[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
UPDATE OF THE BUDGET AND ECONOMIC OUTLOOK
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
HEARING HELD IN WASHINGTON, DC, SEPTEMBER 8, 2004
__________
Serial No. 108-25
__________
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house04.html
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COMMITTEE ON THE BUDGET
JIM NUSSLE, Iowa, Chairman
CHRISTOPHER SHAYS, Connecticut, JOHN M. SPRATT, Jr., South
Vice Chairman Carolina,
GIL GUTKNECHT, Minnesota Ranking Minority Member
MAC THORNBERRY, Texas JAMES P. MORAN, Virginia
JIM RYUN, Kansas DARLENE HOOLEY, Oregon
PAT TOOMEY, Pennsylvania TAMMY BALDWIN, Wisconsin
DOC HASTINGS, Washington DENNIS MOORE, Kansas
ROB PORTMAN, Ohio JOHN LEWIS, Georgia
EDWARD SCHROCK, Virginia RICHARD E. NEAL, Massachusetts
HENRY E. BROWN, Jr., South Carolina ROSA DeLAURO, Connecticut
ANDER CRENSHAW, Florida CHET EDWARDS, Texas
ADAM PUTNAM, Florida ROBERT C. SCOTT, Virginia
ROGER WICKER, Mississippi HAROLD FORD, Tennessee
KENNY HULSHOF, Missouri LOIS CAPPS, California
THOMAS G. TANCREDO, Colorado MIKE THOMPSON, California
DAVID VITTER, Louisiana BRIAN BAIRD, Washington
JO BONNER, Alabama JIM COOPER, Tennessee
TRENT FRANKS, Arizona RAHM EMANUEL, Illinois
SCOTT GARRETT, New Jersey ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina DENISE MAJETTE, Georgia
THADDEUS McCOTTER, Michigan RON KIND, Wisconsin
MARIO DIAZ-BALART, Florida
JEB HENSARLING, Texas
GINNY BROWN-WAITE, Florida
Professional Staff
Rich Meade, Chief of Staff
Thomas S. Kahn, Minority Staff Director and Chief Counsel
C O N T E N T S
Page
Hearing held in Washington, DC, September 8, 2004................ 1
Statement of:
Douglas Holz-Eakin, Director, Congressional Budget Office.... 6
UPDATE OF THE BUDGET AND
ECONOMIC OUTLOOK
----------
WEDNESDAY, SEPTEMBER 8, 2004
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to notice, at 2:10 p.m., in
room 210, Cannon House Office Building, Hon. Jim Nussle
(chairman of the committee) presiding.
Members present: Representatives Nussle, Gutknecht,
Hastings, Portman, Garrett, Diaz-Balart, Moran, Moore, Neal,
Edwards, Scott, Capps, Thompson, Baird, and Emanuel.
Chairman Nussle. Good afternoon. Welcome back everyone.
This morning we heard from the Federal Reserve Chairman
Greenspan on the economic outlook and current fiscal issues.
This afternoon we will follow up that discussion with a review
of the Congressional Budget Office. Yesterday the update of the
budget and economic outlook was released. Our witness today,
back again, is the Congressional Budget Office Director,
Douglas Holtz-Eakin.
Dr. Holtz-Eakin, we appreciate you being back with us today
and for the good information that you provided us with
yesterday.
So what does the report tell us? That is the bottom line.
First it tells us, from my read, that our near-term budget
situation has improved significantly over the past 6 months,
and that the improvement is due primarily to a sharp increase
in the amount of revenues that are coming in, brought on by
strong economic. Parenthetically let me say, as I read it, that
the Congressional Budget Office projection for economic
activity was dead on. From previous analysis and projections,
you hit that on the nose as I understand it, and again, we
appreciate the good information and analysis that has been
provided.
As we heard from Chairman Greenspan this morning, we now
know without question that the investments that we made in the
economy are beginning to pay off. Our policies are working. The
economy has shown strong growth, recently growing at its
fastest pace in about 20 years, growing at 4.7 percent over the
past year. We have seen 1.7 million new payroll jobs over the
past year, and then the unemployment rate falling to 5.4
percent from the 6.3 percent in August of last year. The
private Blue Chip forecasters expect strong growth to continue,
and real GDP growth of about 4 percent over the second half of
this year.
Both Chairman Greenspan and the Congressional Budget Office
expect this pattern of steady economic growth to continue. As
the chairman said this morning, the economy has now finally
show signs of traction.
As I mentioned a moment ago, associated with the growing
economy we have seen the Federal Government's revenue increase
over the past 6 months even with the acceleration of tax cuts,
so taxes were reduced, but more money was coming into the
Federal Treasury. As the chairman said this morning earlier,
they don't always pay for themselves, but in this instance we
have seen that even by reducing taxes more revenues come into
the Federal Treasury.
Now, all that said, we still have large deficits in the
near term. I am not trying to sugar coat that at all, $422
billion in fiscal year 2004. That is a big number, but those
numbers have to be put in some context. You can't just throw a
number out there, as was unfortunately done yesterday in many
of the news reports of this, ``largest deficits,'' ``record
deficits.'' Compared to what? Compared to what, just the
number? That is a big number, I agree. I am not satisfied. None
of us are satisfied. We've got to have a plan to deal with it.
You can't just say you are not satisfied, but you have to be
able to compare it against something, to show that it is $422
billion for fiscal year 2004, and $348 billion in fiscal year
2005, according to CBO. That is $56 billion less than was
projected just 6 months ago. It is far from where we want to
be, but heading $56 billion to the plus is the right direction,
and certainly much more in the right direction than anyone was
projecting just 6 months ago.
Even though our near-term deficit picture has improved, we
still need to keep an extra tight grip on our spending, and
that brings us to an important point. CBO, as is required by
law, must assume the continuation of current law in its
projections. Thus, its revenue baseline beyond 2004 includes
the expiration of a whole range of tax relief provisions
including the increase in the marriage penalty, reducing the
child tax credit, resurrecting the death tax, increasing taxes
on capital gains and stock dividends, increasing taxes on small
businesses, and increasing taxes for every American who
currently pays income taxes. It also assumes $115 billion in
one-time emergency spending this year which will continue
indefinitely. That adds up to $1.4 trillion in just 10 years.
Clearly, these assumptions, again as required by law, fairly
and by convention, are not necessarily going to happen.
Let me just show you a chart that we have here that shows
the CBO baseline. Using CBO numbers, if you back out the tax
increase they assume and back out the continuation of emergency
spending, in other words, if you make these numbers closer to
reality, they show that the deficit falls to $215 billion in
2009. This represents probably a much more realistic benchmark
for us to make policy decisions. It brings me to what I think
is the second most notable point of this report, in that our
current rate of spending growth is unsustainable, not that we
needed that report to tell us that it was unsustainable. I
think we all know that the spending is unsustainable, but you
would wonder that the closer you get to election time.
According to CBO, if spending continues in future years or
increases at the rate of nominal growth of the economy, the
deficit will be increased by $1.38 trillion over the next 10
years, and that situation would be even worse if spending grows
faster than the economy, as it has for the past 5 years.
Spending is what we have to get under control.
As Dr. Holtz-Eakin has told us before, a growing economic
and jobs market will certainly help improve our deficit
picture, but alone it is not going to get us back to balance.
No one is suggesting here, certainly I am not suggesting here,
that we can grow our way out of deficits. Never have I
suggested that we have to work both on the economic growth as
well as on the spending side.
I am extremely proud of this committee. We have been on the
forefront in the efforts to restrain spending in all the non-
military, non-Homeland Security spending. Have our efforts
always been successful or as successful as we would like? No.
Do we think it is going to be any easier in the next Congress?
No, probably not. But this report underscores it is not simply
an option any more. It is always difficult to get Congress or
it certainly has been traditionally difficult to get Congress
to focus on the spending side of the equation. We have got to
get our spending down to a level that is sustainable, and this
committee will lead the effort to do so.
Let me remind everyone, we incurred these deficits through
intentional spending. These were intentional decisions. We
didn't just find ourselves in this situation, and most of those
spending decisions were nonpartisan or certainly bipartisan.
They happened at an extraordinarily pace to react to
extraordinary circumstances ranging from the terrorist attacks
to the conflicts in Iraq, Afghanistan and the economic
recession. I doubt that anyone in this room or anyone in
Congress would now suggest that we should have simply ignored
any of those spending decisions or spending priorities at the
time. None that I have heard have been willing to come forward
and suggest that they should have been ignored. In fact, I have
heard some say we should have spent more.
The money is spent, and we now have deficits. We have to
stop wasting our time bickering about how we got here only and
focus on the job of what to do about it, which is why we need
plans such as the one we passed in this committee. I assure
that I and this committee will continue to push and prod our
colleagues on both sides of the aisle to restrain spending
wherever we can, while continuing to fund our Nation's
priorities. We may not win any popularity contests, I guarantee
you that, but again, there is no choice to be made here. It
simply has to be done.
I thank you, Dr. Holtz-Eakin, for your analysis. You have
done an excellent job. Your crew has given us a lot to think
about, and you have also given us some policy options other
than just the statutory requirement of the baseline to look at
so that we can see how those options measure against future
decisions that we need to make, and we really do appreciate
that extra analysis that was done for our behalf.
With that, let me turn to Mr. Moran for any comments he
would like to make any opening comments, and I would ask
unanimous consent that all members be given an opportunity, 5
days, to submit a statement in the record at this point.
Without objection, so ordered.
Mr. Moran.
Mr. Moran. Thank you, Mr. Chairman. It is a herculean task
to find something positive about this report. I guess it goes
back to the old adage, beauty is in the eyes of the beholder.
It is like remarking to Mrs. Lincoln, ``Well, it was an
exciting play at least, wasn't it?''
Anyway, Mr. Director, this is frightening. There are three
points that stand out. First of all, your projected unified
budget deficit for this year at $422 billion is the largest in
history in dollar terms. It is $47 billion higher than the
deficit last year, which was the previous record holder. Your
projected on budget deficit, essentially that is the deficit
taking Social Security out of the picture, which is really the
operating deficit for the Federal Government, is $574 billion.
