[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
                   THE CONGRESSIONAL BUDGET OFFICE'S
                      BUDGET AND ECONOMIC OUTLOOK

=======================================================================

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

            HEARING HELD IN WASHINGTON, DC, JANUARY 30, 2007

                               __________

                            Serial No. 110-3

                               __________

           Printed for the use of the Committee on the Budget


                       Available on the Internet:
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                        COMMITTEE ON THE BUDGET

             JOHN M. SPRATT, Jr., South Carolina, Chairman
ROSA L. DeLAURO, Connecticut,        PAUL RYAN, Wisconsin,
CHET EDWARDS, Texas                    Ranking Minority Member
LOIS CAPPS, California               J. GRESHAM BARRETT, South Carolina
JIM COOPER, Tennessee                JO BONNER, Alabama
THOMAS H. ALLEN, Maine               SCOTT GARRETT, New Jersey
ALLYSON Y. SCHWARTZ, Pennsylvania    THADDEUS G. McCOTTER, Michigan
MARCY KAPTUR, Ohio                   MARIO DIAZ-BALART, Florida
XAVIER BECERRA, California           JEB HENSARLING, Texas
LLOYD DOGGETT, Texas                 DANIEL E. LUNGREN, California
EARL BLUMENAUER, Oregon              MICHAEL K. SIMPSON, Idaho
MARION BERRY, Arkansas               PATRICK T. McHENRY, North Carolina
ALLEN BOYD, Florida                  CONNIE MACK, Florida
JAMES P. McGOVERN, Massachusetts     K. MICHAEL CONAWAY, Texas
BETTY SUTTON, Ohio                   JOHN CAMPBELL, California
ROBERT E. ANDREWS, New Jersey        PATRICK J. TIBERI, Ohio
ROBERT C. ``BOBBY'' SCOTT, Virginia  JON C. PORTER, Nevada
BOB ETHERIDGE, North Carolina        RODNEY ALEXANDER, Louisiana
DARLENE HOOLEY, Oregon               ADRIAN SMITH, Nebraska
BRIAN BAIRD, Washington
DENNIS MOORE, Kansas
TIMOTHY H. BISHOP, New York

                           Professional Staff

            Thomas S. Kahn, Staff Director and Chief Counsel
                James T. Bates, Minority Chief of Staff


                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, January 30, 2007.................     1
Statement of:
    Hon. John M. Spratt, Jr., Chairman, House Committee on the 
      Budget.....................................................     1
    Hon. Paul Ryan, a Representative in Congress from the State 
      of Wisconsin...............................................     2
    Peter R. Orszag, Director, Congressional Budget Office.......     4
Prepared statement of:
    Mr. Ryan.....................................................     3
    Mr. Orszag...................................................    10


     THE CONGRESSIONAL BUDGET OFFICE'S BUDGET AND ECONOMIC OUTLOOK

                              ----------                              


                       TUESDAY, JANUARY 30, 2007

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:03 a.m., in room 
210, Cannon House Office Building, Hon. John M. Spratt, Jr. 
(Chairman of the committee) presiding.
    Present: Representatives Spratt, DeLauro, Edwards, Cooper, 
Allen, Becerra, Doggett, Blumenauer, Berry, McGovern, Sutton, 
Scott, Etheridge, Hooley, Baird, Moore, Bishop, Barrett, 
Bonner, Garrett, Diaz-Balart, Hensarling, Lungren, Simpson, 
McHenry, Conaway, Campbell, Porter and Smith.
    Chairman Spratt. I call the meeting to order and open the 
hearing with a congratulations again to Dr. Peter Orszag, our 
witness this morning, on his appointment as the Director of the 
Congressional Budget Office. He is a superbly qualified 
economist. He has an outstanding reputation not just among 
economists, but among the public and Members of Congress alike.
    We are pleased to have you, Peter, as the Director of the 
CBO and as a central part of the budget process as we face the 
challenges, and there are plenty, that lie ahead of us.
    The purpose of today's hearing is to discuss CBO's newly 
released budget and economic outlook, and to give Members an 
opportunity to ask Dr. Orszag about CBO's estimates. CBO does 
excellent work in producing its budget estimates and forecasts. 
It is also important for Members to understand and for the 
general public to understand that the restrictions or 
conventions that are imposed upon CBO by law and by practice 
make their estimates and the subsequent limitations of the 
baseline subject to explanation because they are not to be 
taken as predictions so much as they are benchmarks where we 
are with respect to current policy.
    Any improvement in the deficit is a welcome development. 
Last week's baseline budget estimate from CBO is still not any 
cause for declaring victory. When the surplus from Social 
Security is excluded, as I think it should be, the deficit for 
this year's budget is $362 billion, and it hovers in this range 
until 2011. At that point budget forecasting rules call for CBO 
to assume that the tax cuts passed in 2001 and 2003 will expire 
as the terms provide. The Bush administration assumes 
otherwise, and the consequences for the bottom line are going 
to be enormous.
    CBO is also required to assume that the alternative minimum 
tax will remain enforced and not be adjusted so that the AMT 
becomes a tax schedule for tens of millions of American 
taxpayers, most of for whom it was not intended. If instead the 
AMT is fixed so that it applies only to up-bracket taxpayers, 
those for whom it was originally intended, the loss revenues 
between 2008 and 2017 is in the range of a trillion dollars.
    On the spending side, budget forecasting rules call for CBO 
to assume that the supplemental appropriation passed in the 
previous year carried forward to future years. Since the fiscal 
year 2007 Defense Appropriations Act includes $70 billion for 
bridge funding for operations in Iraq and Afghanistan, this 
level of expenditure is included or assumed in the 2008, 2009 
and through 2017. With the supplementals for Iraq and 
Afghanistan totaling $120 billion in 2006, probably as much as 
$170 billion in 2007, the $70 billion carried forward is a 
likely understatement, at least for the short run.
    When these adjustments are made, the estimates from CBO 
become a sobering reminder of how much current policy will have 
to be changed to return the budget to a fiscally responsible 
course. If not corrected, large deficits--these large deficits 
will result in a rising mound of debt, which CBO already 
estimates to total $8.9 trillion by the end of this year. This 
means there has been a 55 percent increase in the statutory 
debt since the Bush administration took office, and its 
corresponding increase in debt service means that--and a 
corresponding increase in debt service.
    So the challenges we face are considerable. When you open 
this book, Dr. Orszag, and read the first paragraph in the 
first chapter, this sounds like good news. Congressional Budget 
Office projects that if current laws and current policies 
remain the same, the Federal budget will assure a deficit of 
$172 billion for the year 2007. That is good news, no question 
about it. But if you turn the page and read the first paragraph 
on page 2, CBO tells us, however, if all tax provisions set to 
expire over the next 10 years were extended, and the AMT is 
indexed for inflation, the budget outlook for 2017, 10 years 
from now, would change from a surplus of $249 billion, a 
surplus, to a deficit of $476 billion. Debt held by the public 
at the end of 2017 would climb to nearly 40 percent of GDP, and 
the 10-year cumulative deficit total would be $3.2 trillion. In 
other words, we have our work cut out for us.
    Dr. Orszag, I welcome you here, but before turning to you 
to hear your statement, let me offer the Ranking Member Mr. 
Ryan the opportunity to make an statement as well. Mr. Ryan.
    Mr. Ryan. Thank you, Mr. Chairman. Excuse me while I cough 
while I do my opening remarks. When you have a 2-, 3-, and 4-
year-old, you get a cold about every 2, 3 or 4 weeks.
    The budget outlook we are considering today--first of all, 
I want to welcome Dr. Orszag. It is good to have him, off to a 
good start, and this is a very, very good read as far as CBO 
outlooks go.
    The outlook we are considering today does contain some 
truly good news. Even as we have kept tax burdens low, revenues 
have continued pouring into the Treasury at higher-than-
expected revenues, and this is the single biggest factor in 
this current year's deficit reduction. But the good news 
basically does stop right there.
    As Chairman Spratt just noted, and as Dr. Orszag will 
confirm, I have no doubt, much of the budget outlook rests on 
unrealistic assumptions both on the spending side and on the 
tax side. Among them clearly are the funding levels for the war 
in Iraq and significant tax increases. But even taking these 
facts in account tends to obscure the most important driver of 
Federal spending, and the biggest threat to our fiscal and 
economic health; that is, entitlement spending.
    Just a week ago we heard from David Walker, the Comptroller 
General, and others that warned us that unless Congress takes 
prompt, substantive action to address the unsustainable growth 
in entitlement programs, particularly our large health care 
programs, both the budget and the economy will face serious 
consequences.
    CBO's report echoes these concerns. It projects entitlement 
spending to grow about 5.9 percent a year. This trend will be 
led by Medicare and Medicaid, which will grow at about 7 to 8 
percent a year. Even if we allow all the tax cuts to expire, it 
is swamped by this growth in entitlement spending. So even if 
we manage to balance the budget by 2012, which I think we can 
and should do, entitlements will quickly drive us right back 
into deficit, and the situation will keep getting worse after 
that.
    So we see good news now. It is kind of a calm before the 
storm. And let's just put it into perspective and realize that 
we have a big storm coming on the horizon. So the point is that 
it is not enough for us in Congress to only look at war costs 
or discretionary spending or whether taxes are permanent or 
not; we need to face up to the entitlement problem, and we need 
to do it soon.
    Again, there was some truly good news in the report and I 
don't want to lose sight of that. The economy is growing well. 
Inflation is in check. A lot of good things are happening. We 
have had 7.2 million jobs created since the last recession, but 
we can't use this report to bury our heads in the sand, and we 
cannot pretend that simply cutting defense spending or raising 
taxes is going to solve the real problem we face. We can get to 
balance in 5 years, and I believe we should, and I think we 
will. But we cannot do it with massive tax hikes. I believe Dr. 
Orszag will agree that we are going to have to make difficult 
decisions and enact substantive changes to address the growth 
in entitlement spending, and we are going to have to do it soon 
if we are going to do it right. Thank you.
    Chairman Spratt. Thank you, Mr. Ryan.
    [The prepared statement of Mr. Ryan follows:]

Prepared Statement of Hon. Paul Ryan, a Representative in Congress From 
                         the State of Wisconsin

    The budget outlook we are considering today does contain some truly 
good news. Even as we've kept tax burdens low, revenue has continued 
pouring into the Treasury at higher-than-expected levels. And this is 
the single biggest factor in the current year's deficit reduction.
    But the good news stops there. As Chairman Spratt has noted--and as 
Director Orszag will confirm--much of the budget outlook rests on 
unrealistic assumptions--both on the spending and tax side. Among them, 
clearly, are funding levels for the war in Iraq, and significant tax 
increases.
    But even taking these facts into account tends to obscure the most 
important driver of federal spending, and the biggest threat to our 
fiscal and economic health: entitlement spending.
    Just a week ago today, this Committee heard compelling testimony 
from the Comptroller General, David Walker, and others warning us that 
unless Congress takes prompt, substantive action to address the 
unsustainable growth in entitlement spending--particularly of our 
largest healthcare programs--both the budget and the economy will face 
serious consequences.
    CBO's report echoes these concerns. It notes that entitlement 
spending--which already consumes more than half of the budget--is 
projected to grow at about 5.9 per year.
    This trend will be led by Medicare and Medicaid, which will grow at 
7 to 8 per year--faster than projected growth of the entire economy, 
and faster than projected growth in tax revenue--even if the 2001 and 
2003 tax relief was allowed to expire.
    So even if we could manage a balanced budget by 2012, entitlements 
would quickly drive us right back into deficit, and the situation would 
just keep getting worse after that.
    The point is that it's not enough for us in Congress to look only 
at war costs, or discretionary spending, or taxes. We need to face up 
to the entitlement problem--and we need to do it soon.
    Again, there was some truly good news in this report, and I don't 
want to lose sight of that.
    But we can't use this report to bury our heads in the sand, and we 
can't pretend that simply cutting defense spending or raising taxes is 
going to solve the real problem we face.
    We can get to balance in five years--and we can do it without 
massive tax hikes.
    But--as I believe Dr. Orszag will agree--we're going to have to 
make difficult decisions, and enact substantive changes to address the 
growth of entitlement spending, and we're going to have to do it soon.

    Chairman Spratt. Dr. Orszag, you can submit your statement 
for the record, which will be acceptable from you, and I think 
you are our only witness today. Summarize as you please, but 
the floor is yours. Go ahead. We are glad to have you.

 STATEMENT OF PETER R. ORSZAG, DIRECTOR, CONGRESSIONAL BUDGET 
                             OFFICE

    Mr. Orszag. Thank you very much, Mr. Chairman and Mr. Ryan 
and other members of the committee. I am looking forward to 
working with all of you over the next 4 years as we struggle 
with the Nation's fiscal challenges. I will try to be quite 
brief in my opening remarks to leave plenty of time for 
questions, especially since Chairman Spratt and Mr. Ryan 
covered many of the points I was intending to cover, thus 
making it easier for me.
    I have five points to make about the economic and budget 
outlook, and I think interpreting the document that we released 
requires taking all five points into account.
    The first point is that under the official baseline, which, 
as Chairman Spratt noted, reflects current law with regard to 
revenue and spending, the budget deficit falls from $248 
billion last year to $172 billion this year. That excludes any 
outlays associated with a likely supplemental appropriation for 
the ongoing war on terrorism. Including that spending would 
bring the deficit for 2007 up to a figure of around $200 
billion or so.


