Chairman Ryan. Yeah, your average is less than 4 percent
for the decade, correct? Or what is it? Between 4 and 5?
Mr. Elmendorf. I don't remember the average. But it is
worth noting that our interest rate projection is above the
financial markets' reading on interest rates. Our own model
actually has somewhat higher--predicts somewhat higher
Chairman Ryan. And you have just recently revised that
Mr. Elmendorf. We have moved between--I don't remember the
revision exactly. But we put our forecast somewhere between our
own modelling and what financial market participants are
saying. But we can look at other scenarios, of course.
Chairman Ryan. I just think the recent movements of the
yield curve and some other post-cyclical indicators warrant us
looking at different simulations and seeing what the fiscal
effects of that would be.
Mr. Elmendorf. On enrollment in insurance exchanges, we
project that to be 24 million by 2019, which is the last year
of our original cost estimate. And we predict that only 3
million fewer people would have employer-sponsored insurance
I understand that you don't think that is right. There are
many longer explanations I could give. Let me just say quickly
that I know four other groups that have built sophisticated
models of the health insurance system somewhat analogous to
ours. Those are the Office of the Actuary at CMS; those at
RAND; at the Urban Institute; and at Lew and Associates. All
four of those groups show the same or less employer dropping of
health insurance coverage as a result of that legislation than
Now, we and they are all operating off of a very limited
set of evidence, off of the effects of much smaller changes in
policy than has now been enacted. And so I don't take huge
comfort in their having similar answers. I think the range of
true uncertainty is larger than the range of differences in our
estimates. But our estimate is quite consistent----
Chairman Ryan. Sure. I understand.
Mr. Elmendorf [continuing]. With the bulk of professional
analysis of this question.
Chairman Ryan. I could go on.
Labor market participation, tightness and looseness of
labor market factors into all this stuff, competing for labor
based on benefits.
Mr. Elmendorf. Yes. Exactly.
Chairman Ryan. I could go on and on and on.
Mr. Van Hollen.
Mr. Honda. Excuse me. Would the chairman yield for a minute
for a point of clarification?
Chairman Ryan. Sure.
Mr. Honda. The term that you used, Mr. Chairman, dumping
their employees into the exchange, is a definition of exchange
a series of a group of insurance companies operating there or
is it just one entity?
Chairman Ryan. Its employers no longer offering health
insurance to their employees and sending them into the
Mr. Honda. The definition of exchanges is----
Chairman Ryan. To an employee, they have one exchange. If I
am in Wisconsin, I am going into the Wisconsin exchange.
Mr. Honda. Right. But the exchange has many insurance
companies operating within it?
Chairman Ryan. Yeah. You have gold, silver and bronze.
Mr. Honda. Okay. So it is not that they are dumping them
into something that may be less than. It could be that they
give them more choices.
Chairman Ryan. Sure. But the taxpayer is on the hook for it
Mr. Van Hollen. Thank you, Mr. Chairman.
And, Dr. Elmendorf, thank you for your testimony.
Let me just start out where I know we agree, which is the
levels of debt that are projected in the CBO report in the
outyears are unacceptable and unsustainable. Whether you are
drawing the line at 80 percent or 90 percent or 100 percent and
above, the fact remains that we cannot afford as a country to
get into that kind of territory.
There is, however, I think a very important debate as you
indicate in your testimony about how you get there. And I
couldn't agree more with your statement that the sooner we make
a decision to put in place a plan to deal with the debt in the
outyears, the less painful it would be and that if you do too
much in the very short term, it could be disruptive to the
And, again, as I indicated in my opening statement, the
bipartisan commission that was tasked with the job of
identifying ways to reduce the deficit and the debt, warned
that you don't want to have a negative impact on the economy
and growth in the short term because we all would agree, would
we not, that to the extent the economy were to slow down, that
would obviously contribute in a negative way to our debt,
Mr. Elmendorf. Yes, that is right.
Mr. Van Hollen. Now, it is true, isn't it, that if you were
to make immediate deep cuts, that would have a--that would be a
drag, at least in some measure, on the economy and the jobs in
the short term; is that right?
Mr. Elmendorf. Yes, Congressman. A year or so ago, we
analyzed a set of policies being considered as ways to boost
output and employment. And we looked at a variety of reductions
in taxes, including the payroll tax that was enacted. We looked
at some increases in government spending. Our analysis then was
that under the current economic circumstances and the current
posture of monetary policy, that increases in government
spending would in the short run increase output in employment.
And the logic works in reverse, that decreases in spending
would decrease output in employment in the short run. Of
course, as you understand, over the median run and long run,
the extra debt that is accumulated worsens the economic
situation. But there is some tradeoff there for you and your
colleagues in deciding what pace to move in putting fiscal
policy on a sustainable path.
Mr. Van Hollen. Right. And the President indicated in his
State of the Union address that he will impose in his budget,
that will arrive Monday, a 5-year freeze on non-security
domestic discretionary spending, which, by his account, comes
to about $400 billion in savings over a period of time.
I would just, Mr. Chairman, like to enter into the record
an example of the impact of just one of the cuts that was
identified by the Appropriations Committee yesterday. That is
the cut to the Drinking Water State Revolving Fund of about--a
cut of $1.15 billion. That is a matching fund. So States and
localities have to match it. And a very respected consulting
firm, RTI International out of North Carolina, has done an
analysis of the impact of that cut on the economy. I mean, this
is one of those kind of investments that we have talked about;
this is a public investment, transportation, water
infrastructure. And by their account, that cut will result in
between 36,800 and 50,600 fewer engineering and construction
jobs. So these decisions to withdraw investments in public
infrastructure have an immediate impact on jobs in the economy.
Let me just ask you to turn quickly to the question of the
different components of the challenge as we approach deficit
reduction. Because one of the first actions that was taken in
this House was to eliminate the PAYGO rule and replace it with
a rule that was more one-sided. In other words, the rule said,
well, yes, we have to take into account and pay for cuts, but
not with respect to certain revenues, spending cuts. Isn't it
the case that if you reduce revenues, you increase the deficit?
Mr. Elmendorf. Yes, Congressman. That is correct.
Mr. Van Hollen. Well, no, but the math--I will tell you--I
thank you, Dr. Elmendorf. I am not referring to the chairman
here, but there have been a lot of people making statements
around here suggesting that there is not a correlation there.
So as we approach this issue, it seems to me we should have
rules that recognize the deficit is increased not just by
actions on one side of the equation.
Let me just turn last to the health care question. And I
want to ask you about the deficit impact. But before I do that,
as I recall, one of the reasons you argue that--you said with
respect to the labor market would have maybe some small
impacts, but one of the impacts you said was that there would
be some individuals who, because they can get their health care
through the exchange and no longer have to get health care
through their employer, would choose, would now have the
freedom to choose to not get a job simply because they needed
the health care; isn't that correct?
Mr. Elmendorf. Yes, that is right. But on balance, as you
mentioned, we think that the enactment of the legislation
reduced by a small amount, roughly half a percent, the amount
of labor that workers would supply and would be demanded and
would be used in the economy over--by the end of the decade
when the law was fully phased in.
Mr. Van Hollen. And finally, Dr. Elmendorf, with respect to
the CBO projections on the impact of the deficit going forward,
as you know, one of the first actions taken by the new Congress
was to repeal the health care reform law. You wrote to the
Speaker of the House on January 6th of this year indicating
that your assessment would be that that would add $230 billion
to the deficit over the next 10 years and approximately $1.4
trillion over 20, based on your projections of GDP growth; is
Mr. Elmendorf. So the former number is correct, and we
noted carefully in the estimate that this was pending our
complete evaluation using our new economic and technical
assumptions. We also emphasized that that number assumed that
the law would otherwise have unfolded as enacted without
changes. And as we have said for a number of years now and as
you have seen yourself, important changes in policy are often
followed by further changes in policy. It is not clear that
everything will unfold as enacted, but that is our job, is to
score legislation as it was--as it is written.
The second number you did for the 20 years we did not use.
We have carefully referred to longer-term budgetary effects as
shares of GDP. It is not just a semantic issue. We think it
appropriately signals the greater uncertainty that attends to
those longer-term estimates and also appropriately adjusts for
the fact that the economy is growing; there will be some
inflation, that pure dollar numbers from 2025 don't mean very
much to most people.
But we did estimate originally and then repeated in this
letter, to which you refer, that again if the law had otherwise
unfolded as enacted, that repealing it would increase deficits
in the second 10 years, as well as in the first decade.
Mr. Van Hollen. If I could just--one follow up. Thank you,
But just to be clear on the second decade, as you
indicated, you expressed your estimate in terms of GDP, and you
did say that you believed that repealing the health care reform
law would increase Federal deficits in the decade after 2019 by
an amount that is in a broad range around one-half percent of
Mr. Elmendorf. Yes. That is right.
Mr. Van Hollen. And CBO has done estimates of what it
projects GDP to be during that period, right?
Mr. Elmendorf. Yes.
Mr. Van Hollen. And so that is how we got the figure, 1.4,
was we took CBO's estimates of what GDP being would be during
that year and applied the percent savings you indicated.
Thank you, Mr. Chairman.
Chairman Ryan. Something tells me this conversation is
going to continue.
Mr. Campbell. Thank you, Mr. Chairman and Dr. Elmendorf.
And we will continue this conversation right now. First, on
health care, before I get to broader issues, you just mentioned
that you believe or that in your estimates, that the health
care law would reduce the labor used in the economy by about
one-half of 1 percent. Given that I believe you say there is
160 million full-time people working in 2021, that means that
in your estimation, the health care law would reduce employment
by 800,000 in 2021; is that correct?
Mr. Elmendorf. Yes. The way I would put it is that we do
estimate, as you said, that the household employment will be
about 160 million by the end of the decade. Half a percent of
that is 800,000. That means that if the reduction in the labor
used was workers working the average number of hours in the
economy and earning the average wage, that there would be a
reduction of 800,000 workers.
In fact, as we mentioned in our analysis last summer, the
legislation also creates some incentives that might affect the
number of hours people work. It might affect the propensity to
work of lower- and higher-income people. We haven't tried to
quantify those things, but the impact is that the 800,000 might
not be exactly the number.
Mr. Campbell. Sure.
Mr. Elmendorf. The equivalent of withdrawing 800,000.
Mr. Campbell. Sure. But that is your best estimate at this
You just pointed out that the health care law also beyond
10 years increases the deficit. And prior to 10 years, there is
this whole issue about the cuts and payment rates for providers
of services for Medicare programs. Can the same dollar of
Medicare savings both improve the long-term solvency of the
Medicare program and fund a new entitlement? Can the same
dollar be used for both those functions?