So that is really the operable number if we were to stick at
least to our rhetoric with all the lock box and stuff, that we
ought not be raiding the trust fund. The real deficit, if you
do not consider borrowing from Social Security trust funds, is
$574 billion.
Thirdly, your projections are of course baseline
projections which strictly assume the continuation of existing
law. As such, they are even more troubling because this is the
first CBO budget assessment since January 1997, more than 7
year ago, that does not in any year show a unified balanced
budget. There is no possibility of a balanced budget, as you
see it, anywhere out in the future. So in stark contrast to the
$5.6 trillion of surplus that was inherited by this
administration, $5.6 trillion projected for the next decade by
the Clinton administration when this administration took over.
They have now turned it around. It is about a $10 trillion
reversal to the point where there is not one drop of black ink
on the page of the Congress's most trusted projection of the
budget over a 10-year horizon. Over this period, the entire
Social Security trust fund surplus, along with the Medicare
trust fund surplus is dissipated. So much for protecting Social
Security and Medicare. So much for the ``lock box.'' How many
times did we vote yes on that, Mr. Chairman? Was it 14? It was
something like that, but of course where both sides voted for
it, and both sides have to take some responsibility I guess.
But as you well know, this 10-year horizon is the beginning
of a dangerous time for the budget. The baby boom generation
starts to retire in just 5 years. I was born in 1945. I am
eligible to retire then. By the time we all retire, we are
going to double the number of people on Social Security and
Medicare, the largest cohort ever in history--largest age
cohort. We may turn out to be the most selfish too. We are
certainly going to be the most politically powerful, so we are
not going to let the younger generation, I trust, cut any
financial or health benefits. So we have a major problem
looming ahead of us, and you have given us even greater reason
to be concerned because we are stuck in deficit as far as the
eye can see.
Then of course there is the remaining budgetary agenda that
we heard about last week at the convention, more tax cuts. We
know that the alternative minimum tax is going to have to be
fixed. We are not going to hit 70 million middle class
taxpayers with the alternative minimum tax. That is not
calculated in this, nor is there adequate money for the
continuing defense buildup that we read about, and of course, a
costly war that we seem to be stuck in for a long, long time to
come. So you throw in any kind of a natural disaster, any
random bad luck, and we have a catastrophe facing us in
budgetary terms.
We on our side of the aisle, and actually that is our ace
Budget Committee staff of course, they have looked at all of
these contingencies, using all the various estimates of the new
CBO report. We find that with a reasonable consideration of the
administration's program and the political inevitability of
relief from the alternative minimum tax, the budget deficit
never falls below $320 billion a year, and it is then $320
[billion] in 2006. It rises inexorably though, if you look at
all of the most reasonable assumptions, to $504 billion in
2014. At that point the baby boom generation is in the driver's
seat. We start retiring, and then of course it gets even more
frightening.
Some of the Congress say that we should be of good cheer
because this year's deficit at 3.6 percent of the gross
domestic product is not the very largest in history. But we
want to caution that the true bottom line of our budget is the
ratio of the accumulated debt to the GDP, and that ultimate
arbiter is clearly a thumbs-down indicator. When we extrapolate
the administration's program, we find that our Nation's debt is
growing faster than its income, from 34 percent of the GDP in
2002, to 45 percent by 2014, 10 years from now. And again, at
that point we want to emphasize the baby boom generation is in
full retirement, and it just keeps getting worse from there on.
So our budget right now is unsustainable. If anything goes
awry, hurricane, for example, just to use something totally at
random that our folks from Florida are very familiar with, you
have to put more money up that is not budgeted for.
To close on one last piece of bad news for the budget and
the Congress, our Treasury Secretary has put us on notice that
we are going to need to raise the statutory debt limit again by
another $690 billion--third time in 3 years--and we are going
to have to do that before we go home for the holidays.
Secretary Snow says that we are going to bump up against the
debt limit as early as this month, and that he will exhaust his
statutory remedies before Thanksgiving. To compound this bad
news, our committee's extrapolation of the budget under the
President's policy shows the debt more than doubling to 2014 to
almost $15 trillion. It is an unthinkable number. We don't have
room to put all the zeroes down. I can imagine how President
Reagan might have shown that. We could go to the moon, back and
forth, back and forth with that kind of a number. But it is
unthinkable, particularly when we consider what is going to
happen when our baby boom generation retires.
We thank you for coming to discuss this with us, discuss
the implications, and we do look forward to your testimony.
Thank you, Mr. Director.
Chairman Nussle. Thank you, Mr. Moran.
Director, the entire testimony that you have submitted will
be made part of the record, as will your report that you have
submitted. We appreciate the good work, and we are pleased to
receive your testimony as you care to summarize it.
STATEMENT OF DOUGLAS HOLTZ-EAKIN, DIRECTOR, CONGRESSIONAL
BUDGET OFFICE
Mr. Holtz-Eakin. Thank you, Mr. Chairman, Mr. Moran, and
members of the committee. It is a pleasure to have the chance
to present ``The Budget and Economic Outlook,'' as updated for
what we now know through this summer. I thank the chairman
especially for acknowledging the efforts of the CBO staff, who
I think rarely get proper recognition for the effort they put
into these documents.
You have had the report, and I will not pretend to go
through it in any kind of comprehensive detail, but I did want
to use some slides, all of which are contained in the report,
to touch on some of what I think are the key parts of the
update. And as is my capability, I can go through very, very
fast, but certainly we can come back and talk about the details
as you wish.
The bottom line I think, which is nicely illustrated in
this chart, is that the fundamental fiscal outlook is little
changed since March. We have seen some modest improvement in
the near-term deficit outlook, particularly the years 2004 and
2005, and modest deterioration in the out years.
Looking at the 10-year budget horizon, the bulk of the
change is due to legislation, about $500 billion over the 10-
year window that can be attributed to defense appropriations,
including $25 billion earmarked for fiscal year 2004 to cover
costs of operations in Iraq and Afghanistan.
Given that, and given the balance of risks as we examine
the report, the central path of this fiscal outlook will be
determined by policy choices and not the path of the economy.
Indeed, we will not grow out of the fiscal situation, but
Congress will be faced with decisions to make, and we attempt
to illustrate those in the report, and I highlight especially
that beginning in the second half of this budget window we
begin to see the budgetary and economic consequences of the
retirement of the baby boom generation and the rapid growth in
the programs Medicare, Medicaid and Social Security that are
the fundamental source of long-term fiscal pressure in the
Federal budget.
As has already been touched on, these are baseline
projections. They include the assumption that the Tax Code will
proceed as in law, so the tax cuts in 2001 and 2003 will sunset
as scheduled, and that the supplemental appropriations mostly
for operations in Iraq and Afghanistan, in particular, $87
billion in 2004, another $25 billion in defense appropriations,
and a rescission which was undone, leave a total of $115
billion that is devoted to those activities that are in this
baseline. They are in there every year, as the chairman
mentioned, and contribute $1.4 trillion to the overall tenure,
a total of 2.3 in deficits over the 10-year window.
So if we can go to the next slide, the numbers which you
have now heard much about are that this year's deficit, 2004,
will be $422 billion, 3.6 percent of GDP, 3.6 cents on the
national dollar. Those are deficits which are not as large as
those experiences in the mid-1980s and early 1990s. Going
forward, it will diminish fairly rapidly over the next several
years, down to, first, 2.8 percent of GDP and then 2.3 percent
of GDP, at which point they will stay in that vicinity for
about 5 years until the sunsets occur late in the budget window
and we will see the baseline budget move gradually back toward
balance at the end of 2014.
Measured in a different way, the 10-year baseline budget
deficit of $2.3 trillion is about 1.5 percent of the GDP over
this window. Using the indicator debt in the hands of the
public as a fraction of GDP, we see such debt rise from about
37 percent at the beginning of the window, to a bit north of 40
percent in the middle, and then with smaller deficits in the
out-years it goes back down to about 37 percent.
So the basic profile is one of high near-term deficits,
diminishing in the middle of the budget window, and then with
sunsets coming back close to balance.
The next slide. Underneath that picture, as in March, there
are some interesting profiles on both the spending and the
revenue side. Let me spend a little bit of time on each.
First, baseline projections assume that discretionary
spending, outlays in that area, will rise at the rate of
inflation, about 3 percent over the budget window. And so given
that the economy will rise at about 4.7 percent, this is
essentially assuming that a smaller fraction of our national
economy is devoted to discretionary spending. You can see that
at the bottom line. In the middle and the central action on the
spending side are those for the mandatory programs. In this
projection, all mandatory spending grows at about 5.7 percent
per year. Social Security begins to ramp up visibly in the
budget window. It grows at about 4.2 percent per year at the
beginning and then goes up to about 6.4 percent by 2014, so it
goes up by about 50 percent. That is the arrival of the baby
boom generation.
Medicare and Medicaid also grow fairly rapidly. Once the
changes associated with the Medicare Modernization Act are in
place between 2005 and 2007, we see those programs rising at 7
to 8 percent per year in the latter part of the budget window.
In between, between 2005 and 2007, Medicare goes up by over 30
percent. That is the new benefit being brought in. Medicaid,
due to the switch in responsibilities, grows more slowly than
is typical. But taken as a whole, the mandatory programs show
very rapid growth over the budget window, particularly the
second half, and by 2014 those three programs--Medicare,
Medicaid, and Social Security--constitute one-half of all
Government spending in the baseline projections.
If we go to the next slide, you can see that there is
equally interesting action going on on the receipt side. This
year, total Federal receipts are 16.2 percent of GDP, a very
low number by historical standards. At the end of the budget
window, they rise to 19.8 percent of GDP, which would be above
the post-war average of 18.4 percent. So that we see a rise
from below-average to above-average receipts. All of that is
concentrated in the individual income tax.