    Over the next 10 years, as the first chart shows, if the 
first chart comes up, the budget under the baseline moves into 
surplus in 2012 and then remains in surplus through the rest of 
the budget window. That very significant increase around 2012, 
which is that sharp upward movement in the line there, is 
associated with the expiration of various revenue provisions at 
the end of 2010, which raises revenue in 2011 and thereafter.


    My second point is, as has already been noted by both 
Chairman Spratt and Mr. Ryan, that baseline adopts a specific 
set of assumptions for the future. In particular, it strictly 
interprets current law. So various revenue provisions that are 
scheduled to expire or are soon to expire, discretionary 
spending is assumed to keep pace with inflation, but not with 
population growth or with overall economic growth. As a result 
of those two assumptions, revenue rises from 18.6 percent of 
the economy this year to over 20 percent by the end of the 
projection window. That is largely because the alternative 
minimum tax grows significantly from 4 million taxpayers last 
year to 33 million in 2010, and because of the expiration of 
various revenue provisions associated with the 2001 and 2003 
tax legislation, and discretionary spending falls from 7.8 
percent of the economy to 5.8 percent of the economy by the end 
of the budget window.
    If you made an alternative set of assumptions about the 
course of future policy and, for example, assume that 
discretionary spending, including the war on terrorism, kept 
pace with the overall economic growth, and that the 2001 and 
2003 tax provisions were not allowed to expire, and that the 
alternative minimum tax was not allowed to overtake the tax 
system, instead of a surplus in 2012 of $170 billion dollars, 
one would have a deficit of $328 billion, and over the 10-year 
window you would have a cumulative deficit of $4.2 trillion.
    So again, it has already been noted, making different 
assumptions, I think the next slide summarizes those, and those 
are inclusive of the debt service implications of changing 
policy. Changing policy relative to current law has a 
significant effect on budgetary outcomes.


    My third point, if we could go to the next slide, has to do 
with uncertainty. I think it is very important to realize this 
year we are expected to spend about $2.7 trillion. We are 
expected to bring in revenue of about $2.5 trillion for a 
deficit of about $200 billion. If we are 5 percent too high on 
spending and 5 percent too low on the revenue projection, so 
just 5 percent on each, the actual outcome would shift from a 
deficit of $200 billion to a surplus of more than $50 billion, 
the point being that being slightly off on two big numbers can 
have a very big effect on the difference between those two 
numbers, which is the deficit. So there can be very substantial 
swings in the deficit from relatively minor errors in 
forecasting big numbers like revenue and spending.
    To try to illustrate that uncertainty, this chart shows you 
the projected budget outcomes under the baseline, with the dark 
blue area representing the most likely outcomes under that 
baseline. For example, in 2010, we project a deficit of about 1 
percent of GDP of the economy, but there is a 20 percent 
probability based on past forecasting errors of a 3 percent 
deficit or larger, and a 5 percent probability of a 3 percent 
surplus or more. So I want to make sure that everyone 
understands that there is significant uncertainty surrounding 
future budgetary outcomes.


    The fourth point has to do with the changes since last 
August. If we could go to the next slide, please. Thank you. 
Consistent with the emergence of projected surpluses under the 
baseline, which did not occur last August, there has been a 
significant improvement in the baseline since last August. Last 
August, for 2007 through 2016 we were projecting a deficit of 
$1.8 trillion. We are now projecting a surplus over that period 
of almost $400 billion.
    But I want to quickly make two points about that 
improvement. First, it has little to do with changes in 
economic assumptions. In fact, economic changes by themselves 
account for only $173 billion of that shift. Secondly, a very 
large chunk of it, roughly half, has to do with the mechanical 
implications of our assumptions with regard to discretionary 
spending. By scoring convention, what we do is we take enacted 
appropriations in the base year and project them out. In 
August, that base year included $120 billion in appropriations 
for the global war on terrorism, and a little bit less than $60 
billion for domestic relief activities associated primarily 
with the hurricane. This year so far we only have $70 billion 
enacted with regard to the global war on terrorism, and nothing 
corresponding to the domestic relief activity. So in both 
categories there is basically about $50 billion less in the 
base year, and then project that forward in each year 
thereafter and you get about $500 billion less in defense 
spending and $500 billion less in nondefense spending, which 
has little to do with the underlying fiscal environment, and it 
is instead mostly mechanical implication of the way that we are 
instructed to conduct or to construct the baseline.
    The other point, though, is that there is some real 
improvement, as Mr. Ryan noted, in the short term. Some of that 
has to do with improved outlay projections over the longer 
term, over the 10-year period as a whole. Much less of the 
improvement has to do with revenue. In fact, the net effect on 
revenue changes since August 2006 is only $57 billion over the 
10-year window.
    The real improvement, abstracting from that mechanical 
discretionary assumption, has to do with Medicare spending in 
particular. We have $445 billion less in Medicare spending over 
the 10-year window than in August 2006, of which $265 billion 
comes from Medicare Part D, the prescription drug benefit. That 
in turn reflects both lower cost per beneficiary--bids came in 
15 percent lower than last year this year--and also a lower 
outyear assumption with the regard to the number of 
beneficiaries who will take up the benefit, because now we have 
more information--we have real information on beneficiaries. It 
looks like a larger share of beneficiaries will have other 
coverage and, therefore, not take up the Medicare benefit in 
the outyears. Both of those combined reduced the Part D 
projections by $265 billion.


    My final point--and this returns to a theme that Mr. Ryan 
noted also--if we could go to the final chart, please--is that 
over the long term, the Nation's fiscal imbalance is quite 
serious. It has a lot to do especially with our health care 
programs. Medicare and Medicaid combined, the Federal share of 
Medicaid plus Medicare, amount to 4\1/2\ percent of GDP this 
year. They are projected to rise to 5.9 percent by the end of 
the budget window in 2017. If over the next 40 years health 
care costs continue to grow as rapidly relative to economic 
growth as they did over the past 40 years, one gets that top 
line shown in this graph. Medicare and Medicaid would amount to 
20 percent of the economy by 2050 under that projection. That 
is as large as the entire Federal share today. Even if health 
care costs' growth slow to 1 percent faster than economic 
growth, which is the dotted line in the middle, those two 
programs would have accounted for 10 percent of the economy.
    It is not too gross of an exaggeration to say the central 
long-term fiscal challenge facing the United States is to bend 
that curve so that cost growth occurs at a slower rate, and I 
would say there is a significant opportunity for us to slow 
health care costs without impairing innovation and without 
harming Americans' health if we can find better ways of making 
sure that our health care system is cost-effective.
    But in light of that curve in particular, it is implausible 
that economic growth alone will eliminate our long-term fiscal 
imbalance, and some combination of spending reductions and/or 
revenue increases will be necessary to avoid a very significant 
fiscal problem that will develop over the medium to long term. 
Thank you very much.
    [The prepared statement of Peter R. Orszag follows:]

 Prepared Statement of Peter R. Orszag, Director, Congressional Budget 
                                 Office

    Chairman Spratt, Congressman Ryan, and Members of the Committee, 
thank you for giving me this opportunity to present the Congressional 
Budget Office's (CBO's) budget and economic outlook for fiscal years 
2008 to 2017.\1\
---------------------------------------------------------------------------
    \1\ See Congressional Budget Office, The Budget and Economic 
Outlook: Fiscal Years 2008 to 2017 (January 2007).
---------------------------------------------------------------------------
    If current laws and policies remained the same, the budget deficit 
would equal roughly 1 percent of gross domestic product (GDP) each 
fiscal year from 2007 to 2010, the Congressional Budget Office (CBO) 
projects. Those deficits would be smaller than last year's budgetary 
shortfall, which equaled 1.9 percent of GDP (see Table 1). Under the 
assumptions that govern CBO's baseline projections, the budget would 
essentially be balanced in 2011 and then would show surpluses of about 
1 percent of GDP each year through 2017 (the end of the current 10-year 
projection period).
    The favorable outlook suggested by those 10-year projections, 
however, does not indicate a substantial change in the nation's long-
term budgetary challenges. The aging of the population and continuing 
increases in health care costs are expected to put considerable 
pressure on the budget in coming decades. Economic growth alone is 
unlikely to be sufficient to alleviate that pressure as Medicare, 
Medicaid, and (to a lesser extent) Social Security require ever greater 
resources under current law. Either a substantial reduction in the 
growth of spending, a significant increase in tax revenues relative to 
the size of the economy, or some combination of spending and revenue 
changes will be necessary to promote the nation's long-term fiscal 
stability.\2\
---------------------------------------------------------------------------
    \2\ For a detailed discussion of the long-term pressures facing the 
federal budget, see Congressional Budget Office, The Long-Term Budget 
Outlook (December 2005), Updated Long-Term Projections for Social 
Security (June 2006), and The Outlook for Social Security (June 2004).
---------------------------------------------------------------------------
    CBO's baseline budget projections for the next 10 years, moreover, 
are not a forecast of future outcomes; rather, they are a benchmark 
that lawmakers and others can use to assess the potential impact of 
future policy decisions. The deficits and surpluses in the current 
baseline are predicated on two key projections (which stem from 
longstanding procedures that were, until recently, specified in 
law).\3\
---------------------------------------------------------------------------
    \3\ The Balanced Budget and Emergency Deficit Control Act of 1985, 
which established rules that govern the calculation of CBO's baseline, 
expired on September 30, 2006. Nevertheless, CBO continues to prepare 
baselines according to the methodology prescribed in that law.
---------------------------------------------------------------------------
     Revenues are projected to rise from 18.6 percent of GDP 
this year to almost 20 percent of GDP in 2012 and then remain near that 
historically high level through 2017. Much of that increase results 
from two aspects of current law that have been subject to recent policy 
changes: the growing impact of the alternative minimum tax (AMT) and, 
even more significantly, various provisions originally enacted in the 
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and 
the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) and 
modified by subsequent legislation, which are scheduled to expire by 
December 31, 2010.
     Outlays for discretionary programs (activities whose 
spending levels are set anew each year through appropriation acts) are 
projected to decline from 7.8 percent of GDP last year to 5.8 percent 
of GDP by 2017--a lower percentage than any recorded in the past 45 
years. That projection derives mainly from the assumption in the 
baseline that discretionary funding will grow at the rate of inflation, 
which is lower than the growth rate that CBO projects for nominal GDP. 
The projection for discretionary spending implicitly assumes that no 
additional funding is provided for the war in Iraq in 2007 and that 
future appropriations for activities related to the war on terrorism 
remain equivalent, in real (inflation-adjusted) terms, to the $70 
billion appropriated so far this year.

                                                                         SUMMARY TABLE 1.--CBO'S BASELINE BUDGET OUTLOOK
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Actual                                                                                                       Total      Total
                                                                  2006     2007     2008     2009     2010     2011     2012     2013     2014     2015     2016     2017   2008-2012  2008-2017
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                     IN BILLIONS OF DOLLARS

Total Revenues................................................    2,407    2,542    2,720    2,809    2,901    3,167    3,404    3,550    3,717    3,896    4,084    4,284     15,001     34,531
Total Outlays.................................................    2,654    2,714    2,818    2,926    3,038    3,179    3,234    3,391    3,533    3,687    3,892    4,034     15,194     33,731
                                                               ---------------------------------------------------------------------------------------------------------------------------------
      Total Deficit (-) or Surplus............................     -248     -172      -98     -116     -137      -12      170      159      185      208      192      249       -194        800
On-budget.....................................................     -434     -357     -299     -332     -367     -258      -85     -101      -79      -57      -72      -10     -1,342     -1,662
Off-budget\a\.................................................      186      185      201      216      230      246      255      261      264      265      264      259      1,148      2,461
Debt Held by the Public at the End of the Year................    4,829    4,995    5,104    5,232    5,380    5,403    5,242    5,089    4,912    4,709    4,521    4,274       n.a.       n.a.
                                                                                                            AS A PERCENTAGE OF GROSS DOMESTIC PRODUCT

Total Revenues................................................     18.4     18.6     19.0     18.7     18.4     19.2     19.8     19.8     19.8     19.9     20.0     20.1       19.1       19.5
Total Outlays.................................................     20.3     19.9     19.7     19.5     19.3     19.3     18.8     18.9     18.8     18.8     19.1     18.9       19.3       19.1
                                                               ---------------------------------------------------------------------------------------------------------------------------------
      Total Deficit (-) or Surplus............................     -1.9     -1.3     -0.7     -0.8     -0.9     -0.1      1.0      0.9      1.0      1.1      0.9      1.2       -0.2        0.5
Debt Held by the Public at the End of the Year................     37.0     36.6     35.7     34.8     34.2     32.8     30.5     28.3     26.2     24.0     22.1     20.1       n.a.       n.a.
Memorandum:
Gross Domestic Product (Billions of dollars)..................   13,066   13,645   14,300   15,014   15,742   16,465   17,205   17,973   18,764   19,582   20,425   21,295     78,726    176,766
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Congessional Budget Office.

Note: n.a. = not applicable.

\a\ Off-budget surpluses comprise surpluses in the Social Security trust funds as well as the net cash flow of the Postal Service.