Mr. Elmendorf. So, as you understand, Congressman, the way
the budget works is that if a dollar less is spent out of the
Hospital Insurance Trust Fund, Part A of Medicare, that is a
dollar less of overall government outlay; it improves the
deficit by a dollar. It also means that the Medicare Part A
trust fund, the HI Trust Fund, ends up with an extra dollar's
worth of government securities that is holds.
And as we have written before, those bonds in the trust
fund for Medicare and for Social Security have important legal
meaning. They are real government debt, backed by the full
faith and credit of the government, but they don't have much
economic meaning, because as you are suggesting, if one saves a
dollar by not spending it in someplace and one then spends the
dollar in some other place, one has not improved the ability of
the government to ultimately meet future Medicare or Social
Security obligations. And thus the total increment to the HI
Trust Fund from the health legislation enacted last year was
much larger than the increment that we estimate to government
saving. And that excess is real bonds for the trust fund but
does not reflect an improvement in the government's ability to
meet those later Medicare objections.
Mr. Campbell. And if you don't double count this, it does
change the numbers or the computations for the first 10 years,
does it not?
Mr. Elmendorf. I want to be careful. We do not double
count. We kept track of every piece of legislation and its
effect on the budget once and only once. But our estimates
refer, as all of our estimates do, to the effects on the
unified--the overall government budget. So there is no double
counting that we have done. I think the issue you are raising
is whether--is how many benefits of the legislation one can
claim credit for at the same time. But that is not my end of
Mr. Campbell. Okay, well, unfortunately, I now have just
slightly over a minute to get to what I wanted to get to.
But, other than this, but suffice it to say on the health
care plan, you think it is going to reduce employment over 10
years. It certainly increases the deficit after 10 years. And
there clearly is debate about what it does within 10 years. So
how that is good for what we are talking about here in the
Budget Committee, I don't know.
But in my remaining minute, I just wanted to mention real
quick, first of all, I share the chairman's accolades as far as
CBO and yourself and what you all do and that you have a very
difficult job. You have to predict not only the vicissitudes of
interest rates and the marketplace and GDP, but the
vicissitudes of Congress as well and what we are going to do
and what we are not going to do.
And when I look at the baseline projection versus your
alternative, when the baseline includes tax increases, which
nobody currently is advocating, including the President,
including Democrats in Congress, including Republicans in
Congress--what it includes, cuts to Medicare--or to the so-
called doc-fix providers that none of us have as of yet have
been willing to do and so forth. I look at the alternative
scenario as a much more likely scenario based on what is going
on. And I can go through other things. I mean, your interest
rate projections, even though you moved them up, still you have
the 10-year Treasury bond below anything it was at during all
the 1980s and the 1990s and through much of the 1970s, I
believe if I have your figure, 2.7, right. So anyway--now my
time is up. But the whole point is that this 100 percent of GDP
debt in 2021 is a realistic possibility and not some pie in the
Mr. Elmendorf. So, Congressman, we are not trying to
predict what you and your colleagues will do. We are trying to
illustrate the effects of alternative policy paths. It is up to
you all to judge what you think is likely. But we do say in the
report that with more and more large pieces of policy being set
on a explicitly temporary basis, with many Members talking
about their interest in extending those, we think that the
current law baseline is--has become less useful in showing the
thrust of current policies and that is why we are trying to
illustrate some alternatives for you.
Mr. Campbell. Thank you.
Chairman Ryan. Ms. Schwartz.
Ms. Schwartz. Thanks. Ms. Schwartz is hard to say. I
I will not ask you to repeat it because you have been
absolutely very clear in the answers to the previous questions
that the health law that is law of the land now reduces
deficits over 10 years and over 20 years? And you have not
double counted anything?
Mr. Elmendorf. That is correct, Congresswoman.
Ms. Schwartz. Thank you.
I am sure we will be saying that over and over again. But
you keep saying it. Everybody else says it. It is--and we keep
hearing that it is not understood by the other side.
What I want to do is try and just focus on a couple of
statements you have made, but I wanted to just reiterate some
of them and be clear about where we are on the budget deficit
and where we are going.
We all agree that the deficit is a problem and the national
debt is a problem and that we want to reduce the deficit. Lots
of ideas out there about how to do it.
But in the short term, the Republican majority has made--I
will try to ask the questions in a short way and ask you to
answer them in a short way. They have changed the rules of the
way we count spending and what adds to the deficit in this new
Congress. We went from PAYGO rules to CUTGO.
Mr. Elmendorf. The House Rules have changed. We count the
deficit the same way. We add up all the----
Ms. Schwartz. That is what I want to make sure about. That
is what I wanted you to answer about. The new rules actually
say that they have to find a way to--if they are going to do
spending cuts--no, that is going to--they have to offset any
spending changes, but they don't have to offset or really count
in their rules--you will have to do it generally--count any
changes in tax policy, tax cuts in particular.
So just to relate this to a family budget, it is like
saying, all right, if things are tight, we are going to cut
back on going out to dinner or going to the movies or
entertainment for our kids. We just can't afford to do it. But
in fact, if you get laid off from work and you have no more
salary, we are not counting that and maybe our checking account
won't notice. Isn't that kind of what they are doing? You can't
do it, but that is what they are saying they are going to do?
We are not going to notice there is less money coming in?
Mr. Elmendorf. Well, Congresswoman, we keep track of all
the changes in spending and revenues. And reductions in
revenues increase the deficit, just as increases in spending
increase the deficit.
Ms. Schwartz. So you will help us keep on track? We can go
to CBO; you will actually be able to tell us that this could
and will add to the deficit if, in fact, there are tax cuts,
for example, that they don't want to pay for.
Mr. Elmendorf. The structure of our cost estimates is not
altered by this change in the House Rules.
Ms. Schwartz. We are going to look towards you to actually
help us with that and help the public understand that that is
adding to the deficit, not helping us fix the deficit.
Second, they also are looking at the budget as only
cutting--they only want to cut spending in one piece of the
budget. They are only looking at cutting proposals for spending
in nondefense discretionary. Now the average American, what
does that mean? So I am going to ask you, what percentage of
the budget is that? They are looking for all the spending cuts,
particularly the early ones, to come out of one part of the
budget. Is that the biggest part of the budget? What part of
the budget is it?
Mr. Elmendorf. No, it is not. So, as you know, the
government spends much more on the mandatory programs,
entitlement programs, than it does in discretionary spending.
Ms. Schwartz. And defense? What about defense?
Mr. Elmendorf. So I have in hand in front of me the numbers
for 2021, if one looks at the end of the decade, at which
Social Security would be 21 percent of government spending; the
major health programs would be 27 percent; defense would be 15
percent; net interest payments, 17 percent; and other--all
other spending 20 percent, one-fifth. That is under the
assumption that certain policies are extended.
Ms. Schwartz. Can we get to deficit reduction if the only--
at least for the short term, the only issue on the table is 18
to 20 percent of our budget, and they are going to take all of
these cuts, pretty dramatic ones in some cases, from one part
of that budget? Most economists, most advisors have said you
have got to look at everything. Everything has got to be on the
table, both tax revenue, tax policy, spending in all
categories, in order to actually get to serious deficit
reduction. So that between the rules of the way they are going
to do any of the work they are going to do going forward,
ignore the big piece that is tax cuts, and they are also now
looking for all of the spending cuts to come out of really just
one piece of the pie, under 20 percent.
Mr. Elmendorf. So, Congresswoman, the policy choices are
yours and your colleagues. It is certainly true that the piece
of the pie represented by nondefense discretionary spending is
not a very large piece of the government's total spending.
Trying to--one can reduce the deficit with any given piece. But
if one wants to achieve a goal of stabilizing the debt-to-GDP
ratio or a more ambitious goal of balancing the budget, then
just as a matter of arithmetic, that is very hard to do
focusing on just one-fifth of the budget.
Ms. Schwartz. Thank you.
Chairman Ryan. Thank you. I would just simply say we are
here in a CR because the majority last year didn't pass a
budget at all, nothing. They passed a CR that goes until March
4. So here is where we are. Discretionary spending is what is
on the table right now because the last majority didn't pass a
budget. I just want to ask you one quick question. Can you
count class-act revenues both to go to the CLASS act and to pay
for a new entitlement?
Mr. Elmendorf. If revenues are collected----
Chairman Ryan. Can you use class-act revenues to go to
CLASS act and a new entitlement? Can you use Social Security
revenues to go to Social Security and a new entitlement? Can
you use Medicare cuts to go to Medicare solvency and pay for a
new entitlement? Can you use both those dollars for both
Mr. Elmendorf. One can't use a single dollar to pay a
dollar of benefits here and a dollar of benefits some other
Chairman Ryan. Thank you.
Mr. Van Hollen. Mr. Chairman, if I could just briefly on
Chairman Ryan. I indulged, so I will let you indulge.
Mr. Van Hollen. Let me just say with respect to the point
on the budget resolution.
Number one, we did pass the budget enforcement resolution,
which applied for one year, one year, this current fiscal year
2011, I would point out that that budget enforcement resolution
was less than the budget numbers submitted by the President. We
then enacted a continuing resolution.
Chairman Ryan. So March 4.
Mr. Van Hollen. Till March 4th, which, of course, was even
below the budget resolution act that we have had. And now we
are talking about reducing that further. So the reality is that
we did have a 1-year budget resolution for this fiscal year.
Chairman Ryan. Well, we can go back and forth, but I am
trying to challenge the presumption that we are suggesting we
can balance the entire budget on this narrow slice of the
budget. No, we are not making that assumption. We are in
discretionary because a CR is expiring March 4. With that, I
will go to Mr. Calvert.
Mr. Calvert. Thank you, Mr. Chairman.
Doctor, in your testimony, you say to prevent the debt from
becoming unsupportable, policymakers must cut spending, raise
taxes or adopt some combination of these. But your own report
states that raising taxes have consequences as well. In part,
on page 25, it states that if growing interest costs were
financed by raising taxes, quote, those rates could discourage
work and savings and further reduce output. Could you describe
further how raising taxes negatively affects work and saving?
Mr. Elmendorf. So the reward that people get from working
and saving is the amount that they take home from their job or
the amount that they can take out of their bank account for
investments later, and that depends both on what the employer
is paying or the investment is yielding and also on the tax
payments they need to make on that to the government. Increases
in marginal tax rates, which are the rates you pay on the
additional dollar of income, will tend to discourage work and
Mr. Calvert. It sounds like the old Laffer curve.
Mr. Elmendorf. Well, the Laffer curve is a particular
extreme version of that. I was going to say, there is a lot of
debate, a lot of research and a lot of debate among economists
about how sensitive work and saving are to those tax rates. The
Laffer curve, which as Professor Laffer noted this morning in
an article newspaper, is a concept that predates him by
probably centuries, says that there is a point at which making
tax rates even higher tends to reduce revenue, that you lose
more than you gain.