The rise of 3.6 percentage points of GDP comes in several
pieces: 2.1 percentage points come from the expiration of tax
cuts enacted in 2001 and 2003, so that is the sunsets, and that
contributes to a part of that. The remainder comes from rising
real incomes in our projection, about seven-tenths of a
percentage point. It also comes from the taxation of tax-
deferred savings accounts--IRAs, 401(k)s. As the baby boom
retires, we begin to see those receipts flow into the Federal
treasury. It comes as well from the alternative minimum tax,
people moving into the AMT due to inflation, as well as higher
real incomes, and there is a resumption of capital gains to a
more normal level. Overall, individual income taxes rise at a
bit over 9 percent per year in the baseline projections. So
there is a healthy receipts growth.
If we go to the next slide, all of this is built on an
economic projection that I think is characterized by two
dominant features. The first is that at the front end of the
budget window, our forecast includes a vigorous cyclical
recovery. GDP grows at 4.5 percent this year, 2004, and 4.1
percent next year in this projection, bringing the economy back
to something approximately its full potential to produce, high
employment and full use of capital. That recovery is built on a
very large recovery in private investment. As the report
details, this recession and recovery, as with the one in the
early 1990s, is dominated by an investment swing. We see a
healthy rebound in private investment. The need for additional
capacity appears to be present. The risk spreads associated
with earlier years appear to have diminished so that the
setting for capital accumulation is well set up. We also have
modest tax incentives present this year to accelerate that
investment into 2004. That is augmented by strengthening global
economic growth which will help our net export position. And it
allows for the pieces of the economy which have really carried
the ball in recent years--the household sector as well as
policy, fiscal and monetary policy--to hand over the key parts
of the economic recovery. Monetary policy can move toward a
less accommodative stance in this projection. The household
sector is still strong, but it is by no means carrying things.
And fiscal policy can become less of a stimulus as well.
So we have a strong cyclical recovery and a fairly low
inflation environment at the front end of this. It is a profile
that is typical of many of the private investment recoveries
that we have examined, and the forecast in general is
qualitatively similar to others in the private sector.
At the far end of the budget window, the key factor is,
again, the retirement of the baby boom generation. So we will
see continued strong productivity growth, but with that
retirement a slower growth in the labor force and a decline in
the overall growth rate of GDP that is noticeable in these
projections, averaging something near 2.8 percentage points per
year up to 2009 and then dropping to 2.6 percent in the out-
years.
So the economic forecast on which this is built is a strong
recovery, solid economic performance, but noticeable impacts,
again, of the baby boom and the demographic change that we are
entering into.
If we go to the next slide, given that baseline projection,
given the forecast as we have set it up, it is sensible to ask
what are the natures of the things we do not know about. And I
wanted to spend a couple minutes talking about the risks or
uncertainties facing this particular projection.
In general, the environment in which this forecast takes
place is one which is characterized by risks of terrorism and
the economic uncertainties that that brings. It is cognizant of
the possibility of housing price growth being slower than it
has been in the past several year or even declines in some
regions. We face the possibility that world economic growth
will not be as fast as we had anticipated. We will not get the
support from our export sector. And there is also the chance
that households will move toward rebuilding their savings
balances more aggressively and as a result spend less than in
our projection.
Those kinds of uncertainties that are part of the economic
environment lead to the fan chart which shows the spread of
potential definition outcomes around the central baseline, the
dark area on the chart. Now, one way to interpret this is to
say, well, gee, you just do not know much about the future and
dismiss the entire exercise. I would like to caution against
that. I think a better way to think about this is to recognize
that given historical experience in those kinds of
uncertainties, there is a 10-percent chance that instead of a
deficit of 2 percent of GDP 5 years from now, as the baseline
would have, it could be 6 percent of GDP or larger given
historic evolution of uncertainties. In the other direction,
there is a 25-percent chance that the budget could be in
balance or better. And so that in thinking about the way this
will play out, there is a 3:1 chance we will remain in deficit,
but there is a 1:4 chance that it could move to surplus.
At this point in time, however, there are two specific
risks that I think bear mentioning. If we look at the next
slide, the first is the risks associated with energy prices and
the price of oil in the world economy. Since we put this--can
we go to the next slide? Imagine a picture of oil prices such
as that, and one of the things that we know is that since we
put this forecast to bed in the late summer, we experienced oil
price increases that were above those that were embodied in the
forecast already. The baseline forecast expected oil prices to
be about $40 a barrel in the third quarter and diminish over
the next year or so to about $30 a barrel at the end of 2005.
In contrast, we saw the price of oil spike up to $47 a barrel
and moderate somewhat. But it does raise the possibility that
we will have oil prices that are quite different from those
which are embedded in the baseline.
To address that issue, we have done some additional
thinking since the report was prepared, and I know this is a
topic that the chairman discussed to some extent this morning.
We did our thinking in the context of the models which he
mentioned may not give a satisfactory answer in his view. But,
nevertheless, we ran through the models two possibilities. One
possibility is that oil prices are simply going to be higher on
a sustained basis, that the world oil situation is
characterized by rapid growth in demand stemming from not only
the United States but the growth of China, India, and other
sources, and relatively tight supplies. And as a result, we
will see oil prices that remain somewhat elevated compared to
the forecast.
The other alternative is we will just get a spike,
something consistent with a sharp disruption in supply that
then goes away, and in that exercise, we ran oil prices up to
$35 a barrel above the baseline and brought them down after a
year.
The short version of looking at that is that while both
have economic consequences--the sharp spike more severe than
the sustained increase--and that while the ultimate
consequences will depend a lot on how the Fed reacts to this,
that kind of a difference in the economic performance does not
translate into a dramatic difference in the budgetary outlook.
So that while we would have obvious reason to be concerned
about energy prices from the welfare of consumers, from the
point of view of economic growth and the inflation outlook, it
is not a big budgetary issue and would not change dramatically
the baseline budget as we have presented it to you.
The last risk I will mention is risks associated with
productivity, and if we go to the next slide, that one, we have
a chart we have reproduced from the document itself. Since
1995, the U.S. has experienced very rapid productivity growth,
and through the most recent recession and recovery, we have
seen productivity continue to grow at a very rapid rate, indeed
to in some cases grow even faster. Productivity growth over the
year ending in the fourth quarter of 2004 was near 6 percent,
remarkably fast. And you can see the line labeled ``Actual''
demonstrates that sharp rise in productivity.
The judgment call in making the baseline projection then is
how much of that productivity growth to imagine will continue
into the future. You could imagine simply extrapolating off
that last sharp run-up and moving productivity up at a very
dramatic rate. That would make a big difference in the outlook.
We have chosen to take a middle ground and to say it is true
that we have seen productivity growth embrace the historical
rise in productivity and raise the level of our potential rate,
make the economy more productive in our forecast, but not to
extrapolate that most recent burst in productivity, instead to
assume the trend will revert back to the post-1995.
In budgetary consequences, each one-tenth of a percentage
point in productivity growth translates into about $250 billion
in baseline deficit improvement. So that with a baseline
deficit of $2.3 trillion, it would require an extraordinary
rise in productivity to eliminate that in and of itself. But it
is certainly the case that the future path of productivity will
have a lot to do with the ultimate budgetary outlook.
Then, in closing, I will come back to what I think is the
major theme and which both the chairman and Mr. Moran mentioned
in their opening remarks, and that is that policy choices will
dictate the central path around which all these risks will
evolve. We try to illustrate in the report in broad terms the
budgetary implications of some of those choices, alternative
paths for the ultimate costs of operations in Iraq and
Afghanistan, the ultimate costs of alternative paths for
discretionary spending, a freeze versus growing at the rate of
the economy, and, finally, the budgetary implications of
different treatments of different parts of the tax cuts in 2001
and 2003, in particular the partial expensing versus the
remainder of those provisions. These are numbers with which
this committee is well familiar. I will not spend time to go
through them. They are meant to illustrate that these policy
choices are central.
I will only add that what I believe is the most central
fiscal pressure from the entitlement programs is not
represented on that menu because it is not really easy to show
in a 10-year budget window, but as time goes forward becomes
more and more important.
Thank you for the chance to be here, and I look forward to
your questions.
[The prepared statement of Mr. Holtz-Eakin follows:]
This document, ``The Budget and Economic Outlook: An Update,'' can
be accessed electronically on CBO's website at:
http://www.cbo.gov/ftpdocs/57xx/doc5773/08-24-BudgetUpdate.pdf
Chairman Nussle. Thank you.
If you could put up chart 15 to start my questioning? First
of all, thank you for your testimony and for your work and the
work of all of the analysts at CBO to give us this information.
Chart 15 that I have shows the real GDP growth, and my
understanding is that the last year real GDP grew at 4.7
percent. Is that correct?
Mr. Holtz-Eakin. Yes.
Chairman Nussle. OK. What is CBO forecasting for the final
two quarters of 2004?
Mr. Holtz-Eakin. We do not have a quarter-by-quarter
forecast, but given what we have seen, we have expected 2004 to
come in at 4.5 percent overall, 2.8 in the second quarter,
faster than that in the first. We still think we are on track
to see that forecast come through.
Chairman Nussle. What is your analysis or what would be a
common analysis for what is considered good growth? Now, I
understand it may be in the eye of the beholder, but give as
objective a view as what the rule of thumb for good growth--or
how you make the departure in that benchmark.
Mr. Holtz-Eakin. Taking aside the label ``good,'' as you
mentioned, which is in the eye of the beholder, economists
would distinguish between that part of growth which represents
growth in the capacity to produce, which is our potential GDP
in our projections, and that growth which comes from cyclical
recovery and just getting back to using all your resources
efficiently.
In our projections, potential GDP comes from having people
and their skills, adding technologies and capital with which
they can work; potential GDP grows at about 3 percent overall
in the 10-year budget window, slows down a bit in the end, as I
mentioned, due to the baby boom.
Chairman Nussle. So 3 percent is where you just get back to
using the capacity of our economy.
Mr. Holtz-Eakin. Yes.
Chairman Nussle. So anything above the 3 percent would be
considered good?
Mr. Holtz-Eakin. Above potential growth, recovery to and
then perhaps going above for a brief time.
Chairman Nussle. So just taking this chart, we have been
doing good--I guess I didn't ask you ``well.'' We have been
doing well. But according to that definition, not only on an
annual basis but even on a quarterly basis, we have been doing
well and the economy has been performing above capacity, and it
appears, at least according to CBO as well as Blue Chip, that
that will continue.