    Policy choices that differed from the assumptions in the baseline 
would produce different budgetary outcomes. For example, if lawmakers 
continued to provide relief from the AMT (as they have done on a short-
term basis for the past several years) and if the provisions of EGTRRA 
and JGTRRA that are scheduled to expire were instead extended, total 
revenues would be almost $3 trillion lower over the next 10 years than 
CBO now projects. Similarly, if discretionary spending (other than for 
military operations in Iraq and Afghanistan) grew at the rate of 
nominal GDP over the next 10 years, total discretionary outlays during 
that period would be nearly $1.3 trillion higher than in the baseline. 
Combined, those policy changes--and associated debt-service costs--
would produce a deficit of $328 billion (1.9 percent of GDP) in 2012 
and a cumulative deficit over the 2008-2017 period of $4.2 trillion 
(2.4 percent of GDP).
    Underlying CBO's baseline projections is a forecast that U.S. 
economic growth will slow in calendar year 2007 but pick up in 2008. 
Specifically, CBO anticipates that GDP will grow by 2.3 percent in real 
terms in 2007, a full percentage point less than the growth recorded 
last year. For 2008, CBO forecasts that GDP growth will rebound to 3.0 
percent. Under the assumptions of the baseline, real GDP growth would 
continue at a similar rate in 2009 and 2010 and then slow to 2.7 
percent in 2011 and 2012. For the rest of the projection period, 
average growth of real GDP is projected to decrease to 2.5 percent per 
year as increases in the size of the workforce continue to slow.

                           THE BUDGET OUTLOOK

    CBO estimates that if today's laws and policies did not change, 
federal spending would total $2.7 trillion in 2007 and revenues would 
total $2.5 trillion, resulting in a budget deficit of $172 billion. The 
additional funding that is likely to be needed to finance military 
operations in Iraq and Afghanistan would put that deficit in the 
vicinity of $200 billion. Even so, this year's shortfall would be 
smaller than the 2006 deficit of $248 billion.

             BASELINE PROJECTIONS FOR THE 2008-2017 PERIOD

    Under current laws and policies, the deficit would drop further in 
2008, to $98 billion. That decrease results primarily from two factors. 
On the revenue side of the budget, receipts from the AMT are estimated 
to increase by about $60 billion next year because of the scheduled 
expiration of the relief provided through tax year 2006. (In addition, 
telephone-tax refunds, which totaled $13 billion in 2007, are projected 
to drop by $10 billion in 2008.) On the spending side of the budget, 
outlays for operations in Iraq and Afghanistan and for relief and 
recovery from hurricane damage are about $14 billion lower in 2008 than 
in 2007 under the assumptions of the baseline.
    The baseline deficit is projected to rise modestly over the 
following two years, 2009 and 2010, as outlays grow by about 3.8 
percent annually and revenues increase by about 3.3 percent a year. 
That projected growth rate for revenues is lower than in recent years, 
mainly because corporate profits and capital gains realizations are 
expected to revert to levels that are more consistent with their 
historical relationship to GDP.
    After 2010, spending related to the aging of the baby-boom 
generation will begin to raise the growth rate of total outlays. The 
baby boomers will start becoming eligible for Social Security 
retirement benefits in 2008, when the first members of that generation 
turn 62. As a result, the annual growth rate of Social Security 
spending is expected to increase from about 4.5 percent in 2008 to 6.5 
percent by 2017.
    In addition, because the cost of health care is likely to continue 
rising rapidly, spending for Medicare and Medicaid is projected to grow 
even faster--in the range of 7 percent to 8 percent annually. Total 
outlays for those two health care programs are projected to more than 
double by 2017, increasing by 124 percent, while nominal GDP is 
projected to grow only half as much, by 63 percent (see Figure 1). 
Consequently, under the assumptions of CBO's baseline, spending for 
Medicare, Medicaid, and Social Security will together equal nearly 11 
percent of GDP in 2017, compared with a little less than 9 percent this 
year.
    Revenues are projected to increase sharply after 2010 given the 
assumption that various tax provisions expire as scheduled. In the 
baseline, total revenues grow by 9.2 percent in 2011 and by 7.5 percent 
in 2012, thereby bringing the budget into surplus. Beyond 2012, 
revenues are projected to grow at about the same pace as outlays (by 
roughly 4.5 percent a year), keeping the budget in the black through 
2017 under baseline assumptions.
    Relative to the size of the economy, outlays are projected to range 
between 18.8 percent and 19.7 percent of GDP during the 2008-2017 
period under the assumptions of CBO's baseline--lower than the 20.6 
percent average of the past 40 years (see Figure 2). Mandatory spending 
(funding determined by laws other than annual appropriation acts) is 
projected to grow by 5.9 percent a year over that period, which is 
faster than the economy as a whole. By contrast, discretionary 
appropriations are assumed simply to keep pace with inflation and, to a 
lesser extent, with the growth of wages. Thus, discretionary outlays 
are projected to increase by about 2.0 percent a year, on average, or 
less than half as fast as nominal GDP.


    CBO projects that revenues will average 18.7 percent of GDP from 
2008 to 2010 (close to the 18.6 percent level expected for this year) 
before jumping sharply in 2011 and 2012 with the expiration of tax 
provisions originally enacted in EGTRRA and JGTRRA. After that, 
revenues are projected to continue growing faster than the overall 
economy for three reasons: the progressive structure of the tax code 
combined with increases in total real income, withdrawals of retirement 
savings as the population ages, and the fact that the AMT is not 
indexed for inflation. Under the assumptions of the baseline, CBO 
projects that revenues will equal 20.1 percent of GDP by 2017--a level 
reached only once since World War II.
    Federal government debt that is held by the public (mainly in the 
form of Treasury securities sold directly in the capital markets) is 
expected to equal almost 37 percent of GDP at the end of this year. 
Thereafter, the baseline's projections of smaller annual deficits and 
emerging surpluses diminish the government's need for additional 
borrowing, causing debt held by the public to shrink to 20 percent of 
GDP by 2017.
          changes in the baseline budget outlook since august
    Although the long-term budgetary picture continues to be worrisome, 
the baseline outlook for the next 10 years has brightened in the five 
months since CBO issued its previous projections.\4\
---------------------------------------------------------------------------
    \4\ Those projections were published in Congressional Budget 
Office, The Budget and Economic Outlook: An Update (August 2006).


    Budgetary outcomes have improved for each year from 2007 to 2016 
(the period covered by the previous projections), from a reduction of 
$114 billion in the deficit for 2007 to a swing of $285 billion in the 
bottom line for 2016 (from a deficit of $93 billion to a surplus of 
$192 billion). In all, those reductions represent a difference of about 
1.2 percent of GDP over 10 years.
    Those changes overstate the fundamental improvement in the 
underlying budget outlook, however. Roughly half of the total change 
stems from the baseline's treatment of previous supplemental 
appropriations for disaster relief and the irregular pattern of funding 
for military operations in Iraq and Afghanistan. Consequently, more 
than half of the improved bottom line is unrelated to changes in the 
underlying budgetary and economic environment.
    Much of the remaining change to the current baseline comes from 
lower projected spending for Medicare. Total outlays for that program 
over the 2007-2016 period are nearly 8 percent lower in this baseline 
than in CBO's August projections. That reduction is largely 
attributable to new estimates of per capita costs for all Medicare 
benefits, but it also reflects lower projections of the number of 
enrollees in the prescription drug benefit program. Those recent 
changes, however, do not significantly alter the upward trajectory of 
Medicare spending in the long term.

                          THE ECONOMIC OUTLOOK

    The Federal Reserve's shift in monetary policy over the past two 
and a half years and the recent decline in housing construction are 
expected to restrain economic growth this year, but the economy is 
likely to post solid gains next year. CBO forecasts that GDP will grow 
by 2.3 percent in real terms in calendar year 2007 but by 3.0 percent 
in 2008 (see Table 2).
    Gains in employment, which remained solid in 2006 despite a 
slowdown in economic growth during the second half of the year, are 
expected to lessen in 2007. That change may cause unemployment to edge 
up from the 4.6 percent rate recorded for 2006. As housing construction 
stabilizes, however, economic growth and employment should start to 
recover by the middle of 2007.

                  SUMMARY TABLE 2.--CBO'S ECONOMIC PROJECTIONS FOR CALENDAR YEARS 2007 TO 2017
                                               [Percentage change]
----------------------------------------------------------------------------------------------------------------
                                                                   Forecast            Projected Annual Average
                                              Estimated  -------------------------------------------------------
                                                2006          2007          2008        2009-2012     2013-2017
----------------------------------------------------------------------------------------------------------------
Nominal GDP:
    Billions of dollars...................       13,235        13,805        14,472   (\1\) 17,395  (\2\) 21,519
    Percentage change.....................          6.3           4.3           4.8           4.7           4.3
Real GDP..................................          3.3           2.3           3.0           2.9           2.5
GDP Price Index...........................          2.9           1.9           1.8           1.8           1.8
PCE Price Index \3\.......................          2.8           1.7           1.9           2.0           2.0
Core PCE Price Index \4\..................          2.3           2.1           1.9           2.0           2.0
Consumer Price Index \5\..................          3.4           1.9           2.3           2.2           2.2
Core Consumer Price Index \6\.............          2.6           2.6           2.3           2.2           2.2
Unemployment Rate (Percent)...............          4.6           4.7           4.9           5.0           5.0
Interest Rates (Percent):
    Three-month Treasury bills............          4.7           4.8           4.5           4.4           4.4
    Ten-year Treasury notes...............          4.8           4.8           5.0           5.2           5.2
----------------------------------------------------------------------------------------------------------------
Sources: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis; Department of Labor,
  Bureau of Labor Statistics; Federal Reserve Board.

Notes: GDP = gross domestic product. Percentage changes are year to year.Year-by-year economic projections for
  2007 to 2017 appear in Appendix E.

\1\ Level in 2012.
\2\ Level in 2017.
\3\ The personal consumption expenditure chained price index.
\4\ The personal consumption expenditure chained price index excluding prices for food and energy.
\5\ The consumer price index for all urban consumers.
\6\ The consumer price index for all urban consumers excluding prices for food and energy.

    Last year, robust investment by businesses and solid growth in 
exports helped the U.S. economy absorb the decline in housing 
construction. Investment and exports are expected to continue to 
support the economy in 2007. For many years, businesses' capital stock 
(the plant, equipment, and software they use for production) grew more 
slowly than overall demand for U.S. goods and services; as a result, 
despite the recent growth of investment, the nation's capital stock is 
still low relative to the level of demand. Investment should therefore 
continue to increase, even if the growth of demand slows. Similarly, 
export growth is likely to remain strong because increases in demand 
for U.S. products overseas are durable enough to withstand a slight 
slowdown in U.S. demand for other countries' exports.
    In the absence of any adverse price shocks to the economy, the core 
rate of inflation--which excludes prices for food and energy--is 
expected to ease slightly this year. Overall inflation (as measured by 
the year-to-year change in the price index for personal consumption 
expenditures) will fall from last year's rate of 2.8 percent to 1.7 
percent in 2007 because of a large drop in prices for motor fuels near 
the end of last year. The core rate of inflation, however, is expected 
to decline less rapidly during 2007.
    CBO anticipates that the interest rate on three-month Treasury 
bills will drop slightly this year from the 4.9 percent rate seen at 
the end of 2006. Further declines are expected during 2008, when that 
rate will average 4.5 percent. CBO's forecast assumes that long-term 
interest rates will edge up as short-term interest rates decline. The 
rate on 10-year Treasury notes, for example, is forecast to rise from 
4.8 percent this year to 5.0 percent in 2008.
    Beyond the two-year horizon, CBO projects that economic growth (as 
measured by increases in real GDP) will average 2.7 percent a year from 
2009 to 2017. As members of the baby-boom generation begin to retire, 
the growth of the labor force is expected to slow, pushing down the 
rate of real GDP growth during the second half of that period. 
Projected rates of inflation, unemployment, and growth of labor 
productivity average 2.0 percent, 5.0 percent, and 2.2 percent, 
respectively, after 2008. Interest rates are projected to average 4.4 
percent for three-month Treasury bills and 5.2 percent for 10-year 
Treasury notes.