Mr. Calvert. I think it would be an accurate statement that
if you tax someone 100 percent of their revenue, there is no
inducement to work.
Mr. Elmendorf. That is right. I think a very wide spectrum
of economists think that most tax rates in the United States
today are not at or beyond that peak of the Laffer curve. But
as I said, there is disagreement about just where that peak is
and how large the disincentive effects are.
Mr. Calvert. As customary, your baseline revenue estimates
are based on current law. As such, the figures for 2013 and
beyond assume increases in marginal tax rates, expansion of
alternative minimum tax; various other tax hikes are scheduled
to occur under current law, as you know. Based on the table of
selective policy alternatives, the scheduled tax law would
amount to a total tax increase of about $3.8 trillion through
2021, and revenue would rise to about 20 percent of GDP. Even
with that significant tax boost--if, in fact, that was
accurate--would revenues ever even come close to catching up
with spending with what is going on today?
Mr. Elmendorf. Well, revenues get closer, but that is not
sufficient. As you say, our baseline projections include the
expiration of those provisions in the tax law, and we show
Mr. Calvert. And even looking beyond the 10-year window,
isn't it fair to say that spending under the current policy
would continue to outpace revenue even if the tax revenues were
built into the baseline projection?
Mr. Elmendorf. Yes, that is right, Congressman.
Mr. Calvert. Thank you, Mr. Chairman.
Chairman Ryan. Mr. Doggett.
Mr. Doggett. Thank you very much, Mr. Chairman.
I want to agree with the expression of concern that
Chairman Ryan has made concerning the growth of our debt and as
well to agree with the need for us to ferret out every
inefficiency in spending we can find and indeed to make some
cuts in spending even of programs that are performing well
because of the size of that debt.
The concern that I have--and I am not asking you to take
sides with reference to that concern--is the overly narrow
focus of the chairman's approach to our debt problem. And let
me ask you if it is not true that unpaid-for direct
expenditures and unpaid-for tax expenditures have the very same
effect on the size of our national debt.
Mr. Elmendorf. Certainly, Congressman, the dollar of extra
spending and a dollar----
Mr. Doggett. A dollar of lost revenue?
Mr. Elmendorf. Just as a dollar of lost revenue widens the
deficit by a dollar.
Mr. Doggett. And indeed, in terms of the size of what has
been left off the table by the chairman, the size of total tax
expenditures each year most observers have estimated rival the
total amount of direct discretionary expenditures; isn't that
Mr. Elmendorf. I think that is right. Estimating the total
effect of tax expenditures is difficult because of interactions
among other things.
Mr. Doggett. Exactly. But both are big.
Mr. Elmendorf. I have seen it suggested that it is a very
large number, yes.
Mr. Doggett. So, really, when we make decisions about how
we are going to deal with this debt, one of the things we can
do is to cut direct spending. We can say families are just
going to have to fend for themselves; we are going to cut the
budget of law enforcement with regard to the Wall Street banks,
with regard to the Wall Street security companies, with regard
to the health insurance monopolies. We would like to do
something about that, a little bit, but we just can't afford to
do it any more. And we can't afford clean air and clean water.
We don't want as much environmental law enforcement as we have
had. Let's cut that by $4 billion a year, and that might be one
way to address the deficit, but can't we achieve the very same
thing if we conclude that a provision in our tax laws that
allows Wall Street financial enterprises to enjoy preferential
treatment on some of their financing operations abroad and
takes $4 billion a year by closing that tax loophole, wouldn't
it have the same effect on the deficit?
Mr. Elmendorf. Dollar per dollar----
Mr. Doggett. Dollar per dollar. And the same thing with
reference to cancer research, with reference to scientific
research that might spur additional job growth. If we cut that
by $500 million a year, that will help us solve the deficit but
perhaps with some very negative effects.
Or we could eliminate the $500 million a year in what is
called the look-through rule that advantages some
multinationals in their interest, rents and royalties that they
earn abroad, and it will have the same effect on the deficit.
It is a choice that we need to make.
Would we rather continue to advantage these foreign
operations, some of which may actually encourage the export of
American jobs overseas, or do we think it is better to cut
cancer research and cut scientific research? That is really the
choice the committee has to make rather than you, right?
Mr. Elmendorf. Yes, Congressman.
Mr. Doggett. And that is the problem with the narrow focus
that the chairman and the Republican majority have brought to
this hearing today.
They only want to look at half the problem. And I believe
we need to look at all of the expenditures and especially the
many tax advantages, tax preferences, exemptions that powerful
lobbyists with their string of limousines up here have been
able to get into our Tax Code.
And that is not being done by this hyper narrow focus that
the majority has in this budget process.
Now, let me ask you about another aspect, and that is your
estimates on job creation. You analyzed last year what would be
the most effective ways to encourage job growth in our
policies. And isn't it correct that one of the least efficient
ways to encourage job growth is to extend permanently the Bush-
Cheney tax breaks for the wealthiest people in our society?
Mr. Elmendorf. Congressman, we did estimate that extending
the across-the-board extension of the 2001/2003 tax cuts would
have a low bang for the buck, affecting the economy per dollar
with wider deficits.
Mr. Doggett. Right. Your conclusions were the same as
almost every expert who has ever come before this committee,
Republican or Democrat, that those tax cuts won't pay for
themselves, that they will add significantly to the deficit,
that they are an inefficient way to create job growth. If the
objective is to encourage more job growth than what you have
predicted, extending the Bush tax cuts permanently for the
wealthiest in our society is the wrong way to go.
Mr. McClintock [presiding]. The chair recognizes me.
Dr. Elmendorf, thank you for coming. My first question is
spending. Under George Bush, would you say that spending grew
faster or slower than it did under Bill Clinton?
Mr. Elmendorf. Total Federal spending?
Mr. McClintock. As a percentage of GDP.
Mr. Elmendorf. I am sorry, I don't know the answer to that
question. So total Federal outlays in fiscal year 2008 were
about 2.5 percentage points of GDP above where they were in
2000. And in 2000, they were about 4 percentage points of GDP
below where they were in 1992.
Mr. McClintock. So spending grew much faster under George
Bush than it did under Bill Clinton?
Mr. Elmendorf. Relative to the growth of the economy, yes,
Mr. McClintock. How about deficits under George Bush, would
you say they were bigger or smaller than they were under Bill
Mr. Elmendorf. They were a good deal bigger, Congressman.
Mr. McClintock. Tell us, didn't we have a big stimulus
program in February 2008 under George Bush where we all got
$600 checks to stimulate the economy?
Mr. Elmendorf. There was, yes. I don't remember the total
size of that legislation, but yes, those checks were issued.
Mr. McClintock. Well, if higher and higher spending and
bigger and bigger deficits and massive government stimulus
spending was the root to prosperity, I would have thought that
the George Bush administration would have ended with a new
golden era for the American economy. I wonder how that
happened. I guess that is a rhetorical question. I will move
Mr. Van Hollen warned us earlier today that the deep cuts
would be a drag on the economy. I was wondering if you could
tell us about the great depression of 1946.
Mr. Elmendorf. Congressman, as you know, there was not a
great depression of 1946.
Mr. McClintock. There wasn't a great depression in 1946?
Well, how could that possibly be? In 1945, Harry Truman
abolished the excess profits tax. He slashed Federal income tax
rates. In 1946, Harry Truman cut Federal spending from $85
billion down to $30 billion in a single year. He fired 10
million Federal employees. It was called war demobilization.
How would you characterize the post-war economy under Harry
Mr. Elmendorf. The economy performed well in the wake of
the Second World War. It actually was a surprise to macro-
economic forecasters at the time. It is an interesting episode
in the period of economic thought.
Mr. McClintock. Yes. The Keynesians at the time, as I
recall, were predicting a 25 percent unemployment rate, a
second great depression. And instead, we had the post-war
economic boom. That is very interesting. Maybe we stumbled upon
Mr. Elmendorf. In fact, economists changed their models
ever since that point to reflect some of the things that they
learned during that episode.
Mr. McClintock. Apparently they haven't changed those
models enough in the current administration.
Mr. Elmendorf. I am not sure what you are suggesting. I
think that the models that CBO uses for this and other sorts of
analysis are at the cutting edge of the models that economists
in universities and the private sector use for the questions
that we analyze.
Mr. McClintock. I am glad to hear that. Are there any other
periods in our Nation's history when our debt to GDP was
comparable to what it is now?
Mr. Elmendorf. Well, during World War II, as you know, the
debt ran up to a point above 100 percent of GDP and then fell
from that point during the 1950s, 1960s, and 1970s relative to
Mr. McClintock. Right. And any other times?
Mr. Elmendorf. I wrote a paper once, but I forget,
Congressman, the nature of debt in the----
Mr. McClintock. The Revolutionary War debt, I believe,
brought us to about that same height, as I recall.
How were those debts discharged?
Mr. Elmendorf. Well, so in the wake of the Second World
War, what happened was the government's budget ran small
deficits mostly, but was close to being in balance, so there
was a nominal amount of government debt. It didn't change very
much, and the economy grew. So, as a burden on the economy,
debt fell relatively.
Mr. McClintock. So Harry Truman slashed taxes, slashed
spending, slashed Federal employees, and the economy grew out
of a debt comparable to the one we have now?
Mr. Elmendorf. That is right, Congressman.
As you understand, of course, the path of the budget and
the debt depends not just on the policies that you and your
colleagues enact, but also on the economic circumstances. And
your policies have some effect on those, but also there are
many other influences and economic circumstances.
One of the things that we take seriously in our----
Mr. McClintock. If I could, my time is fleeting, so if I
can move on to a final question here.
Mr. Van Hollen earlier today said that we must not
jeopardize the full faith and credit of the United States
Government, and we all agree with that.
Tell me, would the full faith and credit of the United
States Government be strengthened by requiring first call on
revenues to go for debt service as most other States already
Mr. Elmendorf. To be honest, Congressman, I think that is
unclear. The government has a range of obligations. It might be
the case that protecting certain obligations and not others
would then strengthen confidence in the government's commitment
to paying those obligations.
On the other hand, it might be the case that the government
not honoring all of its obligations would then cast doubt on
its commitment to honoring any of those obligations.
I think most analysts with whom I have talked, and I have
talked with a fair number, think that were the government to
default on any of its obligations, those to debt holders and
also to those people with regular contracts with the government
and so on, that would represent a rolling of the dice about
investors' perception of the safety of U.S. securities. I don't
know any analysts who think that the government should roll
those dice and see what happens.
Mr. McClintock. Funny, other States do it all the time.
Ms. McCollum is next.
Mr. Elmendorf. Other States pay higher interest rates than
the U.S. Treasury does, Congressman.