What would full employment--I mean, I remember taking the
economics classes in college and hearing somebody's definition
at that time of what full employment is in this country. Is
there a common rule of thumb, at least the top and the bottom,
of what full employment is in this country and how you might
compare that?
Mr. Holtz-Eakin. I think there is a consensus vague
definition that full employment is a high level of resource
use, and there is an enormous disagreement about the specific
numbers of the unemployment rate that would be consistent with
that. In our projections, we anticipate that once the economy
goes back to its full use of capacity, which we would think
would occur by the end of 2005, going forward we would expect
the unemployment rate to be in the vicinity of 5.2 percent.
That is a number that is consistent with full utilization of
resources in our projection. There is an enormous amount of
uncertainty. Some people would argue that number belongs below
5 percent, for example. But given the evidence we have looked
at, at the moment that seems like a reasonable estimate.
Chairman Nussle. The average rates of unemployment during
the last three decades, in the 1970s it was over 6 percent; it
was 6.2 percent. In the 1980s, it was 7.3 percent in the 1980s.
And in the 1990s, it was even higher than we find now; it was
5.8 percent as an average. Now, I know you can take all
different periods of time, but at 5.4 percent, certainly that
still means people are looking for work, clearly, but that is
below certainly the decade averages. Compared to where we were
last year at this time, which I believe was 6.3 percent, we are
moving in the right direction.
Mr. Holtz-Eakin. Certainly the unemployment rate coming
down in that way is consistent with the rapid GDP growth
illustrated in these bars as the economy moves back to using
both its workers and its capital in a more complete fashion.
Chairman Nussle. ``This is the worst deficit in history,''
cried the papers yesterday, as I read the headlines. And I
thought to myself, ``Wow, what a short memory. Is this the
worst deficit in history?'' And how do you even try and compare
deficits? What is the best way to compare them, and is this the
worst deficit in history?
Mr. Holtz-Eakin. This is the largest dollar value for a
unified deficit in the Federal Government's history. To compare
deficits across the time, the first step you would want to make
would be to put those dollars on an equal footing, adjusted for
inflation. But perhaps an easier way to do it would be to make
it relative to the capacity to repay the debts that are being
incurred. And for that reason, I think it is most appropriate
to look at deficits as a fraction of GDP. This is 3.6 percent
of GDP, not the largest in post-war, certainly, which was 6
percent of GDP back in the 1980s.
Chairman Nussle. We have a chart that--skip, if you would
not mind, to that. We have a brand new chart that we have
breathlessly brought to the committee to show the 10--or
actually the 12 worst post-war deficits, and we will make this
available to Members and the media, because I just wanted to
find out, based on your definition which one is the worst. And,
you know, we are right now at 3.6 percent of GDP in 2004. Last
year's ranked 11th, and that was 3.7 percent. Actually, you can
see that is an interesting number right there: $422 billion as
compared to the gross domestic product is less than $401
billion last year was to the same economy and output. So you
have got that there.
But, I mean, interestingly enough, that is not--neither one
of those are even in the top 10 deficits. In 1946, we were up
at 7 percent. You just said in 1983 we were at 6 percent; 1985,
5.1 percent; end of the 1990s, 4.7 percent. When I came to
Congress, it was 3.9 percent. So we are even below that. Even
though the nominal figure is higher compared to the gross
domestic product, it is not as high as it could be.
Now, I want to underscore by saying that by not suggesting
to anybody that this is not a bad deficit or that we do not
want to do something about it. But it just was amazing to me to
see the headlines crying out that this somehow was the worst
deficit in history, when, in fact, it was not when you compare
it to our ability to repay it, to our economy to deal with it.
A $200,000 mortgage for me is a lot of money. I will just
report that, and that may be full disclosure that, as I said
before, my wife does not want out there. But to Donald Trump, I
am not sure that probably would be much of an impact. You have
got to compare the deficit to something. It does not mean that
he and I both would not want to reduce our indebtedness, but
you have got to compare this to something. And it is certainly
not the worst deficit in history.
Mr. Thompson. Mr. Chairman.
Chairman Nussle. Please.
Mr. Thompson. Could I just ask----
Chairman Nussle. Oh, you will have more than ample time
to----
Mr. Thompson. I just need to understand your analogy, if I
could.
Chairman Nussle. Oh, I think you understood it just fine. I
will be glad to provide you with the chart, and you can draw
your own analogy. If you want to continue to say this is the
worst deficit in history, that is fine. Keep talking down the
economy. Keep doing all those things. That is fine. You will
have your opportunity. But I think it is a little bit of a
desperate tack. I would much rather see effort put into coming
up with a plan to deal with it than to just try and make
political hay out of it. And we have a plan. We are controlling
spending. The economy is coming back and that is the right
recipe. It was the right recipe in the 1990s to grow the
economy and control spending, and it will be the right recipe
now as we continue on the track to getting back toward a
balanced budget.
With that, let me end my questions and recognize Mr. Moran.
Mr. Moran. Thank you, Mr. Chairman.
You can put that chart back. That is a fascinating chart.
If we could, could we put that one back? We have an
extraordinary House Budget Committee staff over here. I know
you guys are good, too, but ours just remarked--and I wanted my
colleagues to recognize this, too. And I am appreciative that
you brought this chart up----
Chairman Nussle. Careful, because I did not put in there
who was controlling Congress at the time, and you might notice
that the Democrats were controlling----
Mr. Moran. Well, what I wanted to point out, Mr. Chairman--
you may have anticipated this observation so you are
undoubtedly aware. In 1946, of course, that was Franklin
Roosevelt. We had a deficit because we had to spend a little
money to preserve the free world. But beyond that, every single
one of those other ten deficits were under a Republican
President. Do you recognize it? Every single one of them.
Numbers 2-7 were Reagan and Bush, 8 was Nixon-Ford, 9 and 10
was again Reagan-Bush, 11 and 12 is President Bush the junior.
So it is remarkable that----
Chairman Nussle. Who was in control of Congress during
those times?
Mr. Moran. Well, you mean the Reagan-Bush--you mean
President Bush Jr., 11 and 12? I think that you are in control
of both the House and the Senate. That is probably why you are
sitting in the chairman's seat, Mr. Chairman.
Chairman Nussle. We will take credit for those.
Mr. Moran. Take credit. Well, be our guest.
What I wanted to ask you about, Dr. Holtz-Eakin, when we
get back to focusing on you and your excellent report,
statistics, Dr. Holtz-Eakin show that receipts as a percentage
of the gross domestic product were at 16.5 percent in 2003.
They fall to 15.8 percent in 2004.
Now, in 2003, that was the lowest amount of revenue as a
percentage of GDP since 1951. This past year, it was the lowest
since 1950 as a percent of GDP.
Now, both of these figures are way below the average of
revenues, which, on average, revenue has been about 18 percent
of gross domestic product. From 1962-2003, over a 40-year
period, it averages 18 percent. Meanwhile, over the 10-year
budget window, the highest figure that you show for spending as
a percentage of gross domestic product is in 2011 at 20.2
percent. That figure is less than the average of outlays
spending for the 1962-2003 period, that 40-year period. It is
also less than receipts were in fiscal year 2000 when the
Clinton administration balanced the budget.
So if revenue is way below its historical norm and
spending, though, is within the average for the last 40 years,
and, in fact, if spending is at a level that is consistent with
the level it was when we balanced the budget in the year 2000--
in fact, we generated a substantial surplus just 4 years ago--
how does it make any sense to say that our budget has a
spending problem rather than a revenue problem? Couldn't you
maintain that the real problem is not so much spending--even
though the party in control has increased spending by 8 percent
a year over the last 4 years, the reality is that spending is
considerably less--excuse me. Revenue is considerably less than
average revenue, and yet spending is just about even with what
it normally has been.
So the point is that when we--and we have tried to
emphasize this. We keep trying to get these triggers in the Tax
Code. When the tax cuts were passed, there were sunset
provisions. Now, you know, some might think it was merely to
manipulate the budget resolution so you could have a more
restrictive budget limit. But I trust that they were genuinely
put in there. And we had, of course, a surplus for 2004 when
they were put in of almost $400 billion. Now we have had a
swing of $800 billion. We have a deficit of $422 [billion].
But is it not a valid option when things change so
dramatically to, in fact, have a trigger that would sunset tax
cuts until they can actually be paid and do not, in fact,
exacerbate the budget deficit beyond what we are faced with
now?
Mr. Holtz-Eakin. It is certainly within the power of
Congress to construct both the spending and the tax side in
that way.
Mr. Moran. Yes, you are giving me kind of the same answer
we got from Alan Greenspan. You know, sure, we can do what we
want, but the point is--and I want to make sure that I am not
missing something--that, in fact, revenues are much less than
they historically have been. Are they not?
Mr. Holtz-Eakin. Yes.
Mr. Moran. They are considerably less. Yet spending is
consistent with what it generally has been as a percentage of
gross domestic product, is it not?
Mr. Holtz-Eakin. It is close to the 20-percent range that
it has been on average in the post-war.
Mr. Moran. OK. And, in fact, when it was at that level, the
Clinton administration was able to balance the budget and even
produce a surplus in 2000.
Mr. Holtz-Eakin. Yes.
Mr. Moran. I know that is a factual statement. Well, maybe
I am actually directing the question more at my colleagues on
the right than at you, but I wanted to make sure that our
assumptions are accurate.
So this really is an issue of revenue more than spending,
even though all the emphasis seems to be on trying to control
spending. Spending is just about what it normally has been to
keep this economy functioning. Thank you, Dr. Holtz-Eakin. I
know that there are other questioners.
I have one other issue, though, if I could, Mr. Chairman,
on Medicare Part B premiums because we just got information
that the Medicare program is going to go up by 17 percent,
premiums will go up by 17 percent in 2005. Now, when seniors
have come to us, they say, well, how is that going to--how am I
going to pay for that given the small COLA that I will get? I
think the COLA is about 2.7 percent. Is that what we are
figuring?
Mr. Holtz-Eakin. About that range.