    Chairman Spratt. Of course, like I was referring earlier to 
some of the positive changes in your forecast, if you read all 
the way to appendix B, you find CBO has made some major 
changes, which you have testified, in the so-called baseline 
since just last August, in a matter of months. The cumulative 
changes come to how much?
    Mr. Orszag. The cumulative changes come to 2 point--over $2 
trillion.
    Chairman Spratt. Over $2 trillion between 2008 and 2017.
    Mr. Orszag. No. It is $2.1 trillion, Chairman Spratt, 
between 2007 and 2016. We do it over that window because that 
was the window used in August.
    Chairman Spratt. And the remaining bottom line is a 
surplus?
    Mr. Orszag. That is correct. Roughly $400 billion now.
    Chairman Spratt. If you keep reading, you find that more 
than half of these changes related to the way you adjust for 
supplementals.
    Mr. Orszag. Correct.
    Chairman Spratt. Would you expound upon that? We have got 
the war costs, we have got the Katrina costs, we have got 
various costs. Under current law you are obligated to carry 
forward prior-year supplemental appropriations. But in the case 
of defense, only $70 billion has been appropriated, so that is 
your carry forward; is that correct?
    Mr. Orszag. That is correct.
    Chairman Spratt. The difference between that and what was 
appropriated in 2006----
    Mr. Orszag. Is about $50 billion.
    Chairman Spratt. And the carry forward on that accounts to 
how much over a 10-year period of time?
    Mr. Orszag. About $500 billion.
    Chairman Spratt. So just in adjusting for the baseline, 
which is a technical adjustment really, you have got a 
substantial adjustment to the bottom line.
    Mr. Orszag. And again, Mr. Chairman, that is only with 
regard to defense discretionary spending. There is also another 
roughly $500 billion of basically the same thing on the 
nondefense side. So a trillion dollars total.
    Chairman Spratt. Well, in particular, Medicare, while you 
just gave us the dire possibilities given the rate of growth in 
the Medicare program, what you have found in looking forward 10 
years, 2007 to 2016, is a substantial reduction, I think it is 
$588 billion cumulative cost reduction in Medicare since your 
last forecast?
    Mr. Orszag. I believe it is $445 billion.
    Chairman Spratt. Four hundred forty-five.
    Mr. Orszag. But in any case, it is a significant 
adjustment.
    Chairman Spratt. Medicaid is $70 billion?
    Mr. Orszag. A little bit above $70 billion reduction, yes.
    Chairman Spratt. Any other adjustments like that of that 
magnitude?
    Mr. Orszag. Those are the most substantial ones, but I want 
to return for a second to nondefense discretionary spending, 
because in addition to the Medicare and Medicaid reductions 
that you noted, there is also less nondefense discretionary 
spending because we have not had a repeat of the hurricane 
spending in 2007. So that also accounts for roughly $500 
billion lower discretionary spending in this baseline.
    Chairman Spratt. All right. Let me put up our first chart, 
which you have seen many times and everyone else has, but it 
goes directly to the point you are just making. There are two 
diverging curves here. The lower curve--the upper curve plots 
your baseline. I am not sure whether it includes the 
adjustments you have made in this report or not, but I believe 
it does. The lower curve----
    Mr. Orszag. I think it does.
    Chairman Spratt. Yeah.
    Mr. Orszag. It goes above zero.
    Chairman Spratt. But beginning in 2006, 2007, there is a 
steadily widening divergence between where we would go if we 
assume politically what will happen with the Bush budget and 
where CBO will take us with your particular baseline. When you 
get to the end of the period of time, I can barely see, but I 
think that deficit is $500 and some odd billion. Your 
corresponding deficit on page 2 is $476 billion for that point 
in time, that particular period. It is my understanding that we 
are using slightly different assumptions about war costs.
    Now, would you walk us through the changes that account for 
that divergence? First of all, a reestimation of war costs; 
secondly, the extension of the 2001 and 2003 tax cuts; and 
thirdly, leaving the AMT unadjusted or adjusted, or leaving the 
AMT as is.
    Mr. Orszag. Okay. And again, the $502 billion figure you 
are showing there is your calculations. What I can do is walk 
you through some of the changes in policy that we show in table 
1-5 that would have a material effect on the 2017 outcome.
    So as we show in table 1-5, if one extended the 2001 and 
2003 tax provisions rather than allowing them to expire in 
2010, the revenue reduction in 2017 would be $333--sorry--$330 
billion and there would be additional debt service of $94 
billion. So that gets you to a total of roughly $424 billion 
from that provision.
    Chairman Spratt. That is a cumulative revenue effect of 
renewing the expiring tax cuts?
    Mr. Orszag. No. I am sorry. That is in 2017 alone. Over the 
10-year window as a whole, that policy change by itself would 
have a budgetary effect inclusive of debt service of $2.2 
trillion.
    Chairman Spratt. $2.2 trillion.
    Mr. Orszag. Correct.
    Chairman Spratt. Due to the renewal of these expiring tax 
cut programs alone.
    Mr. Orszag. That is correct.
    If you then also extend other expiring tax provisions like 
the research and experimentation tax credit and other things 
that are scheduled to expire over the 10-year window, that is 
an additional almost $500 billion, and then the alternative 
minimum tax combined with making the 2001 and 2003 tax 
legislation permanent or extending it past its currently 
scheduled sunset would raise--I mean, would incur an additional 
budgetary effect of over a trillion dollars also.
    Chairman Spratt. Say it again, please, sir.
    Mr. Orszag. The alternative minimum tax effect in the face 
of extending the 2001 and 2003 tax legislation, because there 
is an interactive effect, would involve a budgetary cost of 
over a trillion dollars over the next 10 years.
    Chairman Spratt. That alone, on top of the $2.2 trillion.
    Mr. Orszag. Correct.
    Chairman Spratt. In other words, if we fix the AMT so that 
it does not reach any more taxpayers than it reached last year, 
the cost in revenues over a 10-year period of time, 2007 
through 2016, would be a trillion dollars.
    Mr. Orszag. Slightly more than that, yes.
    Chairman Spratt. And that would add to the $2.2 trillion 
due to the extension of the expiring tax cuts due to expire in 
2010.
    Mr. Orszag. That is correct.
    Chairman Spratt. War costs. How do you treat war costs? Let 
me just stop to you say--I am not trying to answer your 
question or lead the witness. You are a hell of a lot smarter 
than I am.
    Mr. Orszag. I am very cautious whenever you say something 
like that, but go ahead.
    Chairman Spratt. You give two different estimates, ways of 
looking at the ongoing cost of the war.
    Mr. Orszag. That is correct.
    Chairman Spratt. Would you take a minute just to describe 
how you did that and why you did that?
    Mr. Orszag. Sure. We provided two different paths for 
potential defense spending associated with Iraq, Afghanistan, 
and the global war on terrorism in particular, in part because 
I think there is widespread acknowledgement that there will be 
some divergence between merely taking the $70 billion that has 
been enacted thus far and kind of inflating that out into the 
future. So we provide you with two alternative paths.
    One would involve--they both involve some increase in troop 
levels in the near term, and then they phase out at different 
rates into different levels. So in particular under one 
alternative, you wind up with 30,000 troops involved in those 
activities by 2010, so a more aggressive phasing out; and then 
the other alternative you wind up with 75,000 troops by 2013. 
Under both alternatives there is more spending than under the 
baseline in the short term, and there is less spending by 2017 
than in the baseline.
    Chairman Spratt. That is, the baseline otherwise carries 
forward the $70 billion thus far appropriated in 2007?
    Mr. Orszag. Correct. Under the first alternative that I 
mentioned in which you wind up with 30,000 troops there is a 
net--over the 10-year window, you have those higher costs at 
the beginning and lower costs at the end, a net budgetary 
savings of a little bit over $300 billion. Under the second 
alternative where you have a slower phase-down, and you wind up 
with a higher troop level relative to the first alternative, 
there is a net budgetary cost, including debt service, of a 
little bit over $200 billion, and that is because your savings 
don't quite offset the nearer-term costs.
    Chairman Spratt. On page 2 when you say that the--if you 
make these assumptions that the deficit would be $476 billion 
instead of a surplus of $249 billion in 2017, what assumption 
are you making about the ongoing war costs?
    Mr. Orszag. That just takes the baseline assumptions with 
regard to discretionary spending.
    Chairman Spratt. Seventy billion dollars and carries it 
forward.
    Mr. Orszag. Correct.
    Chairman Spratt. So it tends to understate the near term 
and probably, we hope, overstate the outyears. But in any 
event, once you make these adjustments, the path we are looking 
at is radically changed; is it not?
    Mr. Orszag. For example, under the change in policy that I 
showed you with discretionary spending excluding the war on 
terrorism, keeping pace with overall economic growth and with 
the tax provisions extended and the alternative minimum tax 
stabilized instead of having a falling deficit and moving it to 
surplus, you have a rising deficit as a share of the economy 
from a little under 1\1/2\ percent of the economy this year to 
more than 3 percent of the economy by the end of the budget 
window.
    Chairman Spratt. So the choices we make this year and next 
year are going to have a profound effect on the outyears and 
determine whether or not we continue on the deficit-ridden path 
we have been taking, or whether or not we begin to put this 
budget back into balance in 2012.
    Mr. Orszag. There clearly is, even over the 10-year window, 
an impact from changes in policy or from policy choices on 
budgetary outcomes. And I would again note, though, what we do 
over the next 10 years has importance, but the central long-
term challenge facing the Federal Government in terms of 
budgetary outcomes has to do with that longer-term problem 
involving health care costs. So we need to be able to keep both 
problems in mind.
    Chairman Spratt. One final question. One of the big issues, 
and maybe one of the big differences between CBO and OMB, will 
be revenue growth. Would you take just a minute to explain what 
you have assumed, CBO has assumed, with respect to revenue 
growth since substantial revenue growth over the last couple of 
years has had a remarkable, dramatic effect upon the bottom 
line? I think we have had 11.7 percent growth between 2006 
and--between 2005 and 2006, and the question is, can we expect 
the growth rate to continue at those high levels, or do you see 
it reverting to normal?
    Mr. Orszag. Well, under the baseline we have an irregular 
pattern of revenue growth because we incorporate current law 
with regard to revenue. So the expiration of various tax 
provisions can cause very significant growth rates around those 
sunset years, but if you abstracted from that and so, for 
example, looked at a path that did not allow the sunset to 
occur, what would happen is that we would have somewhat slower 
revenue growth towards the end of the projection period than 
towards the beginning for a couple of reasons. One is that 
overall economic growth is projected to slow, and I think this 
is a very important point. As the workforce enters retirement 
age, the growth rate of the workforce will slow relative to 
historical rates, and that will slow overall economic growth, 
and that slower overall economic growth will have a dampening 
effect on revenue growth also.
    In addition to that phenomenon, the part of the revenue 
uptick that we cannot explain based on known factors is assumed 
after 2008 to revert to more normal historical patterns because 
that is the traditional way that--or that is what has tended to 
happen in the past, that these sort of forecast errors or 
unexplained components tend to revert to more normal patterns 
relative to the economy as a whole. So that is what we assume 
after 2008.
    Those two factors may well mean that our revenue growth in 
the outyears and, you know, in 2016 and 2017 is slower than the 
administration's projections, but we will need to wait and see 
what the projections are when they release their budget next 
month.
    Chairman Spratt. Thank you very much, Mr. Orszag.
    Mr. Orszag. Mr. Spratt, if I could quickly make one--the 
$588 billion figure you mentioned is the change for all 
mandatory spending, which includes the $445 billion for 
Medicare and then additional spending on Medicaid and some 
others.
    Chairman Spratt. But the point I was trying to make was 
even with these substantial favorable developments, when you go 
back and factor in the tax cuts extension in 2010, and you 
factor in the cost or the likely cost of the war, and you leave 
the--you assume that the AMT will be sort of neutralized in 
place, you have got a profound change in the course of the 
budget, and we are back deep in deficits again, notwithstanding 
these very favorable changes you have made otherwise to your 
forecast; is that a correct simulation?
    Mr. Orszag. Again, changes in policy relative to current 
law with regard to both revenue and spending could have a 
significant effect on budgetary outcomes over the next 10 
years.
    Chairman Spratt. Thank you, sir.
    Mr. Ryan.
    Mr. Ryan. First, let us go back to the Medicare savings you 
talked about. Your new baseline says that Medicare spending is 
projected to be $445 billion less than the August baseline; is 
that correct?
    Mr. Orszag. That is correct.
    Mr. Ryan. Break that down again; $265 billion for Part D.
    Mr. Orszag. For Part D. The rest appears to be concentrated 
mostly in Part A, but we are still looking at exactly what is 
going on between Part A and Part D.
    Mr. Ryan. And the $265 billion savings off the August 
baseline comes from what exactly?
    Mr. Orszag. The majority comes from the lower cost per 
beneficiary; in other words, the PDPs, the prescription drug 
plans, and the Medicare advantage plans are coming in lower 
than we projected.
    Mr. Ryan. So that is lower cost because lower prescription 
drug prices are being reimbursed?
    Mr. Orszag. Correct.
    Mr. Ryan. And so you are seeing downward bend in the growth 
curve in Medicare in the new program, Part D and Medicare 
advantage, than previously. And enrollment, you said your 
enrollment numbers are getting lower because people are getting 
coverage elsewhere; is that right?
    Mr. Orszag. Before I get to that, it is not really that the 
cost growth in--out in 2016 or 2017 has changed, but rather 
that there is just a lower level.
    Mr. Ryan. Right. You are knocking the base down and then 
move forward.
    Mr. Orszag. Correct. In addition to that factor, while 
enrollment in the very near term has actually been higher than 
we projected, slightly higher, we now have more information 
about other coverage that Part D beneficiary--or Medicare 
beneficiaries have, so instead of assuming that 87 percent of 
beneficiaries would take up Part D, we are now in the outyears 
assuming that 78 percent would, and that leads to lower costs.
    Mr. Ryan. Eighty-seven to seventy-eight, you said?
    Mr. Orszag. Correct.
    Mr. Ryan. Well, you mention budget policy alternatives to 
get to balance, which basically we talk about war costs, 
discretionary spending and tax policy. There aren't really any 
alternatives offered in the entitlement side of the budget in 
this new outlook.
    It seems that something good has happened in Medicare. It 
seems that something favorable has happened in Part D where you 
have--just in one part of this large entitlement program you 
have got a savings of $265 billion, which without coincidence 
is the new part that involves more competition within the 
program which is bringing more savings not only to the 
beneficiary, but to the taxpayers. Is that not an area that we 
can discover more as far as future health care spending 
direction to go toward a competitive model like the Part D 
program? Does that not lay sort of a groundwork that perhaps 
where we are seeing substantial savings in the new competitive 
model within this entitlement program, that that might be a 
place for more savings to be got in other parts of these 
entitlements?
    Mr. Orszag. Well, again, I don't want to jump to 
conclusions because of the cause of the reduction, but I would 
fully agree with you that it is encouraging, and, in fact, you 
know, to the extent that it is continued, could have a material 
effect on Medicare projections in particular.
    Mr. Ryan. It just seems to me that this is something we 
need to look at quite a bit more because this is--of all the 
good news in this, it is all overshadowed by the entitlement 
explosion. But within the entitlements we are seeing less 
spending because of this new program, which is providing a 
competitive product where providers compete against each other 
for beneficiaries' business, and that active competition has 
actually lowered the cost of the program.
    Let me go over the revenue estimates. Obviously if you take 
a look at the baseline--I won't ask for the chart back up. If 
you just let the tax cuts go away to go to balance, and that is 
all the tax cuts you are talking about, all the 2001 and 2003 
and the expiring provisions, those are what you assume go away 
because that is what current law is, and that is what brings us 
into surplus in 2012, correct?
    Mr. Orszag. Correct.
    Mr. Ryan. So that means if we get rid of the per child tax 
credit, if we get rid of the marriage penalty, if we raise 
income tax rates across the board on every taxpayer, if we 
bring the death tax pack to pre-2000 levels, and if we get rid 
of the lower rates on capital gains and dividends, those are 
all of the tax cuts you are talking about go away, then we will 
go back in the balance and therefore surplus, right?
    Mr. Orszag. That is the alternative, the change in policy 
that is shown in table 1-5.
    Mr. Ryan. It is the revenue estimates themselves that give 
me a little bit of a cause for concern. If you take a look at 
CBO's forecasting record on overall revenue, let us just take a 
look at one of these components, capital gains taxes, which I 
would argue probably has the best macroeconomic feedback effect 
of any of these tax changes. I am not saying all tax cuts pay 
for themselves, but if you take a look at the initial CBO 
forecast, say, for the lower rate on capital gains taxes, CBO 
projected revenue to be $42 billion in 2003, $46- in 2004, $52 
billion in 2005 and $57 billion in 2006. And what actually had 
occurred was 51- in 2003, 72- in 2004, 97- in 2005, and $110 
billion in 2006. Overall CBO's forecast on capital gain 
revenues were off by 68 percent, so when you take a look at the 
fact that, you know, CBO and using joint tax numbers were so 
far off on estimating the revenue loss associated with just 
this particular tax change, it makes one think about whether or 
not your estimates for all the new revenues that would come in 
with these tax increases are quite there or not, because it 
seems like these don't accurately take into consideration a 
realistic assumption on the macroeconomic feedback effect on 
some of these.
    Not all tax cuts are the same, it is clear, but my fear is 
that if we just take this money to the bank and say, let us 
just raise all these tax rates across the board, this money 
will show up, well, that is not what happened when we cut the 
tax rates. We didn't lose as much as we thought we would, so I 
wonder if we are going to gain as much as we think we are going 
to gain if we let all these tax cuts go away.
    The point I am trying to make is, even if we do this, even 
if we let all these tax cuts expire, and we achieved that line 
on the chart, put all the other factors aside, is it not true 
that just as we did after 2017, we pretty much go back into 
deficit soon thereafter because the entitlement growth just 
swamps this?
    Mr. Orszag. Yes. We would eventually go back into deficit.
    Mr. Ryan. So even if we let the tax cuts expire, we are 
going back into deficits.
    Mr. Orszag. The ongoing increases in health care costs in 
particular will eventually overwhelm the budget.
    Mr. Ryan. Okay. I just have a quick baseline question on 
the war. Is the way you assumed war costs going out is you just 
take the last supplemental and you run that through the 
baseline? So the last supplemental was $70 billion, and so is 
that basically the plug you put in for for the next 5 years? Is 
that essentially how you are doing this in your baseline?
    Mr. Orszag. Essentially, although I would note that the 
outlays associated with previous budget authority that had been 
provided spends out over the budget window. But, yes, you are 
basically correct.
    Mr. Ryan. So if we get a $100 billion supplemental in a 
month or two, and you are redoing the baseline next time 
around, you will take the 70- out and put the 100- in and carry 
that out, is that basically how the baseline would be affected?
    Mr. Orszag. It would be added because they would both be 
for the same fiscal year.
    Mr. Ryan. That is right. That is right. Because it would be 
the same. So it would be 170- you are carrying out.
    One more quick question. The workforce participation rates. 
These assumptions are really interesting to me. You are using 
these workforce participation rates, because of the aging of 
our society and because of boomers coming into retirement, the 
demographics are such that workforce participation rates would 
decline; therefore, that would negatively affect the economy.
    Are you using the same assumptions on retirement rates that 
the models have been using for years? Meaning, are you taking 
into consideration that people are actually working longer 
these days; that people are working well into their seventies, 
whereas 20 years ago, you pretty much retired at 65, where 
today you retire more at 75?
    My question is does that model take into consideration 
longer work periods for and longer workforce participation by 
this new generation of people? You know, the generation before, 
the boomers pretty much retired at 65. These boomers seem to be 
working a lot longer. I am just curious whether you have taken 
that into consideration in your model or not.
    Mr. Orszag. Yes. And obviously one could debate how much, 
but basically what has happened over the past 10--well, going 
back over a longer period of time is workforce participation 
rates for, say, those in their early sixties were declining 
substantially. They then kind of stabilized and have increased 
a bit over the last 10 years, rising from sort of the 
midforties to kind of the midfifties. For those in their late 
sixties, workforce labor participation rates are a lot lower 
than they are, in sort of the 20 percent range or so.
    We assume some additional increase in the projection 
window, but I think the important point is to offset the effect 
of moving more of the population into those age groups would 
require--and to have it have no effect on the overall 
participation rate, you would have to get those rates up to the 
rates for like people in their late fifties. Those are up near 
like 70 percent, and that is basically implausible.
    Mr. Ryan. Right. Okay. Thank you.
    Chairman Spratt. Mr. Edwards.
    Mr. Edwards. Dr. Orszag, could you tell me, based on 
whatever assumptions you have made, what percent of the 2006 
and 2007 deficits are due to tax cuts passed since 2001?
    Mr. Orszag. That is a difficult calculation. One could take 
the original revenue projections, I suppose, and compare that 
to the existing deficit, but that is not a calculation that we 
have done.
    Mr. Edwards. Okay. Could you make whatever assumptions you 
would need to make and present that back to the committee?
    Mr. Orszag. I guess we are being asked to do so, so we 
will.
    Mr. Edwards. Good.
    [The information follows:]