Mr. McClintock. Ms. McCollum.
Ms. McCollum. Thank you, Mr. Chairman.
I would like to start my comments with a reflection on a
misstatement made during the hearing yesterday. After I left
yesterday's hearing, the gentleman from Missouri, Mr. Akin,
referenced my statement, twisted my words into something I
neither said nor implied, and I am sorry he is not here. He was
I hope the gentleman's misrepresentation of my comments
does not reflect the manner in which this committee will
conduct itself in the future.
As Mr. Akin is from the Show Me State, I brought the
transcript of yesterday's hearing with me, and I would like to
enter that in the record, but right now I would like to read
from the transcript.
``Mr. Akin. The comment was made earlier I thought which
was an amazing quotation from Ms. McCollum that the budget
deficit is not a spending problem. I found that amazing because
it seems to me that it sure is a big spending problem. So we
must be on different planets, I suppose.''
Mr. Chairman, I don't know what planet Mr. Akin lives on,
but in the real world, I pride myself in conducting myself with
respect and civility with my colleagues.
For the record, I wanted to restate my comments from the
``Ms. McCollum. I am going to paraphrase a popular Tea
Party slogan that goes something like this, quote, the Federal
Government doesn't have a revenue problem, it had as a spending
I went on to say, ``Chairman Bernanke, it seems clear to me
that the deficit is not just a spending problem.''
Nowhere in my statement did I say the budget deficit is not
a spending problem.
For new Tea Party members here on the committee, this is a
good moment for a little bit of history. Mr. Akin and I both
entered Congress in 2001.
Mr. Elmendorf, am I correct remembering back in 2001, there
was a projected 10-year budget surplus of $5.6 trillion?
Mr. Elmendorf. It was a large positive number,
Congresswoman. I am sorry, I don't remember the exact figure.
Ms. McCollum. At the time, Mr. Akin's party, the Republican
Party, before the addition of the Tea Party, controlled the
House here and the White House. The surplus that President
Clinton left the American people quickly vanished after
President Bush and Mr. Akin entered Congress, as was pointed
out by the gentleman in the chair right now.
Mr. Elmendorf, am I correct, or correct me if I am wrong,
that in 2001 and 2003, the Bush tax cuts, which I voted against
and Mr. Akin voted for and favored, contributed to the growth
of the deficit by trillions of dollars?
Mr. Elmendorf. Yes, that is correct, Congresswoman.
Ms. McCollum. Again, Mr. Elmendorf, correct me if I am
wrong, but the war in Iraq, which I opposed and Mr. Akin voted
in favor for, added to the Federal deficit by nearly a trillion
Mr. Elmendorf. Yes, Congresswoman. It may be over a
trillion dollars; I am not exactly sure. It is a big number,
though, as well.
Ms. McCollum. Mr. Elmendorf, I also believe it is correct
to say that the December vote to extend the Bush tax cuts added
$858 billion to the Federal budget deficit; is that not
Mr. Elmendorf. Yes, that is correct, Congresswoman.
Ms. McCollum. I raise this because this is another example
of where Mr. Akin and I disagree. He voted to add $858 billion
to the deficit by voting for tax cuts. Included in that were
NASCAR's racetrack owners, tax breaks for Caribbean rum
manufacturers, along with extra tax cuts for millionaires and
billionaires. And I voted against the deficit-busting bill.
So Mr. Akin is very concerned about spending. His record to
me would indicate that he has voted to add trillions of dollars
to the national debt.
Now, Mr. Elmendorf, what would be the effect on future
deficits if Congress were allowed to let the Bush tax cuts
expire in 2012? And did not the economic growth we saw under
President Clinton include a tough vote, in which no Republican
helped Democrats' vote, that included a tax increase?
Mr. Elmendorf. So, Congresswoman, as you know, our baseline
projections, which follow current law, assume that the tax cuts
now scheduled to expire, expire. As we show one of the policy
alternatives in the report, if one instead, if you and your
colleagues instead voted to extend those expiring tax
provisions, that would add trillions of dollars to the deficit
over the next decade and thus to the accumulated level of debt
by the end of the decade.
You are also right, Congresswoman, of course, that in the
1990s, a number of votes were taken to change policies in ways
that reduced the deficit, and those actions, together with the
strong economy, led to budget surpluses at the end of the
Ms. McCollum. Just to clarify, because the clarification
was that tax cuts were part of that decision under the Clinton
administration, to remove the tax----
Mr. Elmendorf. A change in tax policy is part of what
[The information follows:]
February 9, 2011, Budget Committee Hearing Transcript
Excerpts Submitted by Ms. McCollum
* * * * * * *
[remarks by rep. mccollum]
Ms. McCollum. Thank you, Mr. Chairman. Chairman Bernanke, thank you
for being here. I believe that we have a lot of work ahead of us, and I
want to thank you for the work that you did in stabilizing our economy
in the past, and I look forward to hearing some of your advice,
suggestions, and ideas on how we move forward with getting out of the
Great Recession. And I want to be part of the solution, and we hear a
lot of talk here in Congress about spending, but I'm also concerned
about a lot of the tax perks that lobbyists have been very successful
in getting for special interests in our tax code, and I think that we
need to put everything on the table.
But having said that, today, we've focused on spending quite a bit,
as some of the questions have come through. And in fact, I'm going to
paraphrase a popular Tea Party slogan; it goes something like, quote,
``The federal government doesn't have a revenue problem, it has a
Now last week, Chairman Ryan put forward his best effort to reduce
the deficit with spending target cuts, that is $41 billion from the
fiscal year 2011 budget. The Republican target reduces the fiscal year
2011 projected deficit by about 2.5 percent. That leaves 97.5 percent
of the deficit intact.
Now, in an extreme scenario, if all 176 Republican Study Committee
members were able to have their way and take control, they would be
allowed to cut four times what Chairman Ryan's best effort is. But that
would only then still only represent 10 percent of the federal budget
deficit for fiscal year 2011, still leaving more than 1.3 trillion.
Chairman Bernanke, it seems clear to me that the deficit is not
just a spending problem. Is it possible to reduce the federal deficit
to responsible levels without capping or cutting defense spending and
without looking at the tax perks that many corporations and lobbyists
have been successful in getting?
And my second question is: With the type of cuts that are being
discussed, do you think that we need to be insightful when making these
spending decisions on what to cut, on the impact of jobs as well as
U.S. competitiveness, and the global economy? I think we need to be
careful of gutting domestic investments in education, infrastructure,
and R&D in the next decade, because we might see reverses that would
put us at a competitive disadvantage.
Mr. Bernanke. Well, on your second question, I'm hoping to,
obviously, it is very important that the deficits be brought under
control, but it is not just a matter of total spending and total
revenues, it is also how smart is the spending and how are we using it?
And the tax code, are we doing it in a way that is constructive for
growth and for competitiveness?
So, I would urge the Congress not only to talk about total budget
numbers, but also to think hard about the various programs and tax
provisions to make sure that they are growth friendly, and that is a
very important part of your job.
In particular, you mentioned perks, et cetera. I think one
direction that at least should be considered would be, in the corporate
tax code, for example, to reduce a lot of loopholes, to broaden the
base, and therefore be able to lower the tax rate, which is now soon
going to be the highest in the industrial world so that the decisions
made by corporations are based, you know, not on tax distortions, but
rather on the economics of where, for example, they should locate their
plants, and so on.
So, I do think that growth friendliness is a very important part of
this and that lower rates and broader base is something that most
economists would agree is a good direction to go in the tax code.
On short-run versus long-run, I, again, I understand there's a lot
of focus on this year's budget. Without commenting directly on that, I
do think that in order to be credible, given that the budgetary
problems get worse over time, that is as the baby boomers retire, as
health care costs rise, and so on, given that the prospective deficits
are rising over a long period of time, I would hope that a good bit of
your discussion will be about the long-term over the 10, 15, 20 year
horizon and to the extent that you can change programs that will have
long-term effects on spending and revenues. That will be a more
effective and credible program than one that focuses only on the
current fiscal year.
Ms. McCollum. Thank you, Mr. Chairman. As you know, we are setting
the budget. We're setting the spending and Ways and Means does its
issues with the tax code and addressing what I hope will be any tax
perks. But I can't make a decision in isolation, so I look to all of us
to put everything on the table so that we make a well-rounded decision
as we move forward with the budget. So, Mr. Chairman, I'll be looking
to see what your comment is.
Chairman Ryan. Thank you, Ms. McCollum, and I can only say what we
are doing right now is our best; it is our first effort at getting
fiscal control under this place. Mr. Ribble.
* * * * * * *
[remarks by rep. akin]
Mr. Akin. Thank you, Mr. Chairman. It seems like when we talk about
dealing with the budget deficit, it reminds me a little bit about these
all kinds of imaginative weight-loss programs, you know? It seems like
when you get down to the bottom line, you can either eat less or you
can exercise more. You're only given two alternatives. It seems like we
are in the same way, we can try and sugar-coat it, but the problem is
that either we are spending too much or we've got to tax a whole lot
more. The comment was made earlier, which I thought was an amazing
quotation from Ms. McCollum, ``The budget deficit is not a spending
problem.'' I found that amazing, because it seemed like to me it sure
is a big spending problems. We're just on different planets, I suppose,
but let's just assume, instead of you are going to cut spending, that
you are going to try to increase taxes.
Now, my understanding is, I take a look at historic data, our tax
revenues run somewhere in that 18 percent range. My understanding is if
we were to double the tax rate on everything across the board, we
couldn't assume that we are going to get double in revenue, federal
In fact, we may well do what you are saying, crash the economy and
get even less. I do recall, we did dividends, capital gains, and death
text in May 2003, and the Congressional Budget Office said, ``Well, now
you are going to have less revenue,'' but in fact, there was more
revenue because the economy kind of got going.
So, my question is, when I take a look at this overall problem that
we are, you know, too heavy, in terms of like a weight loss thing, it
is pretty spooky to me because you add all of the entitlements, the
main ones, Medicare, Medicaid, Social Security, and then the other
kinds of entitlements, and add debt service to that, and it seems, when
I looked at the numbers, it was looking like about 2.3, roughly,
trillion. And our revenue is about the same thing. So that says you get
zero defense, zero discretionary non-defense, and you are right now
just a parody. So, I don't understand. I guess my question to you is,
first of all, don't we have to, essentially, deal with the
entitlements, just by definition, or can you actually make it up by
just doubling taxes and hope there's going to be a ton more revenue?
Mr. Bernanke. Well, I think that, as you point out, I mean, that in
the long run, the way we are going, entitlements plus interest would
basically be the entire government budget, and so, unless you raise
taxes considerably. Now it is up to Congress to find the right balance
between taxes, and cuts, and so on, of course. But I think you need to
look seriously, particularly at the health care costs, which is of
course, part of what has been going on the last couple of years here in
Congress, but I think a focus on the cost side is important.