Mr. Moran. Cost of living about that. And they have to pay
25 percent of the Medicare premium. It looks as though about
half of their entire cost-of-living increase is going to be
taken up by their Medicare premium, particularly after the
Medicare prescription drug bill goes into effect and we have to
pay for both higher--we are going to have to pay for private
insurance carriers. There is legislation, 79 cosponsors I know
are on it, including Mrs. Capps, Mr. Edwards, Mr. Cooper, Mr.
David, Mr. Lewis, Mr. Neal, and Mr. Scott. It appears to be
most of the Democratic members of the Budget Committee are on
legislation that would, in fact, protect those seniors from
having to pay those higher premiums.
I think this is a major issue, and I suspect my colleagues
are going to elaborate on it a bit in further questioning, but
thank you, Mr. Chairman. I am not going to take up any more
time right now. Thank you.
Chairman Nussle. Mr. Diaz-Balart.
Mr. Diaz-Balart. No questions at this time.
Chairman Nussle. OK. Mr. Gutknecht.
Mr. Gutknecht. Thank you, Mr. Chairman.
I called up earlier a chart--I think is it No. 13? Can we
bring that one up again. I am not asking you really to
criticize, any of your predecessors at Congressional Budget
Office, but I think it is important we put this in some
historical perspective. One of the things--and I have the quote
here somewhere, and I will paraphrase it only slightly. It is
not exact. But just 3 years ago, the Congressional Budget
Office was telling us that we could look forward to surpluses
of $5.6 trillion as you see on that chart. And we understand
that that was--I would not call it an educated guess, but we
understood at that time that, they could be wrong. And there
are always things out there that we do not foresee.
But some of the folks who say that the tax cuts are the
problem, the quote that we had--and this was 5 days before the
September 11 attack, your predecessor was here testifying
before this committee. And at that time, even after the passage
of the tax cuts, we were looking at projected surpluses of over
$3 trillion for the next 10 years.
I wonder if you could just comment on your assessment of
how we could have gone from $5.5 trillion surpluses to multi-
trillion-dollar deficits in the course of 3 years. And, more
importantly, if you look at that chart, really the tax cuts
that we passed in the last 3 or 4 years have really only
represented less than a third of the change, if you will, in
those assessments. I wonder if you could just comment on that.
Mr. Holtz-Eakin. Certainly. One thing you can do is simply
do the essentially budgetary autopsy between, say for 2004,
what was projected then versus what we now project and the
swing from surplus to deficit. Mechanically, that swing comes
in the form of legislation which has transpired in the interim
on the receipt side, legislation on the outlay side, and then
what is left over, which takes the form of economic and
technical changes in our projections.
The numbers differ depending which year you pick, but when
we look at those numbers, what we learn is that on the order of
60 percent--or I would say about 40 percent is in the form of
legislation. So the dominant impact has been change in
legislation since the projections were made, with a big piece,
40 percent or so, which is economics and technicals.
That decomposition is far from obvious. Many of the things
that we label technicals you might think of as economic, such
as the large collapse in capital gains receipts, the incomes
associated with bonuses and options and the tax receipts that
flowed from them. All that gets lumped into the technical
because that is performance above and beyond that which you
would be able to capture in the state of GDP or unemployment,
say.
So if one looks mechanically at given years in that window
or the 10-year budget surpluses, it turns out that over 50
percent of it is typically attributed to legislation; the
remainder is due to economics and technicals; and within that
part, not forecasting a recession as part of it, but not being
able to fully anticipate the consequences of the large rise in
equity-related incomes in the late 1990s, bonuses, options,
capital gains, and the subsequent decline in those in the early
2000 period. That is really at the heart of the difference
between what we projected then and what we have now. Whether
those projections could be done better the next time around in
light of that is the ultimate question. You try to learn from
that.
Mr. Gutknecht. The other question that my colleague from
Virginia raised--and I think it is a legitimate issue and we
ought to have some serious discussion about it. But I come at
it from a little different perspective, and I certainly do not
want to defend watching seniors' premiums go up by 17 percent.
On the other hand, at some point we have to come to grips with
the fact, it seems to me, that this health care thing is
starting to eat us all over. I mean, small business people are
talking--when I spent the month at home, virtually every small
business person that I talked to talked about the rising cost
of health care. And it strikes me that we have had precious
little discussion on what we can do.
Now, I think there have been some things--and I am a big
believer in medical savings accounts or health savings
accounts. But I think at the end of the day--and I do not know
if you want to comment on this, but that has got to become a
bigger and bigger drag on our overall economy. If we are
spending 15 percent of our gross domestic product on health
care, and many of the countries that we compete against are
spending 8 or 9 percent, it strikes me that that is a fact that
we have to deal with. That is not a debate. I mean, that is a
fact.
Mr. Holtz-Eakin. I think it is a very important issue. As I
said in my opening remarks, the most pressing fiscal issue is
associated with Social Security and Medicare and Medicaid, and
the latter two are really the ones which get the largest the
fastest.
To give you a flavor, in our 2003 study of the long-term
budget outlook, we examined the historic growth in health care
costs in those programs. Health care costs per beneficiary rose
2.5 percent faster than GDP per capita, so spending per
beneficiary rose relative to income per person.
If one repeated in the next 50 years the experience of the
past 30, that 2.5-percent excess cost growth, those programs
which are now 4 percent of GDP rise to 20 percent of GDP, or
the current size of the Federal Government.
Now, that is not the typical assumption. The typical
assumption is that something will intervene to moderate the
pace of cost growth and we will end up at somewhere around 12
percent of GDP. But, nevertheless, it is important to recognize
that that is a factor in the budget outlook and that it
reflects health care costs, not the structure of those
programs. And so it also affects the private sector and health
care spending as a whole.
I don't offer any easy solutions to that, but it is
important to recognize that it is out there and it is an
important fiscal consideration.
Mr. Gutknecht. Thank you.
Chairman Nussle. Mr. Edwards.
Mr. Edwards. Mr. Chairman, I am amazed that the Republican
Party, which for decades prided itself as the party of fiscal
responsibility and balanced budgets, now at least in Congress
seems to be the party that goes out of its way to minimize the
significance of the largest deficit in American history. And,
yes, it is the largest deficit in American history. The
chairman said we should compare it to something. Well, let me
do that.
Prior to this administration, the largest deficit in
American history was in 1992 under former President Bush's
administration. It was $292 billion. This year's deficit is
$422 billion.
Let me compare it to something. It took two centuries for
this Nation to build up $1 trillion in national debt. In just
the last 2 years alone, under the leadership of partisan
budgets put together, chosen to be in a partisan way by this
committee and House Republicans leaders, has resulted in
deficits that nearly equal the total combined deficits for the
first 200 years of our Nation's economy.
Now, I want to ask the staff to put back up the chart that
Mr. Moran and originally Chairman Nussle asked to show
regarding deficits as a percent of GDP. Could the staff put
that up on the screen, please? It is the one that showed the
years of highest deficits as a percentage of GDP.
Now, some have defined insanity as being to do the same
thing over and over and over and over again and to expect
different outcomes or results. Now, let me point out the chart
Chairman Nussle brought out earlier. If you look at many of
those years of highest deficits in our Nation's history as a
percent of GDP, those just happen to have come in the wake of
the Reagan tax cut in 1981. The last time anyone in Washington
promised a free-lunch ideology that you can have massive
defense build-ups, massive tax cuts, and balance the budgets:
1983, 1985, 1986, 1984, 1992, the largest deficit in American
history at that time before this administration, 1991. You
know, I thank the chairman for pointing out that the false
promise to the American people that you could have a free
lunch, that you could have massive defense increases, you could
balance the budget and have massive tax cuts, proved to be a
false promise in the 1980s. In fact, President Reagan had to
ultimately agree to, I believe, four tax increases to overcome
those false promises. The only difference between then and now
is we should have learned about the lessons of 20 years ago. At
least some of President Reagan's Budget Directors were honest
enough to admit that they knew they had cooked the books. They
knew you could not promise the American people defense
increases, massive tax cuts, and balanced budgets.
Here we are 20 years later doing the same thing again and
again and again as we did in 2001, 2002, 2003, and now 2004,
promising different results from the same flawed free-lunch
philosophy.
Mr. Chairman, massive Federal deficits are wrong for our
economy and jobs, and they are wrong for our children's future.
And I believe those Members of Congress who led us down the
primrose path of promises of massive tax cuts, defense build-
ups, and balanced budgets should once and for all be honest
with the American people, take personal responsibility as they
preach to welfare recipients, and admit that their free-lunch
economic ideology simply has not worked when it has come to
creating massive Federal deficits that threaten today's
economic growth and our children's and grandchildren's futures.
You know, the cost of this flawed ideology is enormous. It
is real. We have for the second year in a row in actual dollars
the largest deficit in American history. Whether they want to
hear that or not, it is the truth. These deficits will harm our
economy and our families by driving up the price of buying a
house or building a business, thus stunting economic growth--an
impact that even Dr. Holtz-Eakin I think in his last report
mentioned on dynamic scoring.
And, finally, I would say as we borrow billions of dollars
from China and other foreign nations to finance our deficits,
our Nation becomes more dependent upon those nations, less able
to negotiate fair trade deals with those countries, and
literally putting our economy at the mercy of the good will of
the Chinese and other foreign nations.
Mr. Chairman, I will submit my addition comments for the
record, and I would like to reserve time in the next round, if
we have one, for additional questions.
Chairman Nussle. Mr. Garrett.
Mr. Garrett. Thank you, Mr. Chairman.
I had the opportunity to be here earlier this morning when
Mr. Greenspan was here for his testimony and for almost all of
your testimony as well. The thing that I walk away from, as far
as hearing both of your testimonies--and I hope that the people
that are reviewing what is occurring here today--is that
overall, generally speaking, the policies that this Congress
has put in place and the administration has attempted to enact
and has enacted are, generally speaking, working; that we are
seeing an economy that is certainly growing, that is larger
than where we were just a couple years ago; that you see a
growth in gross domestic product, around 4.4, 4.5 percent. All
the charts--and I am not going to pull up the charts, but the
charts that you looked at before show that that is--whether you
want to define that as good or well or I think that is really
good, we are doing well in the areas of GDP.