                      CBO Response to Mr. Edwards

    According to the original scoring of various enacted laws by the 
Joint Committee on Taxation, legislation since 2001 reduced revenues by 
$190 billion for 2006 and by $221 billion for 2007.

    Mr. Edwards. Secondly, do you have with you now, or could 
you put together, for the past 10 years both short-term and 
long-term projections made by OMB and CBO, and then juxtapose 
with that what the actual deficits were compared to the 
projected deficits, to show the difference between the CBO 
projections and the actual reality?
    Mr. Orszag. Yep.
    Mr. Edwards. Partly--not to criticize CBO, but certainly 
clarifies that CBO has to live under certain assumptions that 
simply are not realistic. Is it fair to say the actual deficits 
have been on the whole larger than the short-term and long-term 
projections by CBO over the past 5 years?
    Mr. Orszag. Over the past 5 years as a whole, if you 
started with, say, the January 2001 projections, the budget 
outcomes have certainly been worse in the sense of much larger 
deficits rather than the surpluses that were projected at that 
time.
    Mr. Edwards. Okay. Am I correct also that CBO did a study a 
year or two ago requested by the Republican Majority on the 
dynamic impact of tax cuts and actually came to the conclusion 
that one very probable outcome of tax cuts paid for by 
borrowing money from foreign governments, including the Chinese 
and others, those tax cuts paid for by borrowing money from 
foreigners and other groups actually could slow down economic 
growth; is that correct?
    Mr. Orszag. It is possible. The effects of tax reduction on 
the economy will reflect where you are starting, you know, the 
existing tax rates, the type of tax change you make, and then 
how you finance it, and financing it for some period of time 
through additional deficits imposes sort of a countervailing 
force. So a reduction in marginal tax rates, for example, might 
encourage more work and more investment and more risk taking, 
and that could boost the economy, but financing it through a 
deficit reduces national saving. That puts a drain on the 
economy, and the net effect of those two forces could be 
slightly positive or slightly negative, although it is 
typically quite small.
    Mr. Edwards. Do you believe that generally a dollar in tax 
cuts create a dollar in additional revenue to make up for the 
dollar lost in revenue and tax cut?
    Mr. Orszag. There is no credible evidence suggesting that 
that is the case.
    Mr. Edwards. Thank you.
    Chairman Spratt. Mr. Porter of Nevada. The reason I am 
doing this is that he was here at the time the gavel went down 
and before that; he was the first to appear. This is a reward 
for early behavior. In the future we will record the people who 
are sitting in their seats at the time the gavel goes down.
    Mr. Porter?
    Mr. Porter. Thank you, Mr. Chairman. I appreciate that vote 
of confidence. I will be on time in the future, too. Thank you 
very much.
    Doctor, again we appreciate your being here, and I guess 
you may have addressed in your backup material, but I haven't 
been able to find it. Regarding deficits and 9/11, is there a 
way to equate the impact on our national deficit based on the 
attacks on New York and Washington in 2001?
    Mr. Orszag. Well, I can answer that in a couple of 
different ways. There was, as you know, an economic slowdown 
that occurred around that time. That economic slowdown did have 
an adverse effect on budgetary outcomes, and that is one 
effect, although I would note that most studies that try to 
directly link the attacks themselves to that economic slowdown 
suggest that there is not all that much of a connection, in 
part because of the timing of the two events.
    Secondarily, there is also new spending that is associated 
with new efforts to better protect the United States, including 
both the global war on terrorism and homeland security efforts. 
And we do provide figures for both homeland security spending 
and for the global war on terrorism spending in this document, 
and, you know, combined for 2007, just looking at enacted 
appropriations, that would be more than $100 billion.
    Mr. Porter. And certainly it is not a perfect science, but 
if we could go back to 2001 into our U.S. economy, I heard 
estimates of a trillion dollars or less, the impact on our 
national economy. Do you know of any numbers, separate from our 
deficits as a government, but to the U.S. economy--is there 
estimates that were placed based on the loss to our economy?
    Mr. Orszag. There were some. One of the things about both 
natural catastrophes and other catastrophes like terrorist 
attacks is that the human cost is very, very substantial. Most 
of the analysis that has been done of the overall macroeconomic 
impact has suggested a more modest effect from both natural 
disasters and human-induced disasters like a terrorist attack. 
So there were some attempts to provide an aggregate impact 
number.
    I don't believe that CBO has examined that question, and 
most attempts--most things--most analyses that have tried to do 
so have suggested relatively modest effects in the context of 
an economy that is now $13 trillion a year.
    Mr. Porter. I can give a Nevada experience as a tourist 
destination for the world. And we are a bellwether on the 
positive side of the economy. When things are good, we are very 
busy in Nevada because people are comfortable, and they can 
travel. But we were literally out of business for a number of 
months in Nevada. People were afraid to get on a plane. They 
were afraid to leave their homes in many respects.
    So there was a serious hit on our economy, and I would like 
to get for the record some of our statistics. I don't have them 
with me today, but there is no question that 9/11 changed our 
country and put a major impact on our budgets as businesses and 
as families, but also as a Federal Government. I just want to 
make sure as we are talking about some of the reasons that we 
are where we are today certainly had a lot to do with what 
happened in 2001.
    Mr. Orszag. And again I would say that, you know, there 
was--you can see it in the numbers--a material effect on the 
budget, and I would also note on particular areas within the 
United States, your State, obviously activities in New York 
City itself and elsewhere, and just to be clear, my comments 
were only with regard to the overall macroeconomic effect which 
might be more modest than the effect in particular areas.
    Mr. Porter. Thank you.
    Thank you, Mr. Chairman.
    Chairman Spratt. Mr. Doggett.
    Mr. Doggett. Thank you, Mr. Chairman.
    Dr. Orszag, I would like to just continue some of the 
questions Mr. Edwards was asking you and talk about this cure-
all that is offered to the American people and all kinds of 
economic weather and big gulps of tax elixir, tax cut elixir.
    We heard testimony recently from the Comptroller General 
David Walker. We have heard comments from even one of the 
former chairmen of President Bush's Council of Economic 
Advisers that the Bush tax cuts have not paid for themselves, 
and they will not pay for themselves. Do you agree with that?
    Mr. Orszag. All of the studies that I have seen from 
credible analysts, including the Department of Treasury, 
suggest that the tax cuts may have helped to spur the economy 
somewhat in the short term, and that that offsets some of their 
costs, but the offset especially over the long term comes 
nowhere near the cost itself. In other words, the tax cuts do 
not pay for themselves, and only a very small share of their 
revenue cost is offset from the economic growth effect of the 
cuts themselves.
    Mr. Doggett. Well, I appreciate your qualifying your answer 
by saying credible evidence, and I believe that was the term 
that you used with Mr. Edwards, because we have heard plenty of 
incredible comments within the halls of Congress and, of 
course, by some of those who observe Congress and feel that the 
tax cut elixir will solve all of our problems.
    Indeed, to be more specific as it relates to the deficit 
for the year 2007, I believe the Joint Committee on Taxation 
has already estimated that the total cost of the Bush 
administration tax cuts in 2007 will be higher than the budget 
deficit for this year. Is that an estimate that seems 
reasonable to you?
    Mr. Orszag. It is possible. The original estimates of the 
revenue effects associated with the 2001 and 2003 tax 
provisions, including the alternative minimum tax, were about 2 
percent of the economy, and our projected deficit is a little 
under 1\1/2\ percent of the economy.
    Mr. Doggett. It is either the tax cuts then amount to 
either the total amount of the deficit or almost the total 
amount of the deficit, the numbers.
    Mr. Orszag. Again, those were based on the original 
projections from the Joint Committee on Taxation, and just 
comparing them to this year's deficit without taking into 
account a potential effect on economic activity and others, but 
if you just did that simple comparison, that would be the 
conclusion you would reach.
    Mr. Doggett. And again, I believe you will provide some 
additional specific analysis to Mr. Edwards on that.
    Mr. Orszag. I gather so, too.
    Mr. Doggett. You have pointed out that whether it is your 
analysis or that of OMB, that just the slightest variations in 
the assumptions can produce very different answers. I suppose, 
for example, you can assume away this year's deficit if you 
have enough phony assumptions to put in place. And I want to 
ask about some of the assumptions that were made by the Bush 
administration back in 2002 when they forecast what this year 
would look like as a result of all of our great policies, and I 
believe that the original estimate was that we were going to be 
in much better shape this year than we turned out to be. Do you 
have information on those contrasting estimates?
    Mr. Orszag. Sure. I should have the original 2000--well, 
what I have is the official baseline from 2001, and what that 
suggested was that in January of 2001, the projected baseline 
outcome at that point for fiscal year 2007 was a surplus of 
$573 billion.
    Mr. Doggett. So their view was of a $573 billion surplus 
for this year?
    Mr. Orszag. Again, that was the official baseline, CBO's 
numbers for the official baseline in January 2001, $573 billion 
for this year.
    Mr. Doggett. So even if you subtract out the cost of the 
war on terrorism, that is a pretty wide variation, isn't it, 
from what we really ended up with?
    Mr. Orszag. That is obviously a significant difference 
from----
    Mr. Doggett. And I think as we look at framing this budget, 
it will be important to not only consider the Federal deficit, 
but the deficits the policies of the Bush administration have 
created in education, in health care and in other areas for so 
many American families, and to look at what caused this deficit 
and not to fault those who didn't cause the deficit for this 
problem. Thank you, Mr. Chairman. 
    Mr. Orszag. Mr. Chairman, if I could actually for just a 
second----
    Chairman Spratt. Certainly.
    Mr. Orszag. I realize I am looking at the table. I might be 
able to answer Edwards's question directly.
    The revenue legislation that was enacted since 2001 based 
on the original scoring of that legislation amounts to over 
$200 billion for 2007, $273 billion including economic and 
technical changes, $221 billion just for the legislative 
changes itself. So that may be the number that you were looking 
for.
    Chairman Spratt. Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman. Did I arrive early 
as well?
    Dr. Orszag, with this continuing discussion of tax relief, 
I believe last week we heard from Comptroller Walker that 
although not all tax relief may pay for itself, that some tax 
relief, especially dramatic reductions in marginal rates, do. I 
don't have that testimony in front of me, but I feel that is 
accurate. Do you agree with Comptroller Walker?
    Mr. Orszag. Again, I did not see his particular statement, 
but the analyses that the Congressional Budget Office, the 
Department of Treasury and other entities have done suggest 
that reductions in marginal tax rates in general--and it 
depends on where you start from if you are starting from 70 
percent or 80 percent rates is different than if you are 
starting from 35 or 40 percent rates--do not pay for themselves 
in the sense of having an economic growth effect that offsets 
their full cost. The precise results will depend on how you 
finance the tax change, though.
    Mr. Hensarling. I believe I have it now that the 
Comptroller General said marginal rates do pay for themselves, 
and that indeed our capital gains tax cuts have paid for 
themselves several times over. Isn't it indeed true that since 
we have had the tax relief of 2001 and 2003 that we have 
dramatically larger tax revenues?
    Mr. Orszag. Revenues in nominal terms are now higher than 
they were in 2001.
    Mr. Hensarling. Isn't it also true that we have the largest 
amount of tax revenue in nominal terms than we have ever had in 
our tax history?
    Mr. Orszag. Yep.
    Mr. Hensarling. I think that one area of agreement that you 
have with the Comptroller, and I don't want to put words in 
your mouth, but I think you said something earlier in your 
testimony that the central fiscal challenge we face as a Nation 
was our rising health care cost curve. Is that a fair 
assessment of what you said?
    Mr. Orszag. Yes.
    Mr. Hensarling. Did I also understand you to say that it is 
possible to bend that growth curve without necessarily 
degrading our health care quality and accessibility? Did you 
say something along those lines?
    Mr. Orszag. I think that there is an opportunity to do so, 
and the central challenge is figuring out exactly how that can 
be done. We are not yet in a position to make the changes that 
would produce that outcome, but I think it is--there is hope 
that it is possible.
    Mr. Hensarling. So logic would tend to dictate, then, that 
every reduction in a growth curve does not necessarily lead to 
a lesser commitment or a lesser quality of health care. For 
example, it wasn't all that many years ago--we trip across 
these things from time to time--I recall Medicare was paying as 
much as five times as much for a wheelchair than what the 
market forces would have cost, and they did that because they 
didn't have competitive bidding. I think we went back and 
corrected that one. But would that be an example of somebody is 
getting the same wheelchair, the same model from the same 
manufacturer at a cost that is less to the taxpayer? So it is 
one small little anecdote, but wouldn't it seem to suggest that 
it is possible to find reforms that might save money and not 
degrade health care?
    Mr. Orszag. It certainly does, and perhaps even on a 
broader scale there is evidence that Medicare costs per 
beneficiary vary a lot across different regions of the country 
in ways that don't correspond to health outcomes, raising the 
possibility that there could be very significant cost growth 
taken out of the system again without impairing innovation or 
harming health.
    Mr. Hensarling. Dr. Orszag, returning to the deficit 
question, let us assume for the moment that all your 
assumptions are right. Let us assume we allow the tax relief to 
expire.
    If we don't reform and bend this health care cost curve, 
what does the tax burden look like on the next generation, say 
30 years from now, people's children and grandchildren in this 
room.
    Mr. Orszag. Do you mean if we allowed----
    Mr. Hensarling. If we wanted to balance our budget 30 years 
ago from today, we would go ahead and get rid of all of this 
tax relief. We would let it expire. If we wanted to balance the 
budget 30 years from now, if you have got a figure, 40, 20, 
what is the tax burden it is going to take? What is the 
magnitude of tax increase to be placed on the American people 
if we do not reform this entitlement spending?
    Mr. Orszag. If cost grows, continues to grow about the same 
rate as in the health sector as it did over the 40 years and 
you finance that entire revenue side on the budget by the mid-
2030s, it would be an increase of about 10 percent of the 
economy relative to a current base of about 18\1/2\ percent 
now. So a very, you know, more than a 50 percent increase in 