And, it would be difficult, I think. I'm very loath to prescribe
exactly how to address these issues; I do think that it would be very
difficult to leave health care programs untouched and still achieve
budgetary balance in the next 15 years.
Mr. Akin. Thank you. I think what I heard you saying is, is you
really got a deal with that rate of spending, and particularly, in the
entitlement, the health care piece is such a big part of that, that has
to be dealt with. And that raising taxes, just to finish the question.
Mr. McClintock. I am sorry, we are out of time.
Mr. Akin. Thank you.
* * * * * * *
Mr. McClintock. Mr. Stutzman.
Mr. Stutzman. Thank you, Mr. Chairman.
Thank you, Doctor, for being here today.
I want to go back to what Mr. Calvert was talking about a
little earlier with the tax rates and where we are at with our
current tax rates and specifically the corporate tax rate.
The President in his State of the Union Address: closing
loopholes and lowering the corporate tax rate. My question is,
would you agree with that, and how might that be accomplished?
We have seen that other countries around the world are starting
to adjust. Is the corporate tax rate maybe over the crest of a
good Laffer curve, and are we starting to see job loss because
of higher taxes and, obviously, I would say, more regulation?
Mr. Elmendorf. So we have not done analysis to identify the
peak of the corporate Laffer--tax Laffer curve. But I think
there is widespread agreement among analysts that lower tax
rates applied to broader bases are a much more efficient way to
raise any given amount of revenue that the Congress wants to
And we have some work underway that we hope to release soon
that looks at our treatment of international aspects of the
corporate business and how that is taxed and compared with the
way other countries address those issues, and we hope that will
be helpful to you and your colleagues in thinking about this
Mr. Stutzman. So you will be taking a look at other
countries around the world that have adjusted their corporate
Mr. Elmendorf. It is a comparison. The study looks at how
adopting different sorts of systems or the sorts of that exist
in some other countries might affect incentives for U.S.
companies to engage in various kinds of behavior.
Mr. Stutzman. Okay. We all talk about simplicity and
simplifying the Tax Code, and would you agree that we have a
very complex Tax Code and that it and should be simplified?
Mr. Elmendorf. No doubt. Again, I think it is a very
widespread view that a simpler Tax Code would be more efficient
in terms of people and companies spending less time filling out
forms and would also be perceived probably as being fairer than
the complicated tax system that we have now.
Mr. Stutzman. I think that the American people obviously
want both sides to fix the problems in Washington. And you
know, we can sit here and point fingers at each other all day
long, but that is not going to fix the problems. I think they
want simplicity. I think they want fairness and equitable
taxation. The proposal has been thrown out with a flat tax or
the fair tax. Could you comment on one of those? I mean, is
that part of a solution?
Mr. Elmendorf. So we haven't studied those proposals
specifically. You know, in order to reduce the deficit, one has
to either spend less or raise more revenue. It is, again, I
think a widespread view among analysts that if one wants to
raise more revenue than some benchmark, that it is more
efficient to do so if one has a better tax system in the sense
of having a broader base and lower tax rates.
The discouraging effect on work and savings, as I discussed
earlier with one of your colleagues, come really from the level
of tax rates. One can, as we did as a country in 1986,
restructure the tax system in a way that can bring down tax
rates while broadening the base. But again, if one wants to
reduce the deficit through this action, one has to ultimately
raise more revenue than under some alternative.
Mr. Stutzman. But raising more revenue is obviously through
growing the economy, not just raising taxes?
Mr. Elmendorf. That is right. But as Chairman Bernanke said
yesterday, and as many people have said, the size of the
current imbalance between spending and revenue in the United
States is not something that can be closed through any
conceivable feasible growth rate.
Mr. Stutzman. Do you have any idea, how do we compare, as
far as our regulatory measures in this country, compared to
around the world? We know some countries are already adjusting
corporate tax rates. Are they also adjusting and correcting
their regulatory systems as well?
Mr. Elmendorf. So there are certainly changes going on in
lots of places. In a lot of other developed countries, in
Europe, where they are feeling fiscal stress, there are
changes, important changes in policy, that are meant to help
those economies grow faster, as you said, and to make other
changes in budget.
We need to remember, of course, that most other developed
countries are starting from levels of revenue relative to GDP
that are a good deal higher than the levels in the United
States. So if they bring those down, they are bringing them
towards us, for the most part, not beyond where we are.
And, of course, a number of countries are raising tax
rates. The government in Britain, for example, is raising taxes
as well as cutting spending. They are working on both sides of
the ledger in an effort to reduce very large budget deficits.
So different countries are doing different things,
hopefully an appropriate response in their situations, but that
is not always clear.
Mr. McClintock. Mr. Honda.
Mr. Honda. Thank you, Mr. Chairman.
Good morning, Dr. Elmendorf.
We all agree that the trajectories of our national deficit
and debt are unsustainable and that they place our Nation's
future in great peril, and that it is this committee's
responsibility to make this right for the American people.
Relative to Afghanistan and other things, the only way we
can make it right is if we are honest about what has placed us
in this predicament. Republicans have placed the blame entirely
on Social Security, Medicare, discretionary spending, which
provides for our working families and our parents in their old
age. They want us to ignore that two policies of the Republican
Party, the Bush tax cuts and the wars in Iraq and Afghanistan,
accounted for over $500 billion of the 2009 deficit and,
including interest, will account for almost $7 trillion over
the next decade.
So my question to you is this, would the savings that
resulted from ending combat operations in Iraq and Afghanistan
and allowing the Bush tax cuts for the wealthy to expire reduce
Mr. Elmendorf. Yes, Congressman. Relative to the
But I want to emphasize that our baseline projections
include the expiration of the Bush tax cuts. So the baseline
projection of deficits of $7 trillion include that expiration.
They do not include a more rapid drawdown of troops overseas.
We offer an alternative in our outlook that picks a particular
scenario in which that reduction would reduce deficits by an
additional $1.25 trillion. It still leaves deficits in excess
of $5 trillion over the coming decade.
Mr. Honda. And the technique that we use with a war on
terror or Afghanistan and Iraq, if you will, the supplemental,
is that something that is directly attributable to the deficits
that we are experiencing and a growing national debt, in the
way it is being done now?
Mr. Elmendorf. Any form of spending, additional spending,
or tax reduction, will widen the deficit. So whether you enact
that spending through a regular appropriation or supplemental--
Mr. Honda. Is that a ``yes'' to that question?
Mr. Elmendorf. Well, I am not sure that I understand you.
It doesn't matter for the ultimate effect on the deficit
whether you enact something in a supplemental appropriation or
a regular appropriation. It is just a matter of your
authorizing the government to spend money.
Mr. Honda. And obligate.
Mr. Elmendorf. Yes.
Mr. Honda. And create a deficit that is not balancing the
budget that would be financed from somebody that would be added
to our national debt.
Mr. Elmendorf. Yes, that is right, Congressman.
Mr. Honda. Thank you.
The other one is investing in education and infrastructure.
In your testimony, you highlighted the jobs crisis that
continues to confront working and middle-class families. You
cited two culprits, the anemic growth rate and structural
changes in the labor market.
In regards to growth, past CBO reports have recommended
investments in transportation and infrastructure, while your
observations regarding the changing labor market and the need
to equip our workforce with 21st century skills, and to do this
implies a need for investment in education. So can you explain
to this committee how public investments in education,
transportation, and infrastructure promotes economic growth?
Mr. Elmendorf. Yes, first, to clarify, we have not
recommended any policies. That is not in our charter. We have
analyzed the effects of policies.
Mr. Honda. Right.
Mr. Elmendorf. And we have said that--for example, we
released a report at the end of last year about the
transportation and water infrastructure of the United States.
We in this case cited analysis by other people, other
organizations, that there are additional highway spending, if
used on the projects with greatest economic return, would have
economic return that exceeded their costs. That doesn't--and
other sorts of investments, like education, can again, if
effective, can enhance future economic output.
I think the key, and this is a big issue as you know in the
infrastructure discussion, is how to direct the money to a
place, to certain sorts of projects that have high returns.
Mr. Honda. One of the high returns is not only job creation
but public safety, and we can see what happened in Minnesota
when we don't keep up with our obligations.
So it appears to me that the return on our investment is
high and would be positive to our economic growth.
Mr. McClintock. Mr. Flores.
Mr. Flores. Thank you, Mr. Chairman.
Dr. Elmendorf, thank you for joining us today. You and your
team have the unenviable task of taking the projected policy
impact on human behavior and organizational behavior and trying
to convert that to numbers. So I appreciate your efforts to try
to do that.
But with that said, I think we can all agree that it is
somewhat, even though you do your best, it can be somewhat
And with that, one of the things that I am going to ask you
to keep in mind as we go forward is that we are marching off in
uncharted territory as a country with high debt levels, and so
the old models may not apply as we go forward. I am sure there
will be times when we will talk about that as we go forward.
My first question, how much has the Federal debt grown in
the last three fiscal year? It is over $4 trillion, right?
Mr. Elmendorf. Yes.
Mr. Flores. There has been some commentary during this
hearing extolling the virtues of PAYGO. In my view, growing our
debt by $4 trillion while PAYGO was in operation would indicate
that PAYGO has been an abject failure.
The next thing I want to talk about is, you said earlier in
your testimony, not only today but earlier, that you don't get
a good bang for the buck in terms of reducing taxes on the
economy. Where do you get the bang for the buck?
Mr. Elmendorf. Actually, I don't think that is a fair
characterization of what we said.
Mr. Flores. Maybe I heard it wrong. I want to make sure I
heard it correctly.
Mr. Elmendorf. The short term stimulative effect on the
economy in a weak economy, like ours is today, depends very
importantly on the nature of a spending or tax change. So, in
fact, in our analysis, the highest bang for the buck was
increasing aid to the unemployed. But the next three options
ranked on our list were different ways of reducing employers'
So the methodology that we use does not have an intrinsic
tax-versus-spending hierarchy. It is the nature of the policy.
The payroll tax we think would be more effective than an
across-the-board tax cut of the sort I was asked about earlier
because more of the money is directed at people who have less
savings and are likely to spend the larger share of the extra
income that they receive.
Mr. Flores. Okay, well, that is helpful, because the way I
heard it originally, it was in contravention with what
Christina Romer, who is the former chair of the President's
economic team, who said at one time that the best economic--the
best bang in terms of economic--the best bang for the buck in
terms of increased economic activity was due to reducing taxes.
How many jobs did the CBO estimate were created under
Mr. Elmendorf. So we estimated--I have it here. Our latest
estimate is that employment in 2010 was between 1and a quarter
and 3 and a quarter million higher than it would have been in
the absence of that legislation.