Back home, when I go to town-hall meetings, one of the
issues they talk about is job growth, and the testimony that we
heard earlier today in that field as well is that we are seeing
that job growth--144,000 last month, 1.7 million over the
period of time, last year--and not so much in my district where
there is not a heck of a lot of manufacturing going on, but
nationally, the testimony earlier today was that we have seen
significant improvements in the manufacturing as well. Home
starts, that is certainly something you would see in my
district. You see that continually going off the charts. I
don't quite understand how it can continue to go at that trend,
but somehow or other it continues.
So, overall, the impact of what we have done in this
Congress appears to be a positive one in each one of those
areas, with the caveat, of course, that there is still work to
be done. Certainly going back to the unemployment side, my
district is pretty good at around 5.0 percent in a couple of
counties, 5.1 percent in one of the other counties in my
district. But overall we still have some work to do, it
appears, in the unemployment area. Also, as Mr. Gutknecht was
raising, as far as the health care side of the equation, it
seems that we have some work to do there as well as far as
bringing down the cost.
You went very quickly over a number, and maybe you can just
throw it out again at me, with regard to where we are going to
be somewhere down the road with regard to overall health care
costs and Medicare and Medicaid and how that is going to impact
upon, what size it is going to be on our economy overall down
the road.
Mr. Holtz-Eakin. The number I gave you, which was by no
means a forecast, but it tells you the power of these numbers
in the overall economy, is Medicare and Medicaid are currently
about 4 percent of GDP, combined, the Federal share of
Medicare--Medicaid plus Medicare. If costs per beneficiary
continue to rise in the future, as they have in the past 30
years, those two programs would grow to 20 percent of GDP,
roughly the size of the entire Federal Government.
So that dominates the long-term budget outlook, and the
possibility of continued increases in health care costs on top
of the aging of the baby boom generation is the number one
long-term budgetary pressure. I don't know if it will be that
fast. One hesitates to believe that it can continue at that
pace. But if it even drops to 1 percent faster than GDP, we
still get to 12 percent. You know, these numbers are large, and
they are important and merit attention.
Mr. Garrett. And reiterate what percentage of the entire
Federal budget, not of GDP?
Mr. Holtz-Eakin. The current Federal budget is 20 percent
of GDP, so that if those grew to 20 percent of GDP, they would
be the size the entire Federal budget is right now.
Mr. Garrett. Because some of the argument that is made on
the other side of the aisle, and by others as well, is that
when you are looking at the ledger sheets, there are two sides:
the spending side of the equation and the revenue side. And
some are suggesting that you can solve some of these problems
simply by increasing the revenue side of the equation, although
for the life of me, I have never met anyone in business or in
family life or anywhere else where they said all we need to do
to solve your problem in your household is to have you pay more
taxes, or all we need to do to help your small business is to
take more money away from you. I haven't seen anyone that tells
me that. But there is that argument that raising the revenue
will address that issue. But if we are looking toward the day
where our entire budget is going to those expenditures, can we
ever make the argument that spending is not the problem that we
have to address?
Mr. Holtz-Eakin. I will give you two responses to that to
frame it up. The first is that a lot of what CBO does in these
hearings is tell you the implications of current law so that
you can decide which way you want to move. If one does the
current law extrapolation out to 2050, acknowledge that that is
extremely heroic given how we do on 10-year, but it says that
receipts rise to about 25 percent of GDP. So there is built
into the existing Tax Code a substantial rise in revenues. That
rise in revenues would be unlikely to be sufficient to cover
the growth in spending built into the entitlement programs, so
that as Mr. Greenspan mentioned this morning, there is an
imbalance that is built in.
In terms of policy, it seems to me that the message that we
talked about when I talked about the long-term costs of Federal
obligations still is true, which is the first-order measure of
costs is how much you spend, and then you choose the means to
finance that spending. So the first thing to decide is how much
and what programs to finance.
Mr. Garrett. Thank you very much.
Chairman Nussle. Mrs. Capps.
Mrs. Capps. Thank you, Mr. Chairman.
Director Holtz-Eakin, thank you for being here. I am going
to ask a question about the Medicare Payment Advisory
Commission. According to this commission Medicare is paying
private plans an average of 107 percent of what it would cost
to cover the same seniors in traditional Medicare. When you
account for the fact that HHS data shows that seniors in
private plans are healthier than average Medicare
beneficiaries, overpayments to plans are more like 115 percent.
My question to you, as a budget and economic expert, what is
the logic to overpaying private plans by up to 15 percent, and
is overpaying private plans for services that would cost less
in the traditional Medicare payment system a good use of
taxpayer dollars?
Mr. Holtz-Eakin. Well, as a budget director I can tell you
that budgets measure cost, and indeed those are the costs
associated with this policy, but presumably those costs are put
in place for an objective, and this particular objective dates
as far back as 1997. Congress has on a regular basis since then
embraced the notion that in order to make Medicare Plus Choice
or Medicare Advantage Plans available in higher cost areas,
that they would be willing to spend more money to do so, and
these payments are a reflection of that policy.
Mrs. Capps. I guess I am bothered by the fact that Medicare
costs are going to increase dramatically because of the baby
boom generation and the retirement, and that will cause an
inexorable rise also of health care costs per se. Yet, the plan
that the Republican leadership has put forth to save Medicare
relies on turning this program over to private plans that will
charge taxpayers 15 percent more, a surcharge if you will, to
provide seniors with the same level of health care that
presumably they could be getting at this point.
I want to now address a topic that Mr. Moran brought up at
the end of his time because it is about health care as well. As
you know, Health and Human Services announced this past Friday
that the monthly premium for Medicare Part B will be $78.20
next year. This announcement was made the day after the
President gave his acceptance speech at the Republican
Convention, at which he described in glowing terms the programs
that Medicare provides for seniors. This increase is $11.60 or
17 percent over the 2004 premium of $66.80. It is the second
largest premium increase in the history of the program. This
premium increase, this is what I want to ask you about, this
could wipe out a senior citizen's Social Security cost of
living increase. I wonder if you could tell me what you
estimate the Social Security COLA will be in 2005?
Mr. Holtz-Eakin. I don't know that number off the top of my
head. I do know that we looked at this issue in our March
report, and at that point we expected a 14 percent increase
based largely on what we knew about the Medicare Modernization
Act, and that we knew that this would impact a larger number of
seniors with regard to their Social Security checks. Since the
actual premiums come in at 17 percent, I don't know how it will
balance out, but we can easily get those numbers for you once
we work through it.
Mrs. Capps. I would appreciate that because it seems that
many seniors could really lose their entire COLA due to this
increase in the Medicare premium. And then again, how many
seniors would lose 50 percent or more of their COLA due to this
premium increase? I imagine you are going to have to get the
same numbers?
Mr. Holtz-Eakin. Yes. What we knew in March was that given
the projections, we saw the number of seniors affected moving
from about a little under 1.5 million to something a bit under
6 million, 5.8 [million] I think. The premium increase came in
a bit bigger than we expected and the COLA we have to nail
down, and we could work through and get the exact projections.
Mrs. Capps. Isn't it true that not getting a COLA is the
same as getting a cut in benefits?
Mr. Holtz-Eakin. In real purchasing power, yes.
Mrs. Capps. In real purchasing power it amounts to the same
thing. In other words, a senior with a monthly check of $860
would lose 50 percent of their COLA to this premium increase. A
2.7 percent COLA on the benefit of $860 is $23, so the Medicare
premium increase of $11 consumes half of this COLA and that is
for someone getting a monthly check of $860. The average
monthly benefit this year is around $846, I have been led to
believe is roughly the case. A senior with a check of $860 or
less will lose half of their COLA to the Medicare premium. It
seems clear to me that a lot of seniors could be in the
situation of losing up to half of their COLA, some of them
maybe even more than that, due to the very Medicare premium
increase that we have been talking about. There is a few
seconds if you could comment on that.
Mr. Holtz-Eakin. Well, we can certainly work through the
numbers. It is the case that to the extent that your purchasing
power doesn't go up at the rate of inflation, then your real
purchasing power goes down. A broader calculation would include
what they are getting for their Medicare premium included in
that, and we could work it out as well.
Mrs. Capps. Thank you. I yield back.
Chairman Nussle. Mr. Diaz-Balart.
Mr. Diaz-Balart. Thank you very much, Mr. Chairman. One of
the things that I learned in my short time in DC is how all of
us get into this mode that what happens in DC kind of happens
in a vacuum, it is not affected by things outside of DC, nor
does it affect things outside of DC. I just heard a person that
I really respect, Congressman Edwards, talk about the failed
policies of the Reagan administration as if, you know,
everything happened in a vacuum. We have to remember what
happened, what was there when President Reagan took the White
House. Does anybody forget that Americans were taken hostage,
that Americans were taken hostage? Does anybody forget that
when you traveled around the world, different offices would
tell you to not look like an American because you were subject
to getting taken hostage or subject to abuse? Does anybody
forget that the President of the United States, Jimmy Carter,
said that the country was in a state of malaise? That is what
President Reagan inherited.
And what did he do with the policies that my dear friend,
Mr. Edwards, said were failed? He took this country out of that
state of malaise, using President Carter's words about the
American people, not about his administration which was really
the real cause of the malaise, and he brought this country to
its former glory despite the fact that again, what he inherited
was the removal of the Shah or Iran and the replacement with
Ayatollah Khomeini. Again, things don't happen in a vacuum.
History obviously will show that President Reagan was one of
the greatest Presidents in the history of our country because
what he did was really regroup the United States and also
defeat--start the defeat of the Soviet Union without firing one
single shot. But he inherited what his predecessor called a
state of malaise.
To not realize how the economy is doing right now and also
putting it in perspective to where we were, I think again is
kind of this Washington attitude. When President Bush inherited
the White House--he didn't inherit it--when he won the White
House, and what he inherited was the beginning of recession,
and what he inherited was an attack on the United States of
America, a war that he did not ask for. What he inherited was
the implosion of the Internet companies, which he inherited
which he had nothing to do with. What he inherited was the Wall
Street scandals. Again, this is not a vacuum. We can't forget,
you know, believe our own little ivory tower here. And despite
9/11 and despite all those attacks on our economy, some of
those by our enemies and others by some corrupt people on Wall
Street and others, despite that, doctor, you are saying that
according to your numbers, economic growth, if it is over 4
percent is a relatively healthy economic growth.