revenue as a share of the economy.
    Mr. Hensarling. 50 percent increase.
    Mr. Orszag. From roughly 18\1/2\ to closely 30.
    Chairman Spratt. Thank you.
    Mr. Etheridge from North Carolina.
    Mr. Etheridge. Thank you, Mr. Chairman.
    I would like to thank you and thank you for being here. A 
couple of questions if I can go back. I may have written the 
numbers down incorrectly. You are talking about the assumptions 
on the part D for the number that dropped, and I believe you 
said that the assumption originally used was about 87 percent 
assumption rate down to 78.
    Mr. Orszag. Correct.
    Mr. Etheridge. Let me ask you a question on that. Because 
assuming that you--and you use that to extrapolate your number 
out. The question I have is that part of that has to do with 
people looking at the plan that was provided under part D and 
recognizing they had a better plan that was being offered. That 
much I do know. I mean, you don't have to answer that. I know 
that is a fact. The question I have is this, though. Because a 
lot of State plans that offered prescription medicine for 
retirees and they decided to stay with the plan rather than to 
move because they have a better plan. The question I have is as 
you look out, extend the years out for employers, does it 
encourage employers to decide we aren't going to continue to 
offer this, we are going to slowly move out of it? What does 
that do for the cost in outyears if that should happen?
    Mr. Orszag. There are provisions in the Medicare 
legislation to incorporate employer-based coverage for 
retirees. But if there were a significant movement away from 
that system and into----
    Mr. Etheridge. From offering a plan.
    Mr. Orszag. And into Medicare part D, the net effect would 
depend on the additional cost for the enrollees versus what is 
effectively paid to the employer for that coverage. I don't 
have an exact figure for you.
    Mr. Etheridge. The reason I raise that number is because 
more and more people now are falling into what is called the 
donut hole. And each year it will get quicker for them to get 
into it, which is--it is going to create a bigger and bigger 
problem to fix it or people just not, you know, looking for 
alternatives.
    And Social Security, since my time is running out, leaves 
me with one other area. In your economic model as you 
extrapolate out in the outyears, does the model take into 
effect economic downturns in the turns in the economy?
    Mr. Orszag. There is a slower economic growth assumption 
for this year because of softness in the housing sector and 
some other sectors and then economic growth picks up again in 
2008 and thereafter. We don't try to predict when recessions 
and boons will occur and instead try to look at the underlying 
trend rate of growth.
    Mr. Etheridge. So that assumption is the same that 
legislation is enacted at the level it is at?
    Mr. Orszag. It is very difficult to predict when a swing in 
the economy will occur, in 2010 or 2011.
    Mr. Etheridge. Help me understand the model as it relates 
to spending. Because I assume you fill that in. For the dollars 
invested in the GDP and the U.S. economy versus the dollars 
that we spend, let us say, in the war on terror or the Iraqi 
war, Afghanistan, those dollars are spent outside the United 
States. How does the model take into account the differing view 
because the factors have to be different for dollars spent 
inside and outside and internally to generate the GDP?
    Mr. Orszag. There is a difference in the short term and 
long term. In the short term, one has to worry about what kind 
of impact on demand. Domestic demand comes from different 
spending patterns. Long-term growth assumptions typically focus 
on--more on the growth rate of the work force and how much we 
are saving and the capital stock and basically focus on that 
side of the economy as driving long-term growth rather than the 
demand side which has more to do with multipliers.
    Mr. Etheridge. But I guess my point is if you are looking 
at something that is extended or protracted over a number of 
years, would that have a negative effect or the model just 
doesn't deal with it?
    Mr. Orszag. I will get back to you but my understanding of 
long-term modeling assumptions is that different types of 
spending do not have a material effect on long-term growth 
rates, that instead they are driven by those other factors that 
I was describing.
    Mr. Etheridge. One final question as the time runs out. You 
were talking earlier, the issue was raised as it relates to 
cuts, but if you make a reduction in a tax revenue at the lower 
end of the bracket where you give a tax credit, doesn't that 
have a stronger impact on bumping the economy than if you take 
one or two points off the top?
    Mr. Orszag. Again, in a situation in the short term where 
the key--where the economy is weak and the key thing is getting 
more demand for goods and services that people can produce, CBO 
has focused on what observations that moderate income household 
incomes may be likely to spend any dollar that is delivered to 
them than higher income household in the short term.
    Chairman Spratt. Mr. Campbell.
    Mr. Campbell. Thank you, Mr. Chairman. Dr. Orszag, my line 
of questioning will be to the revenue side. I understand that 
in order to project revenues right, you have to project 
interest rates right, you have to project GNP growth right, 
personal income growth, personal behavior right and if you 
could do all of that that Warren Buffett would be calling you 
for advice.
    But if my numbers are correct, your projection is a 5.6 
percent revenue growth, 2007 and 2006, but my understanding is 
thus far the revenue growth has been in excess of 8 percent in 
this fiscal year.
    Mr. Orszag. I think it is difficult to look at subpatterns 
within a year because of seasonal factors, and you get a lot of 
action--for example, there was a lot of action before when 
people actually filed their tax returns in April and we have 
more information about specific income trends at that point.
    Mr. Campbell. So you are sticking with this in spite of the 
current--the numbers thus far this year?
    Mr. Orszag. Yes.
    Mr. Campbell. Then the subsequent year you have a 7 percent 
increase. Why the increase in growth next year over this year?
    Mr. Orszag. That is because the relief from the alternative 
minimum tax expires under current law, and you have a fairly 
significant 50 or $60 billion increase in AMT revenue mostly. 
There are a few other smaller factors.
    Mr. Campbell. It is a tax change. And then after that, 
taking aside the tax cuts expiring, 3.2 percent kind of is a 
steady state, is that--where is that in relation to a 20-year 
average, 30-year average, whatever?
    Mr. Orszag. That growth rate is going to be lower than 
during some historical periods because overall economic growth 
is likely to be lower than in some historical periods because 
the work force growth, returning to the discussion I had with 
Mr. Ryan before, is projected to slow as more people enter 
their 60s basically.
    Mr. Campbell. So how much lower is that? I realize you 
could pick 20 or 30. If you took a 30-year period, how much 
lower is that? 3.2?
    Mr. Orszag. What we give you in chapter 2 of the document 
is our long-term assumptions relative to historical periods, 
and I am just quickly looking for it because I know we want to 
get--on page 41 of the document, and what you can see there is 
that real potential output grows by 2.6 percent over the next 
10 years relative to say 3.2 percent over the past 40 years and 
that is mostly because the potential labor force growth rate 
slows from 1.7 to .7 percent over the next 10, and that is the 
major driver of that change.
    Mr. Campbell. Looking at the effective tax cuts and so 
forth since 2003, the total revenue increase since the 2003 tax 
I think it was 8 percent the first year, just short of 15 
percent the next, just short of 12 the year after that. Is that 
more or less than what CBO projected for revenue growth?
    Mr. Orszag. That is more.
    Mr. Campbell. Do you think, and I know there has been 
discussion clearly that you don't believe at this level that a 
dollar in tax cuts yields a dollar in additional revenue to 
match it, do you believe that there are some economic behavior 
factors that were generated by those tax cuts that are not 
taken into account in CBO's projections, or were not?
    Mr. Orszag. I think there are economic responses into the 
tax reductions, including by themselves, without looking at the 
financing side, potentially changing behavior on both for 
corporations and for individuals. That would have some revenue 
effect.
    Mr. Campbell. I am not saying that this is not at all 
pejorative, but in your charge, if you were to do these 
projections, you are not allowed really to take those things 
into account; is that correct?
    Mr. Orszag. They are incorporated now into our baseline, 
and I also should have noted this earlier. The primary 
responsibility for scoring revenue legislation rests with the 
Joint Committee on Taxation. That is the first point. The 
second point is once changes are enacted, they are incorporated 
into--their effects are incorporated into our baseline, and 
then the final point, I know there has been a significant 
uptick in capital gains revenue, but I think it is very 
important to realize lots of factors cause that, and you can 
look at short-term gains which were not affected by the 2003 
changes. You can look at corporate capital gains that were not 
affected by the 2003 changes, both of which have boomed, too, 
and you can look at capital gains abroad, which I don't think 
were affected by our tax changes. In the U.K. There has been a 
surge there, too.
    Mr. Campbell. We underprojected the growth with the tax 
cuts and some other time we will talk about whether we are 
overprojecting the revenue increase from the tax cuts expiring 
on the CPI and the CPA. I have done tax returns. When taxes go 
up the first thing you do, you sit down with your client and 
say how can we avoid paying taxes, and when they go down the 
first thing you do is you sit down and say what opportunities 
are there to recognize revenues or gains now because the taxes 
are lower.
    Chairman Spratt. Ms. Hooley.
    Ms. Hooley. Thank you, Mr. Chair. Thank you for being here 
today.
    Growth from revenue from corporate tax revenues has been 
strong?
    Mr. Orszag. Um-hmm.
    Ms. Hooley. And growth from individuals who pay individual 
tax, that has been strong?
    Mr. Orszag. Um-hmm.
    Ms. Hooley. But slower growth has occurred in payroll 
taxes?
    Mr. Orszag. Relative.
    Ms. Hooley. Relative to those two?
    Mr. Orszag. That is correct.
    Ms. Hooley. What does that say about underlying income, for 
example, and what happened to households who received the 
dividend in capital gains compared to households who relied 
primarily on income from their job?
    Mr. Orszag. We are still trying to--we don't have a full-
figure picture for what is causing the individual and corporate 
revenue increase. And I should say on the corporate side, 
obviously the share of the economy that goes to corporate 
profits, it is now at an exceptionally high level and has risen 
significantly and that is obviously a very important 
contributor to the corporate side. On the individual side, 
there are many hypotheses being put forward. One possibility 
for any given level for overall income, the larger the share of 
higher income household, the more revenue that would be 
collected because the overall tax system is progressive and 
that could be one cause of collecting more revenue than we 
projected based on economic growth alone. But we don't know 
that yet.
    Mr. Hooley. Have the number of high household incomes 
risen? I mean, has that gone up significantly?
    Mr. Orszag. There has been over the past now almost 20 
years particularly rapid growth in incomes at the top end of 
the income distribution.
    Ms. Hooley. And has real income growth been occurring for 
Americans at all income levels, or have we seen inequality 
increasing?
    Mr. Orszag. Again, looking over a period of time since, for 
example, the mid to late 1970s, income gains have been much 
more rapid at the top end of the income distribution than the 
middle or the bottom. During the 1990s, what happened was that 
the middle versus the bottom tends to destabilize but the top 
relative to the middle continued to diverge.
    Ms. Hooley. Okay. Is there anything that we need to do to 
change our income tax structure? I mean, as we get--this gap 
grows larger and larger between the high and the low, are we 
losing our middle class?
    Mr. Orszag. Well, the changes that could or should be made 
to the tax system are obviously up to you, and we are just here 
to provide you with analysis with what different options could 
be, but you are in charge.
    Ms. Hooley. Thank you.
    Chairman Spratt. Mr. Barrett.
    Mr. Barrett. Thank you, Dr. Orszag. Great to see you. You 
are becoming a regular fixture on this committee but thanks for 
coming today.
    I wanted to head down a different direction, talk about 
mandatory spending because that is the elephant in the room 
that is breaking the bank. And I have got three questions. I 
want to throw them open to you and give you all the time to 
answer.
    Number one, would it be plausible somehow to tie the growth 
of mandatory spending into some type of standard index like a 
CPI index? Question one.
    Question two, we are looking at Medicare and I know this 
from personal experience because my mom and dad recently went 
on Medicare, and they are not paupers by any stretch of the 
imagination. They could pay some bills. Isn't it arguable that 
there are people out there that can afford private insurance 
that can't afford to pay for medical bills?
    And number three, and I want to kind of tagteam on my 
ranking member's question. I did not--for the record, I did not 
vote for Schedule D. I thought it was too much for too many 
people, too expensive. But having said that, the one thing that 
is working in this process is the private sector that is 
driving some prices down. Is there some type of relationship 
between government intervention or government involvement in 
the health care market and the skyrocketing prices of health 
care, and that is my third one. I will turn them over to you.
    Mr. Orszag. First, with regard to a standard index on the 
mandatory programs. By design, entitlement programs specify a 
set of criteria to meet and then the spending follows meeting 
anyone who qualifies and so it is difficult to reconcile that 
perspective with tying to a specific index. You might be able 
to come up with mechanisms that the criteria would evolve in 
response to changes--I will give you an example. In Medicare, 
there is something called the sustainable growth rate for 
physicians which something like that was attempted in which 
sort of aggregate spending was tried to be pinned down to 
index; that is, tied to MEI, basically an index kind of 
inflation.
    And what we have seen there is that in fact this is an 
important point to know about the baseline, too. We assume that 
system will be fully implemented in the future and that will 
reduce payments to physicians relative to keeping up to overall 
health care activities by about $250 billion over the next 10 
years. Every time this has been, or over the past few years 
when there has been a schedule reduction in physician payments 
because of that formula, the Congress has decided to undo the 
reduction, including last fall. So attempts to try to pile an 
index on to an entitlement program has not necessarily proven 
to be that successful, but there obviously are other 
possibilities that can be explored.
    With regard to Medicare, as you know, part D, even though I 
gather you didn't vote for it, does involve some modest means 
testing within the Medicare program, which is new, and I know 
that there are various options that could be explored. I am not 
sure when you were talking about that in particular.
    Mr. Barrett. Just the Medicare system in general.
    Mr. Orszag. That would be one way in reflecting the fact 
that some people can better afford health insurance coverage 
than others, at least the concept behind it. And I would be 
happy to talk about other options with you if I got a better 