Mr. Flores. So that would indicate we spent, for every job
created, you assume we spend $800 billion, that it cost $6
billion a job; is that correct?
Mr. Elmendorf. No, no. The mid point in this range I
describe was 2 and a quarter million jobs.
Mr. Flores. So a little less than $4 million a job is what
it cost? Did I do my math right; $400,000 a job?
Mr. Elmendorf. I am sorry, I don't know that number.
Mr. Flores. We ought to calculate it. I think the bottom
line is that stimulus spending is not a very efficient way to
create jobs. If we run the math, whether it is $400,000 or $4
million, and I may have my math wrong, too, but that is a very
inefficient way to create jobs. I think that the economic
models will show that changes in tax policy have a much bigger
impact on economic growth than do changes in Federal spending.
Mr. McClintock. Ms. Wasserman Schultz.
Ms. Wasserman Schultz. Thank you so much.
Mr. Elmendorf, I want to ask you some questions. It
actually is a perfect counterpoint to Mr. Flores's comments
because I think he is exactly wrong in terms of both his
explanation related to the Recovery Act and its impact as well
as what are the policies that provide us with the biggest bang
for our buck.
Tax cuts certainly provide a certain bang for the buck, but
my understanding in just reading a lot about how to recover
from the recession and the best economic policies is that among
the biggest bang for our buck is not so much tax cuts but
providing additional funds directly into the hands of low-
income households; things like that, like unemployment
compensation and other policies that put money directly into
the hands of people who really need to use that money and can't
really afford to sit on it. Am I right?
Mr. Elmendorf. You are right, Congresswoman. In terms of
the short-term stimulative effect of a policy, what matters
most is whether the money gets spent. And giving it to lower-
income people tends to lead to a larger share of the money
being spent. Whether that is done on the spending side or the
tax side is less important than who the money goes to.
Ms. Wasserman Schultz. Just by way of comparison, would you
say that unemployment compensation, a payroll tax holiday,
other kinds of policies that put money directly into the hands
of lower-income individuals, would provide more bang for the
buck for the economy than let's say tax cuts for the wealthiest
Mr. Elmendorf. In terms of the short-run economic stimulus,
Ms. Wasserman Schultz. Thank you.
And just on the Recovery Act itself, according to CBO's
models, my understanding is that the Recovery Act increased
employment in 2010 by somewhere between--and I think this is
CBO's estimate--1.3 million and 3.3 million people. Is that
Mr. Elmendorf. That is right.
Ms. Wasserman Schultz. Yesterday, Chairman Bernanke was
here, and he testified on the state of the economy. He has
previously observed that with the remainder of the Recovery Act
funds set to expire--or not expire but to be spent this year
and then no longer be available to State and local governments,
the expiration, for lack of a better term, of the stimulus
funds is obviously going to worsen the outlook--my State is
facing a $3.6 billion deficit, will no longer have the stimulus
funds available after the end of this year--and that would
present a headwinds for the overall economy. Can you give us a
sense of whether you agree with his assessment?
Mr. Elmendorf. Yes, I think that is right, that the waning
effects of the Recovery Act represent a drag on economic growth
over the next year or so.
Ms. Wasserman Schultz. So that fact, coupled with draconian
cuts proposed, for example, in Chairman Ryan's plan, which is
like an anti-Recovery Act, would you give us a sense whether
you think large spending cuts like that right away would be an
additional drain on economic growth, especially when compounded
with the expiration of the Recovery Act funds?
Mr. Elmendorf. So our analysis, yes, implies that cutbacks
in government spending under current economic conditions tend
to reduce output employment in the short term. And the issue
that you and your colleagues face is how to balance that
against the other problems that arise from the burgeoning
Ms. Wasserman Schultz. So potentially if we cut too much
too quick and we have the expiration of the Recovery Act funds,
with the State and local governments facing significant
deficits to start with, couldn't we endanger the recovery?
Mr. Elmendorf. Well, it could slow the recovery.
Endangering I think depends on the overall scale of the
Ms. Wasserman Schultz. Let me rephrase. Obviously, the
recovery has not been as quick as we would like. Isn't it
likely that the combination of all of those things would result
in the recovery slowing as opposed to quickening?
Mr. Elmendorf. Yes. I mean, our forecast, of course, builds
in the things that are in current law. And additional cuts in
spending in the near term we think would have some dampening
effect on output and employment, and the magnitude depends on
the magnitude of the cuts.
Ms. Wasserman Schultz. Thank you very much.
Chairman Ryan [presiding]. Mr. Mulvaney.
Mr. Mulvaney. Thank you, Mr. Chairman.
Dr. Elmendorf, I apologize. I am going to move very quickly
because I have an additional topic I want to talk to you about.
If I could bring the first draft up, that would be fantastic.
A quick question, can you have a deficit without spending?
You can't, can you?
Mr. Elmendorf. No, Congressman. You can't.
Mr. Mulvaney. This is a graph of the historical revenues
and spending levels as a percent of GDP going back to 1960. I
have heard some discussion today that suggests that we don't
have a spending problem, that we have a spending problem and a
revenue problem. It looks like historical revenues have
averaged about 18 percent of GDP over the course of the last 40
years, and spending has been about 20.
Take a look, Doctor, back in the 1960s, it looks like we
were taking in about 18 percent in terms of revenues, percent
of GDP. Do you remember what the top marginal rate was back
Mr. Elmendorf. It was quite high.
Mr. Mulvaney. So even then, and I think it was above 90 at
that point, even then we weren't able to squeeze more than 18
percent of GDP out in terms of revenue. So we are were soaking
it to the rich pretty good. But we couldn't get much above 18.
In fact, the only time we have gone above 20 was during the
dot-com boom of the late 1990s, early 2000s.
Now it looks like, according to your projections, because
these are your projections, we do get revenues back at
historically high levels in the next 10 years, that we get
revenues back to 20 percent of GDP, and we still have a
dramatic deficit in those years, don't we, sir?
Mr. Elmendorf. Yes. That is right, Congressman.
Mr. Mulvaney. And that is because our spending is way above
our historical average of 20 percent, correct?
Mr. Elmendorf. That is right, Congressman.
Mr. Mulvaney. If I can bring up the second graph.
I asked my staff to come up with something that has been
bugging me since I have been here. This is my own personal idea
of what a tipping point is. I asked them to graph the
projections using your numbers of the total revenues that the
government expects to take in versus the interest payment
obligations. Now the top graph is I think what you call your
extended baseline, but the bottom one is the alternative fiscal
that I think folks around here tell me is what we use
traditionally. Do you see what I see, Doctor?
Mr. Elmendorf. I am not sure what you see, Congressman.
Mr. Mulvaney. In 2055, more than 100 percent of the
expected revenues, using CBO numbers, will go to only interest
payments. Now, I will tell you that we put this together using
your staff, and I would ask you to the extent that a freshman
has the opportunity to ask you to do this kind of stuff, to
make sure those numbers are right. We worked very closely using
your assumptions, and I am confident that they are, but I would
be curious if you folks would also take a look at them as well.
This comes back to the original point that I made yesterday
with Chairman Bernanke regarding your assumptions on interest
rates. If you take a look at the baseline, your all's
assumptions for this year on the 10-year treasury, for example,
just so we get apples to apples, is 3.4 percent. Last week it
traded at 3.5. Yesterday, while Mr. Bernanke was testifying, it
traded at 3.7. At what point, sir, would you think it is
reasonable for you to go back in and readjust your numbers to
take in some more real world considerations on interest rates?
Mr. Elmendorf. We update our forecasts several times a
I would emphasize the time that we set this path for
interest rates, we set a path that was above the path in
financial markets. And we did that because our own modeling
suggested that rates seemed to us that they should be higher.
On the other hand, there are a lot of people betting very
large sums of money on what is happening in the financial
markets, and we thought it was appropriate for us to give
weight exactly to the real world considerations that you are
Mr. Mulvaney. Clearly, I am not suggesting that your
methodology was wrong. I don't think anybody expected a 100
basis point rise in the 10-year Treasury since October, but it
certainly is the real world. And I suggest to you, Doctor, am I
wrong when I say that higher interest rates will move that red
line in the bottom curve further to the left, bringing closer
the date at which our debt obligations will exceed our
Mr. Elmendorf. That is right, Congressman, and we do show
in the appendix to the outlook the effect of alternative
assumptions about interest rates, as well as GDP growth and
inflation and so on, on the Federal budget.
Mr. Mulvaney. I appreciate that. That was one of the best
pieces of the thing that I read, where you all actually went
down section by section and said, look, here are our
assumptions on GDP; here are our assumptions on interest rates;
if they are off by a percent or a 10th of a percent, here is
By the way, the result, if we have an interest rate that is
1 percentage point higher than your assumptions, we are looking
at an additional $1.3 trillion in debt over the course of the
I am going to ask you to do one last thing. Do you have
your report in front of you, sir?
Mr. Elmendorf. Yes, I do.
Mr. Mulvaney. Would you turn to page 118, please?
Mr. Elmendorf. Okay.
Mr. Mulvaney. I ask you to read the last sentence beginning
``in January,'' above the title that begins ``higher
inflation.'' So it is the last section of the previous section.
Mr. Elmendorf. ``In January 2008, under the laws in effect
at that time, CBO projected that debt held by the public would
total about $5 trillion by the end of 2018. In CBO's current
projections, debt held by the public is close to $16 trillion
by the end of 2018 and exceeds $18 trillion by the end of
Mr. Mulvaney. Thank you, Doctor.
Thank you, Mr. Chairman.
Chairman Ryan. Mr. Tonko.
Mr. Tonko. Thank you, Mr. Chairman.
Dr. Elmendorf, thank you for providing your insights to the
committee. I appreciate it.
In January of 2010, did you write a letter to Chairman Ryan
concerning the analysis of Chairman Ryan's roadmap?
Mr. Elmendorf. Yes, we did, Congressman.
Mr. Tonko. And was that letter a formal cost estimate?
Mr. Elmendorf. No, it was not.
Mr. Tonko. Now with the Ryan roadmap, in addition to
restructuring several spending programs, it also puts forward a
plan to dramatically restructure our tax system. As I
understand it, according to a widely cited analysis by the
nonpartisan Tax Policy Center, this plan would cut in half
taxes on the richest 1 percent of Americans.
We all know that tax cuts don't pay for themselves, so
under this plan, the burden of this high-income tax cuts is
then shifted to low- and middle-income families. In fact,
according to the Tax Policy Center's analysis, about three-
quarters of Americans would see their taxes increase.