When you look at what could have been, if it wasn't for the
policies of this President and of this Congress, to me that is
a scary thought. So, again, I think it is just important that
we kind of take a deep breath and not forget that though we
kind of sometimes forget that we do not live in a vacuum and
decisions that we make up here do impact real people, decisions
that were made in the past impact real people, and decisions
that we make now. Again, I think when you look at this economic
growth and you look at the fact of the largest attack on the
history of this country, and the fact that we are at war,
compare those numbers, compare these deficit numbers with,
again, post-war numbers or during war numbers when the United
States has been at war in other times.
Mr. Chairman, I just have to--me as a guy who is relatively
new here, I wanted just to remind myself to not kind of get
stuck in this ivory tower attitude that it doesn't matter,
nothing matters, that this is a vacuum and that we can play
with numbers in every single way. The bottom line is the
economy is doing, I think, well and getting better because of
this President despite--because I don't believe in that vacuum
attitude--despite what the reality was which was again the
United States was attacked, the Wall Street scandals, et
cetera, et cetera. I think that says a lot for these policies
that are clearly working, and we have to continue to work to
make sure that we continue this economic growth, and I think
part of that is to control spending.
Thank you, Mr. Chairman.
Chairman Nussle. Mr. Emanuel.
Mr. Emanuel. Thank you, Mr. Chairman.
Thank you, Director. I know a lot of us have focused on
your report just the other day on the deficit. I would like to
ask you about the summer report of August 13, by CBO and make
sure that I got this right, your analysis basically on the tax
cuts.
Mr. Holtz-Eakin. Yes.
Mr. Emanuel. The top 1 percent of households will receive
one-third of the tax cuts in 2004. Does that summarize the
analysis that you did?
Mr. Holtz-Eakin. That would not be my summary of the
analysis. You might be able to pull that number out.
Mr. Emanuel. How about this? The top 1 percent will receive
an average tax cut of 78,000 in 2004, more than 70 times the
average tax cut received by the middle fifth of households.
Those in the bottom fifth will receive an average tax cut of
$230 in 2004, and the average income of the top 1 percent is
$1.2 million. And as we relate the August 13, CBO analysis of
the distribution of the three Bush tax cuts, that as we argue
about the deficit and tax cuts, et cetera, that if we extended
these tax cuts as being called for, that the additional debt
would go from $2.3 trillion to approximately $4.5 trillion. Is
that correct?
Mr. Holtz-Eakin. The budget cost of extending the tax cuts,
about right, yes.
Mr. Emanuel. Is about $4.5 trillion.
Mr. Holtz-Eakin. The tax cuts themselves are about $1.2
[trillion], $1.3 [trillion].
Mr. Emanuel. Right, the combined, OK.
Mr. Holtz-Eakin. Total.
Mr. Emanuel. I understand. Second, if I understand what you
said today in the paper, that the idea, the concept, the
theory, whatever adjective you want to use, that a growing
economy will solve the deficit as a problem is not correct,
that it will require more than just having a healthy growing
economy. That is what you were quoted as----
Mr. Holtz-Eakin. Yes, and I hope that came out in my
opening statement, that we cannot count on economic growth
alone to remove deficits.
Mr. Emanuel. And basically that it would require both a
healthy economy, a change in our tax policy, whether you want
to call it a reform or increase, whatever adjective you want to
use to describe it, and spending restraint, if you want to make
one of the economic goals is to return the budget into some
form of balance or reduce the deficit. It is going to require
all three of those?
Mr. Holtz-Eakin. You could do it with just spending. You
could do it with just taxes. As you know, I believe----
Mr. Emanuel. But a balance----
Mr. Holtz-Eakin [continuing]. Decide what you want to do
and finance it.
Mr. Emanuel. OK. But I want to make sure that I understood
correctly from your August 13 report and analysis that the
distribution is how those tax cuts, all three of them,
basically impact, that they were not equal across income
groups, that some people making more money got more of the
benefits on dollar terms than those at the lower half, middle
to lower half?
Mr. Holtz-Eakin. Mr. Chairman, I don't want to take his
time. I never felt that that report was very well understood,
nor--can I take a couple minutes and walk through this without
getting things off track?
Chairman Nussle. Yes. We can do that. The gentleman, Mr.
Emanuel, will be recognized for 2 minutes after you complete
your statement.
Mr. Holtz-Eakin. My 10-second version of that report. I
brought a slide or two, because the first thing that has been
said about that which--not to pick on you--has been repeated is
that----
Mr. Emanuel. Go ahead. I am a middle child. You can go
ahead and pick on me. [Laughter.]
Mr. Holtz-Eakin. We share that burden
Mr. Emanuel. It is a burden that we will bear the rest of
our lives.
Mr. Holtz-Eakin. I may never recover. [Laughter.]
What I wanted to show is the entire history as we have
computed of these effective tax rate studies, and then what you
see at the right side is the subject of the August 13 report,
what would be effective tax rates under current law, which is
the bottom line, and then the dotted line which is 2001 law.
Part of my frustration with the characterization of this
report is that everything to the left of the dotted line is
history and reflects from 2001 and back actual incomes, actual
tax payments, and in this particular formulation, actual
effective tax rates, which are an economic measure of the
burden of taxation divided by comprehensive economic income,
not merely a taxable income, but access to Medicare and other
things like that. So we can get into that, but it will take us
off course.
Importantly, going forward, and the topic of the report is
not anything that has happened--I don't know what happened in
2004 because it is not over yet, and so I don't know what will
be the distribution of the tax burden, and that has I think
been not well understood about the report. The second is that
if you see the report, what we did was in the absence of data
past 2001, we simply extrapolated at a very smooth rate of
inflation, and a very smooth rate of income growth. So there
was no recession, nothing that we actually experienced, and
effective tax rates rise under current law because of
inflation, real income growth and the tax law. And in order to
peel out the part that is just inflation and income, we did the
2000 law. There with the law frozen the only reason for tax
rates to change is due to the inflation and the income, and so
the difference between those is the impact effect of the tax
law. What we characterized in that report was that impact
effect, prior to any behavioral responses, prior to any
macroeconomic feedback, prior to any actual data on incomes and
tax payments in looking at effective tax rates which are, in
simple terms, the fraction of your private purchasing power
which you delivered to the Federal Government in all the
variety of tax sources.
So it is not an analysis of these particular tax cuts in
the sense of what really happened, it is impact effects and the
distribution, and it is a distributional study, and it does
have--you may just want to flip to the next slide--different
impacts across different parts of the income distribution. You
can see that, and in particular, if we go to the next slide, a
large, this is the top 1 percent, 5 percent and 10 percent, you
can see that in fact you get declines in effective tax rates
over the impact on effective tax rates in 2003, 2004, and going
forward, and then jump back up at the end.
The one thing I would caution you about, if you go to the
next slide, is 2004 is very special. The difference between the
previous slide and that one is that we took out the net
operating loss carry-backs and the bonus depreciation, the
partial expensing that expires at the end of this year, those
have a dramatic impact on the distributional consequences, and
so you should be aware in using 2004, they are not typical
years.
So that is a big digression. I think the report has been
not well understood. It shows the impact effect. It differs by
income distribution. The effective tax rate is dropped more at
the upper end than at the bottom end, but they aren't facts
yet.
Chairman Nussle. Before you proceed with your----
Mr. Holtz-Eakin. And these are the numbers that we put up,
the numbers you gave, were not the report. We can check and
make sure they are right.
Chairman Nussle. Before you proceed with your 2 minutes,
since we are on borrowed time, my time, my understanding is,
looking at that chart then, that every taxpayer in every
bracket faced lower taxes as long as they paid income taxes?
Mr. Holtz-Eakin. Yes.
Chairman Nussle. That is what that chart says?
Mr. Holtz-Eakin. Indeed, it is not even the act of writing
the check. This is an economic measure of burden, so that, for
example, if there is a sales tax and the store sends in the
check for the sales tax, but they jack up the prices so that
you pay for it, we assign that burden to you as the customer,
not to the person who writes the check. So this is looking
cross all parts of the income distribution, the burden they
bear in the economic sense, not just the check writing sense.
Chairman Nussle. Thank you.
The gentleman from Illinois is recognized for his final 2
minutes.
Mr. Emanuel. I will take only, I hope, only a minute of
time.
One is, you were asked to do that report, because as every
tax fight and debate we have, Treasury usually provides a
distribution analysis and the Treasury Department did not. So
let's underscore why you were asked to do that, which is
unprecedented in history.
Second is, nothing I heard you say, said--you were asked to
extrapolate, and you did, and you tried to make a guess. The
top 1 percent will receive an average tax cut of $78,000 in
2004, more than 70 times the average tax cut received by the
middle fifth, and those in the bottom fifth will receive an
average tax cut of $230. I know you are guessing at 2004, it
has not happened. But based on what we know happened in 2003
and what you are supposed to guess about what is happening in
2004, we know that that tax cut and the dollar terms it means
to a family's budget were not equal in terms of what they got
as a check. Correct?
Mr. Holtz-Eakin. Unquestionably.
Mr. Emanuel. Thank you very much.
Chairman Nussle. Mr. Portman.
Mr. Portman. Thank you, Mr. Chairman.
Thank you, Dr. Holtz-Eakin, for being here again, and for
your good analysis. I have looked at your OMB report and I
really couldn't figure out what all the fuss was about. As I
read your report, and I would like you to correct me if I am
wrong, the top 10 percent of taxpayers in this country, the top
5 percent or the top 1 percent, after the Bush tax cuts were
done with regard to Federal income taxes, and this is taking
into account what is going to happen over the next 3 years, 6
years, 10 years, depending on the provision, not just 2004 with
depreciation, but in every one of those categories, they are
going to pay a higher percentage of the Federal taxes, not a
lower percentage.
