[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

                               __________

           Printed for the use of the Committee on the Budget


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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.]

                                  
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