I find that drastic middle class tax hike would be
insufficient to put the Federal budget on a sustainable path in
the next several decades and, in addition, is accompanied by
provisions that threaten the health care for seniors and the
health care for our most vulnerable populations and plans to
gamble Social Security checks on a stock market that we know
has not been a friend to retirement accounts in the last few
So did your letter do a specific analysis of the tax
provisions of this roadmap?
Mr. Elmendorf. No, Congressman. Because the Joint Tax
Committee staff does the estimates in the 10-year window for
changes in the Internal Revenue Code, our longer-term modeling
focuses on the spending side of the budget. We haven't built
the tax side of the budget. So we were unable to analyze the
tax provisions. That is why you don't find that in our letter.
Mr. Tonko. So you did nothing on the tax provisions. So,
for the purposes of your analysis, you used an assumption that
the overall level of revenues collected would remain the same
as they are under current policies through 2030 and would equal
some 19 percent of GDP in the later years. Who provided you
with that assumption?
Mr. Elmendorf. We followed the specification from Chairman
Ryan and his staff.
Mr. Tonko. So was it the Joint Committee on Taxation that
provided that information?
Mr. Elmendorf. No, they didn't do that analysis.
Mr. Tonko. So all of that assumption and all the guidelines
were done by the Chairman?
Chairman Ryan. Would the gentleman yield?
Mr. Tonko, I can answer your question if you would like.
You are asking the wrong guy.
Mr. Elmendorf. So, Congressman, we didn't have the capacity
to model that part of the roadmap.
In order to take the parts that we could model on the
spending side and show how the pieces fit together, we followed
and were very explicit in the letter that we just followed the
policy as it was described to us by the Chairman.
Chairman Ryan. If the gentleman would yield, where we got
our revenue estimates from were the Office of Tax Analysis at
the Treasury Department. Joint Tax could not give us estimates,
so we went to the next best source using the same model that
Joint Tax uses to try and hit our revenue targets, which were
to get to historic revenue levels.
So our tax reform levels were set at what Joint Tax--at
what OTA told us would hit us at revenue target levels. And
that is how we got that level.
Mr. Tonko. And it is why Dr. Elmendorf then said that it
was you, Mr. Chairman, and your staff that provided that
Chairman Ryan. Yes.
Mr. Tonko. Now, the Tax Policy Center analysis,
unsurprisingly, finds that with a radical restructuring of our
tax system comes a radical change in the amount of revenues
We have heard many claims circulating this year that the
bottom 50 percent of Americans don't pay their fair share of
taxes under our current system.
Well, as of 2007, the bottom 50 percent of households in
America, I am informed, hold just 2.5 percent of this Nation's
wealth. And according to the claims of my Republican
colleagues, they pay 3 percent of the taxes. That sounds to me
like they are paying more than their fair share. And I would
like your response to that.
Mr. Elmendorf. I don't have wealth numbers at hand.
We did testimony before the Senate Finance Committee in
December that presented information on the evolution of
marginal tax rates over time, as was mentioned earlier, and on
the distribution of the tax burden.
The Federal tax burden is higher as a share of income on
higher-income people. Thus, the after-tax distribution of
income is slightly less unequal than the before-tax
distribution of income, but it is still----
Mr. Tonko. A burden.
Mr. Elmendorf. Quite unequal. If it is the right burden is
up to you and your colleagues.
Mr. Tonko. Thank you very much.
Chairman Ryan. Mr. Ribble.
Mr. Ribble. Dr. Elmendorf, thank you for being here today.
I have enjoyed listening to the conversation quite a bit, and I
have especially enjoyed your testimony today.
Mr. Elmendorf. Thank you.
Mr. Ribble. I can tell you, I have only been here a little
over a month, and I have heard quite a bit just this morning
that the Democrats did this and the Republicans did that, and
it is their fault, and it is our fault, and it is everybody's
fault. I have to tell you something, my grandkids don't care
much about that. They care about what the future looks like.
Do you believe when my grandson hits 20 in 2021, that $18
trillion debt makes his future more bright or less bright than
a debt that would be lower than that?
Mr. Elmendorf. It makes his future less bright,
Mr. Ribble. Okay, that is what I thought. That is why I am
I have also heard that our debt and our deficit and our
spending is on an unsustainable trajectory. I have heard that
probably a hundred times since I have been here. You used the
word ``unsupportable.'' What level of debt and deficit spending
would you consider supportable?
Mr. Elmendorf. Well, as we have said in this report and
other places, we don't know if there is a tipping point. And we
don't know where that tipping point might be. It depends not
just on the level of outstanding debt but also on people's
perceptions of where the debt is heading, what current policies
will lead to in the future, and on the willingness of you and
your colleagues to make changes in policy. So I don't want to
pick a particular number.
One criterion, though, for sustainable policy is that debt
cannot continue to increase relative to the size of the
economy. So the upward trajectory that we show, especially
under this continuation of current policy scenario, is not
sustainable because debt cannot continue to rise indefinitely
relative to GDP.
Mr. Ribble. So, your words, I think these were your words,
maybe I am paraphrasing here, that delaying our efforts to fix
this problem would be bad?
Mr. Elmendorf. Delaying--we don't make policy
What we have said very clearly is that delay increases the
costs of the burgeoning debt, and it increases the drain on the
future incomes, like your grandchildren.
It increases the ultimate spending cuts or tax increases
that will be needed to put the budget on a sustainable path. It
reduces the flexibility that you and your colleagues have in
dealing with unexpected problems in this country or overseas,
and it raises the risk of a fiscal crisis.
Mr. Ribble. So the longer we wait, the more difficult the
fix is going to become in terms of how harshly we must cut or
Mr. Elmendorf. That is right, Congressman.
We have a study we released in the fall about the cost of
waiting, the impact of delaying efforts to address the fiscal
Mr. Ribble. And then, along with that, and I realize you
don't make policy suggestions here, but I am assuming that at
some point, this Congress, I would hope it would be this
Congress or some very soon future Congress, is going to have to
address the issue of entitlement spending, aren't we, that we
can't find a place without that?
Mr. Elmendorf. ``Can't'' is a strong word for me,
There are countries--there are functioning economies with
fairly high standards of living that have government programs
much more expansive than ours and tax burdens that are higher.
They give something up through having made that set of choices.
But I don't want to presume, as the Chairman noted, it is not
my place to invoke my policy preferences. That is for you and
Mr. Ribble. Sure.
Very good. Thank you, Doctor.
Mr. Elmendorf. Thank you, Congressman.
Chairman Ryan. Ms. Bass.
Ms. Bass. Thank you, Mr. Chairman.
You might have addressed this while I was running to
another hearing, but just in case you didn't, if you could talk
about the implications with States, especially if we don't
raise the debt ceiling, what is the forecast as to what would
happen there, and then how would the States be able to meet
their obligations? Would we still be able to send States
monies? How would we be able to deal with that?
Mr. Elmendorf. So if the debt ceiling is not raised before
the government runs out of money, then not all of the
government's obligations would get paid. I don't know which
ones might or might not get paid.
Ms. Bass. You don't know how it would be prioritized?
Mr. Elmendorf. I don't know how it would be prioritized.
Naturally, whoever it is who would not be receiving the checks
they would otherwise be receiving will feel that effect. And
that could be bondholders. It could be State and local
governments. It could be households waiting for benefits,
depending on what checks go out and what checks don't. For all
of the people who are waiting, it will be a burden. And for
some governments or businesses or people perhaps an
But it is hard for us to analyze that not knowing what the
priorities would be and also not ever having seen this event
occur in modern U.S. history.
Ms. Bass. In terms of the cuts and knowing that we do have
to cut back spending and knowing that we also have to figure
out what we do with raising the debt ceiling, where are ways
that we can cut that won't hurt the economy and especially hurt
Mr. Elmendorf. So, I think, Congresswoman, there aren't a
lot of easy ways for you to do this or you and your colleagues
who worry about the rising debt would have done those things
I think from an economic point of view, what is beneficial
for the economy is lower debt accumulation over time, and what
can be beneficial now is greater confidence that policies are
being changed in ways that will reduce the growth and level of
At the same time, cutting back spending now, raising taxes
now will by itself, as I said in response to a number of
questions, tend to slow the economy.
So you and your colleagues face a difficult trade-off
there, and that is one of the major problems that we and others
have discussed in connection with rising debt is that it
reduces the flexibility that you have to make policy
adjustments that you want.
Countries that get forced--end up in fiscal crises have to
make often very stark changes in spending and revenues, often
under bad economic circumstances.
Early action by you and your colleagues can help to
forestall that possibility in this country. But again, the
immediate direct effect of cuts in spending or increases in
taxes would be to slow the economy, in our estimation.
Ms. Bass. Thank you.
Chairman Ryan. Ms. Castor.
Ms. Castor. Thank you, Mr. Chairman.
And welcome, Director Elmendorf.
You can see policymakers and budget writers have a real
balancing act. We have a real balancing act on our hands, and I
think both sides of the aisle agree that we have to have a very
bold plan on reducing the debt and deficit. We agree that
government must live within its means.
Then, on the other hand, I think we all agree that we have
got to continue to foster job growth. And when you look at the
public surveys, any public survey from across the country, job
growth and jobs continues to be the number one priority from
the American people. It certainly is in my home State of
Florida, in my community, where we still have a double digit
So I appreciate your expert analysis and guidance on how we
walk that tightrope and effect a balancing act, but it appears
that a consensus is building for our way forward here. I want
to see if you agree with some of the statements that have made
by a number of groups that have studied the issue of debt
reduction and job creation as well.
The President's bipartisan fiscal commission has
recommended that when we are developing our debt reduction
plan, that budget cuts should start gradually so they don't
interfere with the ongoing economic recovery because growth is
essential to restoring fiscal strength and balance. Do you
agree with that general approach?
Mr. Elmendorf. So, Congresswoman, as you know, we don't
make recommendations. So sentences that involved the word
``should'' are sentences that we stay away from, for a good
As you say, you and your colleagues face a trade-off here.
Delay in changing the path of fiscal policy has a collection of
very serious negative consequences for the economy. At the same
time, sharp changes in policy, as I said in my opening remarks,
could be disruptive, and there is a case for giving households
and businesses and State and local governments time to plan and
adjust. And those sets of ideas are in some conflict, that they
push desirable policy in different directions, and we are just
not in a position to judge those trade-offs.
I think one thing to emphasize, though, is I don't think
there is much of a case for delaying the enactment of policy
Ms. Castor. Right. Clearly, we have to get started.
Mr. Elmendorf. The issue here is the actual collection of
more revenue and reduction in spending.
Enactment of changes doesn't cause a near-term
contractionary effect and can be supportive of spending if
households and businesses gain confidence in seeing the Federal
budget on a more sustainable trajectory.
There is really no case that I know of, an economic case,
for waiting for you and your colleagues to make decisions.