sense of exactly what you were interested in.
    And finally and returning to the question that Mr. Ryan 
asked, again we are still parsing out exactly what the causes 
of the lower bids and the lower cost for beneficiaries in 
Medicare part D are. There are two things. We have lower cost 
in part A and Medicaid which have different structures 
associated with them. So the good news on health care is not 
limited to part D.
    And then secondly, that over a long period of time the cost 
growth in public programs, Medicare and Medicaid, has tended to 
track cost growth in the private sector and private health 
plans, and I think that is actually a very important point. We 
are very unlikely to be able to slow cost growth in Medicare 
and Medicaid without a commensurate slowing in overall health 
care costs in the private sector as a whole. I think at this 
point to answer your questions the systems are so interlocked 
that you can't separate one from the other, basically.
    Mr. Barrett. Thank you, Doctor.
    Thank you, Mr. Chair.
    Chairman Spratt. Let's see. We have got Mr. Allen of Maine.
    Mr. Allen. It is a pleasure to have you here and to hear 
you weave through this material as effectively as you have. I 
want to stay with this issue of Medicare for a moment, and in 
particular, I think we all run the risk sometimes of 
categorizing taking data and sort of plugging it into the views 
we already have. Some of us might say, well, the costs are 
still too high, whatever they are, because we believe that the 
negotiated prices would be lower. Some believe evidence of a 
reduced estimate is an indication that competition is working.
    Now, I wanted to just run through--I would like to give you 
some thoughts on what the kinds of causes that I would hope you 
would consider if you would take another and deeper look at 
this. But it seems to me, first of all, we can get all caught 
up in changes, and part of what is going on it seems to me is 
that we have a better evidentiary basis for making estimates in 
the future once the plan has been running for a while.
    Secondly, you mentioned part of the lower cost was because 
prescription drug plans and Medicare Advantage plans were 
coming in at a lower than anticipated rate while the Medicare 
Advantage plans are certainly under considerable amount of 
pressure because MedPAC and others are saying they are 
overcharging their beneficiaries and that is creating a bit of 
some--well, attracting political interest on this side of the 
aisle, for sure.
    You mentioned the different rates of take-up. But also it 
seems to me that there may be larger trends in drug prices, in 
consumer behavior going on. We may be sort of turning back away 
from or maybe--I mean, this is worth looking at anyway. There 
may be some consumers who are turning away from using as 
multiple prescription drugs and maybe the--simply the 
expiration of patents and the greater use of generics is having 
effects. Are there other factors that come to your mind that 
maybe have a bearing that you haven't mentioned in the course 
of your testimony so far today?
    Mr. Orszag. I think you have touched upon the main ones, 
and that is why it is difficult to conclude or parse out just 
the fact of competition among the prescription drug plans as 
opposed to overall trends in health care, which in 2006 we did 
see a slower rate of growth than we had experienced previously.
    Mr. Allen. Is this an area where the CBO might be looking 
at in further dependents when we go forward?
    Mr. Orszag. We are very focused on health, yes.
    Mr. Allen. I think what I would like to do there is a chart 
I would like to have put up on this one. In the course of your 
testimony, in the course of David Walker's testimony, we dealt 
with this question of tax cuts and whether they pay for 
themselves. And as I recall his testimony, he said only in the 
case of a dramatic drop in the marginal rate. You said 
something like a 90 percent or 80 percent to 50 percent when 
you might you see enough change in behavior. That is my 
recollection of his testimony.
    Mr. Orszag. Can I comment on that because the first factor 
I mentioned is where you start really matters. Moving from 90 
to 80 is a lot different than moving from 30 to 20.
    Mr. Allen. I believe the U.S. Treasury recently came up 
with a study that suggested the long-term recovery of revenues 
from the 2001 and 2003 tax cuts was about in the neighborhood 
of 10 percent. Going forward----
    Mr. Orszag. 10 percent of sort of the base costs.
    Mr. Allen. Yeah. The 10 percent of the reduction in 
revenues from the tax cuts.
    If you look at this chart, it seems pretty clear to me 
given the dates we are talking about in 2003 and 2004, 
revenues, as a percentage of the economy, fell to about 16\1/2\ 
percent. I think that is the lowest level in how many years? I 
mean, can you help me?
    Mr. Orszag. That was the lowest level since some time in 
the 1950s.
    Mr. Allen. To me that chart speaks very clearly that the 
drop, the dramatic drop in receipts as a percentage of the 
economy had a good deal to do, though I can't quantify it, with 
the 2001 and 2003 tax cuts, and therefore the deficits that 
resulted from that is driven in part by those two tax cuts. Do 
you have any further elaboration on this chart? Can you help 
explain to us that factor, the importance of that factor and 
any other factors that may have had a bearing on that dramatic 
drop in revenues?
    Mr. Orszag. I would note that revenues do tend to decline 
in an economic downturn and increase during an economic upturn, 
and that is a normal cyclical pattern.
    Mr. Allen. Has the CBO made any estimate yet to quantify 
how much of that decline in revenues was attributable to the 
tax cuts?
    Mr. Orszag. Again, excluding the fact that the tax changes 
may have had on economic activities, we do sort of have a 
narrow accounting sense, have a figure of $221 billion in this 
year from the tax legislation that was passed in 2001.
    Mr. Allen. By this year you mean?
    Mr. Orszag. 2007, and that doesn't include debt service 
effects from the previous revenue effects.
    Mr. Allen. Thank you very much.
    Chairman Spratt. Mr. Garrett.
    Mr. Garrett. Thank you, Doctor, for being with us. As I 
said, looking forward to the future testimony in further 
hearings.
    I want to ask you a question first of all about baseline 
budgeting and supplementals. This committee has already 
discussed this in the past with regard to the global war on 
terror, and in the past we have used emergency supplementals 
repeatedly to fund that to the war effort. And also in this 
committee in the past we have discussed the problems with that, 
the lack of oversight and the reason we should rather at least 
give a given portion of that to go into regular order so the 
oversight committees can have the oversight of that. What can 
we do, if anything, if we move in that direction to have more--
less supplementals and more on the global war on terror go 
through the regular order process? So too that it would not 
become part of the eventual continual baseline budget because, 
as you said, and we have heard in the past, some of these 
figures are not likely to continue on and on.
    Mr. Orszag. Let me try to draw a distinction between the 
baseline and then the budget process that this committee plays 
a key role in.
    With regard to the baseline, regardless of whether an 
appropriation is a regular one or supplemental, if it exists 
when we construct our baseline, it will be inflated out. So 
that distinction doesn't really matter for that purpose.
    When you then go and set your appropriations totals as part 
of the budget process, you can make--this committee can make an 
adjustment in the budget resolution, you know, to take out a 
supplemental if you want to or put in additional money, and 
that is not a function of just our baseline.
    Mr. Garrett. It is going to be included in your baseline 
regardless of whether it is a supplemental or regardless 
whether it is a supplemental or if it is in regular order?
    Mr. Orszag. As long as it is enacted.
    Mr. Garrett. Is there a way, realizing that some 
supplementals wouldn't be reoccurring, that you would have a 
way to take it out of your process so the numbers that you have 
would come out, would be a more realistic figure going forward, 
is my question.
    Mr. Orszag. I understand. There are a set of scoring rules 
that basically govern this and that is what----
    Mr. Garrett. Who sets them and how do we change that?
    Mr. Orszag. That was set by a law that has now expired, but 
there is an established norm there. What we try to do in 
situations like this is try to provide additional information 
where you could take that component back, add something in if 
you want it, and that is what we did with global war on 
terrorism activities in Table 15. There is an official baseline 
projection but then if you wanted to take the----
    Mr. Garrett. So the simple answer is we can change the 
process by your assumptions.
    Mr. Orszag. This committee could change the baseline rules 
if you chose to.
    Mr. Garrett. The second conversation you had when you spoke 
to us previously, I know you made regard to your staff and the 
tremendous work that they will do in the future and what are 
some of the things that you might want to improve upon if you 
could? I think one of the things is response time for members' 
requests as far as scoring, what have you. Can you just comment 
on that?
    Mr. Orszag. My understanding, over the past several years 
there has been a lot of attention paid to responding in a 
timely fashion to members' requests, and we are going to 
continue to do that, and if there are ever problems that arise 
I hope that you will get in touch with me directly about it. 
And I do want to join you in just noting what a tremendous 
staff CBO has. And also I am particularly pleased that Donald 
Marron is staying on as the Deputy Director, which will provide 
a lot of continuity and professionalism in the organization.
    Mr. Garrett. I am glad to hear you make this a priority for 
the Members.
    And finally, we heard a lot of talk about when you make a 
tax cut on the dollar you may not see an increase for the 
dollar. Hearing that from the other side, somebody might 
believe that somebody is setting us up for down the road to see 
a tax increase potentially coming. Maybe not. But can you turn 
that question around, maybe, and that is to say for every tax 
dollar increase that goes can a particular American family 
necessarily see a dollar increase of services that they get 
from the government? Or to bring it home to my State in New 
Jersey where we get $0.57 back on the dollar, so every dollar 
New Jersey families sends to Washington, we get $0.57 back in 
overall government services. If we were to increase taxes in my 
State of New Jersey or a typical American family in New Jersey 
by a dollar, can you tell us whether that family in the State 
of New Jersey would see a commensurate $1 increase from the 
service of the Federal Government for the tax increase?
    Mr. Orszag. What I would say is especially over the long 
term as a nation we need to pay for our governmental services, 
and it is very difficult to parse on an individual family-by-
family basis.
    Mr. Garrett. How about a state-by-state basis like mine 
that has only been getting $0.57?
    Mr. Orszag. It depends on how you do the calculations. How 
do you compute the benefit to New Jersey of having an effective 
defense of the entire Nation. You can do a sort of accounting 
analysis, which people have done, and I am sure that is where 
those numbers come from. But it is very difficult to take into 
account things that benefit the Nation as a whole and how you 
sort of parse that out on a state-by-state basis. So I would 
just say that kind of analysis is very difficult to do. It is 
difficult to do.
    Mr. Garrett. Okay. Thank you.
    Chairman Spratt. Mr. McGovern of Massachusetts. Not here.
    Mr. Scott of Virginia.
    Mr. Scott. Could we get the chart up?
    We keep hearing about this gang busting economy and the 
jobs that are being created. We wanted to show this chart so 
that people would know what we are talking about. This is the 
average number of jobs created over the administration for the 
Clinton administration and the Bush administration, and 
everybody is bragging about how well this administration is 
doing so we just wanted to put that up. I understand the 
numbers. Now this is the average over 6 years. The more recent 
numbers are up to about 150,000 in some recent months, which 
would be a little below average for the previous 
administration. We just want that up there so people will know 
what--put things in perspective.
    This year's deficit, as I understand, it doesn't include 
the expected supplemental for the war?
    Mr. Orszag. That is correct.
    Mr. Scott. Does it include any other supplementals? We 
understand the FBI has complained that they are going to have 
to fire FBI agents and the Department of Justice might have to 
get rid of prison guards if they don't get supps. If that 
supplemental occurs, that is not a part of this either. That is 
something that would have to be added on, right?
    Mr. Orszag. The 2007 number comes very close to the 
continuing resolution limit, and to the extent you wind up with 
domestic appropriations that affect that, that would also 
affect the budget outcome.
    Mr. Scott. I agree with the gentleman from North Carolina 
that I would expect some people to lose their Medicare 
prescription drug coverage in the future. It has been a very 
attractive benefit but since people can get it on its own, it 
is not as compelling a benefit as it has been in the past. So 
we have had--we would have to keep an eye on that number. But 
is the lower cost benefits because of the lower number of the 
people or because of the lower cost per person?
    Mr. Orszag. It is mostly because of the lower cost per 
person. So out of the $265 billion reduction, a little bit more 
than $200 billion is because of the lower cost per person.
    Mr. Scott. The emergency costs like hurricanes, like we 
didn't have many hurricanes this year. You are going to project 
out a lower cost than the year before when we had Katrina and 
Rita and everything else. Does it make sense to do it that way 
for emergencies, which you don't know what they are going to 
be, wouldn't a 5-year average make a lot more sense than the 
ups and downs of each year as to what might be expected?
    Mr. Orszag. First with regard to programs that involve 
spending in emergency programs like insurance programs, we do 
incorporate some estimate of the likelihood in doing the 
projections. But with regard to domestic spending, that is one 
time. Again, the scoring rules suggest that we just take 
whatever has been enacted and inflate that forward and not try 
to guess what you all will do in future years in that category.
    Mr. Scott. PAYGO. Under the PAYGO rules, we have to pay for 
the extension of tax cuts.
    Mr. Orszag. Under the pay-as-you-go rules that apply in 
both the House and the Senate, a revenue, yeah. Basically 
extending the tax provisions past their scheduled sunset have 
to--would have to be offset through some other mechanism unless 
you waive the requirement.
    Mr. Scott. And we have heard about the fact that we have 
got record revenues, the nominal amount is higher. How many 
years in the last--since the Great Depression has the nominal 
amounts of revenues actually gone down?
    Mr. Orszag. I don't have that number off the top of my head 
but the nominal level going down is relatively rare and would 
typically be associated with a recession.
    Mr. Scott. Would it surprise you if somebody told you that 
only after this administration's tax cuts for a couple of 
years, the normal years since the Great Depression, that it 
actually went down?
    Mr. Orszag. It wouldn't surprise me if someone said that. 
Whether if it was true or not, I would want to check that.
    Mr. Scott. Could you get us the information? I think there 
are a couple of times it may have gone down other than this 
administration.
    Mr. Orszag. I would think after World War II there would 
have been a decline.
    Mr. Scott. If you would check and give us that information 
so we will have it for the next meeting.
    Thank you, Mr. Chairman.
    [The information follows:]