For instance, the top 10 percent pays roughly 67 percent of
the taxes in 2000, and after the Bush tax cuts were in place,
they pay approximately, based on your data that I saw, about 68
percent. And I saw the headline saying, you know, the rich are
going to pay less based on the Bush tax cuts. Yes, the rich are
going to get a bigger tax cut because they are paying more
taxes, so Rahm's numbers, you know, in absolute terms, are
correct, but as a percentage of who is paying the burden, I
mean, the rich are going to pay even more thanks to the Bush
tax cuts, because of the 10 percent bracket, because of the
child credit, which is refundable, because of the marriage
penalty the way it works, and I just--I know this is a
political season and all that, but am I wrong about that, Dr.
Holtz-Eakin?
Mr. Holtz-Eakin. No. Those are the numbers on the income
tax. There are two measures of burden in the report. One is the
fraction of private incomes paid in taxes. The second is the
fraction of the public taxes borne by each income class, and
your characterization of the share of income taxes is right on
the mark.
Mr. Portman. So maybe we should ask a different question
next time, and we can clarify this for our constituents. But we
do have a very progressive tax structure in this country now,
which makes it difficult, of course, to put together any kind
of tax reform that does any kind of leveling because so many
folks because of the benefits that President Bush has delivered
in terms of the 10-percent bracket are not paying income taxes
at all, about 3 or 4 million Americans, and others are paying
less of a burden because of the refundability of the child
credit and the marriage penalty. And, you know, in these tough
economic times, that is appreciated. I tell you, 4.4 million
Ohioans are getting a tax cut thanks to what President Bush
did.
I have got some other data on that that I would be happy to
talk about, but I just wanted to quickly go over your findings,
which I really appreciate today your telling us that the
deficit is now going to be estimated to be $56 billion less
than you thought it was going to be for 2004. Why is that?
Mr. Holtz-Eakin. That is largely on the receipt side. One
piece of it is labeled technical. It was our estimate of how
much of the 2003 tax cut would show up in lower withholding
last year versus with refunds this year. With lower refunds
being anticipated--not lower absolutely, but lower than we
expected, so that looks like higher receipts. That is a one-
time event not worth thinking too hard about. And the remainder
is given the economy--we had anticipated a rapid recovery, as
you know. Even given that, we saw more rapid growth in
corporate receipts than we had anticipated.
Mr. Portman. So we have revenue increases this year as
compared to last year, but I thought we just heard from the
other side of the aisle that we had these terrible tax cuts
last year that have taken so much money out of the budget. We
had tax cuts last year, and yet there is more revenue this
year. How do you account for that? If it is less of a tax
burden being paid and we have higher revenues this year, it
reduces our deficit from what you thought it was going to be
even in March, why is that?
Mr. Holtz-Eakin. Well, there are two different metrics, one
of which is last year versus this year, and you can cut taxes,
and there is some offset from faster economic growth. And the
second metric is this year relative to what we expected, and we
certainly underestimated the degree to which we would get some
back.
Mr. Portman. That we would have the fastest economic growth
in the last 20 years over the last four quarters, that 1.7
million new jobs have been created, you did not expect that
kind of economic growth?
Mr. Holtz-Eakin. We have actually received receipts above
our economic forecasts, which even going back to March, we had
anticipated a rapid cyclical recovery with payroll growth and
with rapid GDP growth. And so on top of that, we have gotten a
bit more, not dramatically more but a bit more than we
anticipated.
Mr. Portman. I appreciate your testimony today on the magic
here, which is not all that complicated, which is keeping
spending under control and growing the economy. And that is
what we need to do again, as we did in the 1990s. We heard from
Dr. Greenspan this morning that health care costs, as we have
heard from you, are one of the real cost drivers in terms of
the entitlement programs in particular. Some have suggested
that the preventive health services and chronic disease
management that is in the Medicare bill, for instance, could
save hundreds of billions of dollars, as you know. Many of
these provisions are worthwhile, like having a physical when
you go now to join the Medicare program.
You all at CBO have consistently scored these provisions as
costing money, not saving any money. For example, CBO estimated
that provisions in the prescription drug bill would cost
about--well, almost $3 billion, as I see it, over a 10-year
period. Do you still stand by your original estimate that
preventive health services and chronic disease management cost
money rather than saving money?
Mr. Holtz-Eakin. We have yet to find anything like
consensus and consistent evidence in the peer-reviewed
literature that there are cost savings associated with those
programs. We know that there have been cases where individual
companies or programs have claimed that they have achieved
savings above the initial outlays necessary, but there is no
consistent evidence of that fact. And we are agnostic until we
find such evidence.
Mr. Portman. So you stand by your original estimate.
Mr. Holtz-Eakin. Yes.
Chairman Nussle. The Chair observes that we have three
members who have been patiently waiting to ask questions. I
will come back afterwards and continue the hearing if that is
what you would like to do. I will try and recognize you in
order, see if we can get this done before the vote. And you can
manage your own time.
Mr. Baird.
Mr. Baird. Thank you, Mr. Chairman.
Earlier today, Chairman Greenspan testified that tax cuts,
while there may be some revenue gain, the likely revenue gain
will not exceed the revenue lost by tax cuts. is that generally
your expectation for tax cuts?
Mr. Holtz-Eakin. Yes.
Mr. Baird. So, in other words, further tax cuts is probably
not a solution to balancing the budget in and of itself?
Mr. Holtz-Eakin. One would not expect that if you cut taxes
by $1 you would get $1 or more back.
Mr. Baird. Thank you.
I want to respond to my good friend from Florida's
observation about what people have inherited and about not
living in isolation. I could not agree more. I was just back in
my district, and the head of a mental health clinic told me
about 700 people who are going to lost their mental health
benefits under Medicaid and were going to be without any
therapy, medications, et cetera. So, indeed, the budget cuts we
enact here do have impacts back home.
Another school principal in the spring told me of laying
off 34 teachers' aides because of the Leave No Child Behind
Act. Let's look for a moment at what was inherited by this
administration. They inherited a $200 billion surplus,
profoundly high U.S. standing globally. They inherited a host
of other benefits. What have they left us? They have left us a
$600 billion deficit when you include $150 billion borrowing of
Social Security; 45 million Americans with no health insurance;
1 million more people in poverty, according to the latest
census data; deficits in the transportation infrastructure
which will not be addressed by the current administration's
transportation plans; record trade imbalances; the lowest U.S.
standing in international reputations, I think, in recent
history; thousands and thousands of injured U.S. soldiers;
record-high oil prices, energy prices that were driven up by
Enron due to the inaction of this administration. So there are
inheritances to be had, and I think part of what we are
concerned about is the inheritance of the deficit.
I noticed on your chart, Mr. Holtz-Eakin, that the
borrowing from Social Security looks to me to increase from
$153 billion in 2004 to approximately $256 billion in 2010, if
current trends apply. Is that a more or less accurate figure?
Mr. Holtz-Eakin. We can check. I don't know.
Mr. Baird. I believe that to be the case, which I find
interesting, because this President and this Congress pledged
to put Social Security in a lockbox, and yet we are borrowing.
Now, if we do indeed borrow $256 billion, which is $100
[billion] or so more than we are borrowing today, it seems
somewhat disingenuous to suggest, as the President has, that we
are going to cut the deficit in half if part of the way we get
there is by increasing our borrowing by over $100 billion more
from Social Security. Any comments on that?
Mr. Holtz-Eakin. I think it is best to view the unified
budget, and as a result, those transfers within I think are
less meaningful in an economic sense than the net change in the
overall position.
Mr. Baird. I have heard you say that before and heard
others say it. However, we did promise to put it in a lockbox,
so the President apparently did not buy that when he came into
office and has apparently flip-flopped, if I may use that
popular phrase, on his perspective there. And yet who will pay
that Social Security trust fund back down the road?
Mr. Holtz-Eakin. In the end, the economy is the source of
finance for all programs, Social Security and otherwise, and in
our current projections the key moment for Social Security will
be 2019, the point at which payroll taxes will no longer cover
current benefit payments. And at that point, it will be
necessary for one of three things to happen: either those
resources will come from lower spending elsewhere in the
budget; they will come from higher taxes; or they will come
from additional borrowing. But it will be the case that on a
cash flow basis, Social Security will need to turn to the rest
of the budget for those resources.
Mr. Baird. My take would be essentially our children will--
or future workers, which I am assuming are our kids.
Mr. Holtz-Eakin. It depends on the future course of policy,
as you know. If there are changes in the program, that could be
ameliorated.
Mr. Baird. We heard from Tom Scully--or we heard from GAO
today that Tom Scully, the former head of CMS, should probably
not even receive his salary for having suppressed factual
information from one of his employees. That factual information
was that the Medicare bill would cost not $400 billion but $530
billion just for the next 10 years. Do you know what the
projections are over the subsequent 10 years?
Mr. Holtz-Eakin. With perhaps a little undue pride, I would
say that we estimated the cost of the bill, we believe it was
$395 billion, and there has been nothing that has transpired
since that would cause us to change our estimate. It is built
into our Medicare baseline. It will become more expensive each
year due to additional beneficiaries and rising health care
costs. One could imagine over the second 10 years that benefit
is something on the order of $1.5 trillion.
Mr. Baird. That is $1.5 trillion for that benefit alone?
Mr. Holtz-Eakin. Yes.
Mr. Baird. I thank the gentleman and yield back. Thank you.
Chairman Nussle. Does the gentleman from Virginia have
anything he would like to say before the end of the hearing?
Mr. Scott. No. We appreciate the gentleman coming.
Chairman Nussle. It appears, Director, there are members
who are very interested in continuing the conversation. I know
that they have the opportunity to do so privately with you,
over the phone or in person. And they have agreed to not come
back after the series of votes. So I appreciate them and their
forbearance, and I appreciate your being here today and for the
excellent testimony and for the good work of the Congressional
Budget Office.
If there is nothing further to come before the committee,
we will stand adjourned.
Mr. Holtz-Eakin. Thank you.
Chairman Nussle. Thank you.
[Whereupon, at 3:52 p.m., the committee was adjourned.]