There is an economic case with trade-offs for the pace at which
those decisions affect policy.
Ms. Castor. I think we agree. I think too often in
Washington we focus on where we differ. But I think there is
great consensus building that we have got to act now. We have
to focus on debt reduction and job creation, and we are going
to have this very robust debate about how we get there.
Now yesterday, Chairman Bernanke said the largest drivers
of the debt and deficit are health care costs of government and
the aging population. Do you agree with that?
Mr. Elmendorf. Yes, that is right.
Ms. Castor. Well, what I hope is, we are starting to see
some appropriations cuts coming out from the other side, and I
would just caution my colleagues that if the biggest drivers of
the debt and deficit are health care costs of government and
the aging population, some of the cuts that I am seeing coming
out from the Appropriations Committee are not targeted toward
the real drivers of the debt and deficit. We have got to work
together to get to that point where we are tackling the real
problem and not harming job growth.
Another well known economist has said, has recommended to
us that you can't do it all right up front. You can't--that it
really would push unemployment back to double digits if you try
to have trillion dollar cuts in your first 2 years when the
better approach is to have a long-term deficit and debt
reduction plan. What is your opinion on that?
Mr. Elmendorf. Again, I think from an economic perspective,
the crucial factor for building confidence among American
households and businesses and among purchasers of our debt is
to have a plan in place, to have a set of policies enacted by
the Congress and signed by the President that put the country
on a sustainable fiscal trajectory. So I can come up with a
report like this that doesn't show debt rising relative to GDP
as far as the eye can see. And again, the pace at which those
changes are put in place in terms of the unfolding of the
policies involves a more complicated trade-off.
Ms. Castor. Thank you very much.
Chairman Ryan. Dr. Elmendorf, thank you for spending your
morning with us. We appreciate it. We look forward to many more
times with you. Thank you.
This hearing is adjourned.
Mr. Elmendorf. Thank you, Mr. Chairman.
[Questions submitted for the record and their responses
Questions Submitted for the Record by Mr. Honda
FRAMING THE QUESTIONS
We all agree that the trajectories of our national deficit and debt
are unsustainable, that they place our nation's future in grave peril
and that it is this committee's responsibility to make this right for
the American people.
1. AFGHANISTAN & TAX CUTS
The only way we can do this is if we are honest about what has
placed us in this predicament. Republicans place the blame entirely on
Social Security, Medicare and discretionary spending which provide for
our working families and their parents in their old age.
They want us to ignore that two policies of the Republican Party--
the Bush Tax Cuts and the wars in Iraq and Afghanistan--accounted for
over 500 billion dollars of the 2009 deficit and including interest
will account for almost 7 trillion dollar over the next decade.
So my question for you is this:
Would the savings that resulted from ending combat operations in
Iraq and Afghanistan and allowing the Bush Tax Cuts for the wealthy to
expire reduce projected deficits?
2. INVESTING IN EDUCATION AND INFRASTRUCTURE
In your testimony you highlighted the jobs crisis that continues to
confront working and middle class families. You cited two culprits: the
anemic growth rate and structural changes in the labor market.
In regards to growth, past CBO reports have recommended investments
in transportation and infrastructure; while your observations regarding
the changing labor market, and the need to equip our workforce with
21st century skills, implies the need for investment in education.
Can you explain for the Committee how public investments in
education, transportation and infrastructure promote economic growth?
Dr. Elmendorf's Responses to Mr. Honda's Questions
This is the response of the Congressional Budget Office to
questions for the record asked by the Honorable Michael Honda after a
hearing by the House Budget Committee on February 10, 2011.
Q: Would the savings that resulted from ending combat operations in
Iraq and Afghanistan and allowing the Bush Tax Cuts for the wealthy to
expire reduce projected deficits?
a: spending for operations in afghanistan and iraq
The Congressional Budget Office's (CBO) projections of
discretionary spending for the next 10 years include outlays for
operations in Afghanistan and Iraq and other potential overseas
contingency operations. Specifically, the outlays projected in the
baseline come from budget authority provided for those purposes in 2010
and earlier years; the budget authority provided for 2011 under the
Continuing Appropriations and Surface Transportation Extensions Act,
2011 (P.L. 111-322) at an annual rate of $159 billion; and the $1.8
trillion in appropriations projected for the 2012-2021 period (under
the assumption that annual funding is set at $159 billion plus
adjustments for anticipated inflation, in accordance with the rules
that govern CBO's baseline projections).
In coming years, the funding required for war-related activities
could be smaller than the amounts in the baseline if the number of
deployed troops and the pace of operations diminish. To illustrate the
potential impact on discretionary outlays that would result from such a
decline, CBO formulated a budget scenario that assumes a reduction in
the deployment of U.S. forces abroad for military actions. In 2010, CBO
estimates, the number of U.S. active-duty, reserve, and National Guard
personnel deployed for war-related activities averaged about 215,000.
Under the alternative scenario, the average number of military
personnel deployed for war-related purposes would decline over five
years: from 180,000 in 2011 to 130,000 in 2012, 100,000 in 2013, 65,000
in 2014, and 45,000 in 2015 and thereafter. (Those numbers could
represent various allocations among Afghanistan, Iraq, and other
countries.) Under that scenario, total discretionary budget authority
for the period from 2012 through 2021 would be $1.3 trillion less than
the amount in CBO's current baseline. Assuming that funding is not
spent for other purposes, outlays would be lower by $1.1 trillion over
that same period.
Many other scenarios and estimated savings in discretionary
spending are possible depending on the pace of decline in the number of
military personnel deployed for war-related purposes.
REVENUE IMPLICATIONS OF EXTENDING TAX CUTS
CBO's projection of revenues for the next 10 years is intended to
show what would happen to revenues if current law remains unchanged.
Thus, under the rules that govern CBO's baseline, all provisions of the
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation
Act of 2010 (the 2010 tax act) are assumed to expire as scheduled over
the next two years.
If the tax provisions of the 2010 tax act that were originally
enacted in 2001, 2003, and 2009, were extended, total revenues would be
$2.5 trillion lower than total revenues in CBO's baseline projection
over the 2012-2021 period, according to preliminary estimates by CBO
and the staff of the Joint Committee on Taxation. That estimates
includes increases in outlays for refundable tax credits.
If only the tax provisions of the 2010 tax act that were originally
enacted in 2001, 2003, and 2009, and that applied to married couples
with income below $250,000 and singles with income below $200,000 were
extended--as the President has proposed--the revenue reduction would be
smaller. While neither the Joint Committee nor CBO has estimated the
cost of partial extension (for all but high-income taxpayers) of those
tax provisions of the 2010 tax act over the 2012-2021 period, past
estimates of that option suggest that it would reduce revenues by about
$700 billion less over ten years than full extension.
Q: Can you explain for the Committee how public investments in
education, transportation and infrastructure promote economic growth?
A: Spending by the federal government and state and local
governments on education, transportation, and other infrastructure can
promote economic growth by increasing the amount of productive physical
and human capital in the economy. Public spending on education promotes
growth when it raises the skill level of the nation's workforce because
workers with higher skills are better able to perform their tasks, to
solve problems, and to embrace the latest production techniques. Public
spending on transportation and other infrastructure can increase
economic output by raising the stock of physical capital in the
economy, thereby increasing the productivity of labor and other factors
of production in the private sector. For example, increasing the amount
of transportation infrastructure makes it easier to get materials and
labor to production facilities and finished goods to consumers.
Consequently, workers can produce and deliver more in a given time and
at a given transportation cost. Even so, funds spent for those purposes
cannot be spent elsewhere in the economy; leaving more money in the
hands of the private sector by instead reducing borrowing or lowering
taxes can also promote growth.
The roles of the federal government and state and local governments
vary widely in spending for education, transportation, and other types
of infrastructure. In particular:
In federal fiscal year 2007, the most recent year for
which data on combined spending by the federal government and by state
and local governments are available, total public spending for
education was approximately $852 billion (in 2009 dollars). (That
figure excludes spending for formal and informal training programs that
are not school-based.) Spending by state and local governments accounts
for over 90 percent of that total; the $63 billion spent by the federal
government accounts for the remaining share of public spending. In
addition to that public total, the private sector spends hundreds of
billions of dollars per year on private colleges and universities and
on private primary and secondary education.
In federal fiscal year 2007, the most recent year for
which data on combined spending by the federal government and by state
and local governments are available, total public spending for
transportation infrastructure was approximately $247 billion (in 2009
dollars). (The private sector plays a small role in the provision of
transportation infrastructure and those expenditures are essentially
confined to spending on freight rail and aviation.) The federal
government accounts for over one-quarter of public spending on
transportation infrastructure with state and local governments
accounting for the rest. Spending on highways amounted to almost two-
thirds of public spending on transportation infrastructure; virtually
all federal outlays went to highway construction while state and local
expenditures went to both construction and maintenance.
Total public spending on water infrastructure, defined as
water resources (such as dams and levees), water supply systems, and
wastewater treatment plants, was $110 billion in 2007. Spending for
water supply and wastewater treatment was $101 billion, or over nine-
tenths of public spending on water infrastructure. State and local
governments accounted for almost all of that spending; about one-third
of the expenditures by those governments was for building new
infrastructure and two-thirds was for the operation and maintenance of
that existing infrastructure. Data on spending by state and local
governments for water resources are not available.
The effect of spending for education, transportation, and other
infrastructure on economic growth is imprecisely measured and is not
easily generalized. The impact of public investments in education on
economic growth depends both on the nature of those investments and on
the production technologies and levels of capital (both physical and
human) that currently exist in the economy. For example, investments
aimed at helping young adults complete college may produce returns
fairly quickly, but which are ultimately less than the longer-term
benefits from investments to improve the learning abilities of pre-
school or elementary-school aged children. Further, raising the skills
of the least able workers may have different effects on economic growth
than raising the skills of more skilled workers, and those effects may
depend on the technology and physical capital in use at the time (i.e.,
training skilled workers to use sophisticated equipment will have only
a small payoff if there are only few such machines available). Finally,
it is difficult to accurately measure the level of and changes in the
productive skill-level of the workforce--the most common measure, years
of schooling, is useful but only an approximate measure of skill.
Ultimately, public investments in education that raise the skills of
the workforce should contribute to economic growth, but the returns to
those investments cannot be forecast with any confidence. The economic
research on the payoff to transportation and other infrastructure
spending generally shows that such investment yields positive returns;
however, there is significant variation in the average return both
across different periods of time (especially for highways) and across
individual projects at a given moment in time. As a result, identifying
economically justifiable projects--those with benefits to society that
are expected to outweigh costs--is crucial for realizing the potential
gains from public spending for infrastructure.
[Whereupon, at 11:58 a.m., the committee was adjourned.]