                       CBO Response to Mr. Scott

    Since the Great Depression (and through 2006), revenues have 
declined from year to year 14 times.

    Chairman Spratt. Thank you, Mr. Scott.
    Mr. Simpson.
    Mr. Simpson. Thank you, Mr. Chairman. Do you have any more? 
I would be happy to yield.
    Mr. Scott. When he gets the numbers, that would be best 
when he gets the numbers.
    Mr. Simpson. You mentioned you said instructed to construct 
the baseline. Who instructs you to construct the baseline? How 
do you decide what decisions you make? Are those in statute 
somewhere, or are they just policy that CBO works up?
    Mr. Orszag. They were contained in section 257 in budget 
legislation. That section expired but there has now been a long 
history of applying the rules in a particular way and we 
continue to follow that long history of baseline construction.
    Mr. Simpson. So it is up to you to determine what economic 
assumptions you are going to use when different policies are 
enacted?
    Mr. Orszag. I suppose it is our responsibility to come up 
with economic assumptions but the baseline concept is up to the 
Congress and in particular up to the budget committees.
    Mr. Simpson. I got the impression that you use 
supplementals. You carry forward supplementals as continued 
spending.
    Mr. Orszag. That is correct.
    Mr. Simpson. But by definition, aren't those supposed to be 
emergency supplementals, one-time spending even though we go 
more and more into that arena where we shouldn't and we should 
get back to where supplementals are true emergencies. How can 
you project carrying forward the cost of Hurricane Katrina?
    Mr. Orszag. In this baseline we don't, but I think the 
broader point with regard to the discretionary part of the 
budget, a little bit above a third of the budget that you all 
decide upon year by year, the baseline is not really a 
prediction of what you are going to do in the future but rather 
just some benchmark that inflates the existing year forward 
period and it doesn't try to predict what you are going to do 
on Homeland Security spending in 2010.
    Mr. Simpson. But it bases those assumptions on what we have 
done in the past?
    Mr. Orszag. That is correct. With regard to that part of 
the budget, it is a very simple rule.
    Mr. Simpson. But using supplementals in projecting that 
would seem to me to throw off the future projections.
    Mr. Orszag. It could. On the other hand, if you look at the 
pattern of discretionary spending growth over a long period of 
time, our assumption in the baseline that it just keeps pace 
with inflation goes another direction because over a longer 
period of time discretionary spending has tried to rise more 
rapidly than that--than just keeping pace with inflation.
    Mr. Simpson. When you look at the cost of a tax cut, do you 
look at the lost revenue that you would be assuming that the 
economic activity remain the same and that you would lose that 
much revenue because of a lower tax rate?
    Mr. Orszag. Again, the Joint Committee on Taxation is 
responsible for revenue scoring, and they will take into 
account microeconomic responses. So the fact that people may 
shift the form of compensation in response to tax changes but 
not macroeconomic effects, we have in the past taken those 
macroeconomic effects into account in dynamic analysis papers 
that we have done outside of the formal scoring process. And I 
think the distinction is important. In dynamic scoring, you 
have to pick a certain number. That puts a lot of pressure on 
organizations like CBO to pick the parameter values and small 
changes and assumptions can bring changes in outcomes. So in a 
dynamic analysis, we can present lots of different combinations 
to give you some sense of not only the likely magnitudes but 
how they vary on different assumptions, and that is a luxury. 
That is not possible in a single scoring exercise.
    Mr. Simpson. I guess when we reduced the capital gains rate 
we had to estimate that it was going to cost the Federal 
Treasury when everyone knows that it was going to bring in more 
revenue and in fact it did bring in more, substantially more 
revenue.
    Mr. Orszag. There are two effects. The capital gains tax 
rate. There could be a timing effect with more realizations and 
also an effect in revenue in the very short term and the very 
longer term effect. All of the analyses I have seen from Greg 
Mankiw and others suggest that tax changes of that type when 
you reduce the tax rate, the revenue is reduced over the long 
term but not by as much as the effect itself because there is 
some offsetting impact on economic activity and on capital 
gains realizations. That offset is not--given the tax structure 
of the United States is typically not large enough to offset 
the cost.
    Mr. Simpson. Is that true in every tax category?
    Mr. Orszag. It will depend on where you start, and I don't 
want to say in every category but there may be exceptions, but 
in general, given the existing tax structure that we have in 
the United States and with the level of rates that we have in 
the United States, it is generally true.
    Chairman Spratt. Mr. Moore.
    Mr. Moore. Thank you, Dr. Orszag, for being here.
    The Federal deficit now stands in excess of $8.7 trillion; 
is that correct?
    Mr. Orszag. That is the gross Federal debt.
    Mr. Moore. $8.7 trillion; is that correct, and that is 
projected to be the gross Federal debt, $8.9 trillion, by the 
end of this year; is that also correct?
    Mr. Orszag. We project gross Federal debt to be $8.9 
trillion by the end of fiscal year 2007.
    Mr. Moore. And the gross Federal debt was $5.6 trillion in 
January of 2001?
    Mr. Orszag. It may be correct. It may take me--but for the 
sake of argument, that would be correct.
    Mr. Moore. That would be an increase of more than $3 
trillion in 3 years?
    Mr. Orszag. Assuming that your original number was correct. 
There are--obviously has been an increase in Federal debt 
whether it is on a gross basis or public held basis of a few 
trillion dollars over the past several years.
    Mr. Moore. How much of our national debt now is held by 
foreign nations, Doctor?
    Mr. Orszag. Something like 40 percent now.
    Mr. Moore. What would the number be?
    Mr. Orszag. We have a section in the report that talks 
about foreign ownership out of the publicly held debt, so it is 
roughly 40 percent. I could get you--between 40 and 45 percent. 
We will get you the exact number.
    [The information follows:]

                       CBO Response to Mr. Moore

    At the end of fiscal year 2006, foreign and international held debt 
totaled $1.933 trillion--about 40 percent of debt held by the 
public.\1\
---------------------------------------------------------------------------
    \1\ Source: U.S. Treasury.

    Mr. Moore. While we are talking here, can somebody back 
there get you the number for the increase in the past 6 years 
of our debt?
    Mr. Orszag. [Nods head.]
    Mr. Moore. Thank you.
    Do we even have a ballpark figure for what the foreign debt 
is right now?
    Mr. Orszag. The foreign held debt of the United States is 
roughly--the public debt that is owned by foreigners is roughly 
$2 trillion.
    Mr. Moore. What would be the effect if foreign nations 
decided they didn't want to hold their debt for whatever reason 
anymore? What would be the effect in our country?
    Mr. Orszag. It would depend upon the response of other 
players in financial markets. If there were significant change 
in the willingness for foreign official entities and other 
investors to hold other publicly held debt, one would expect 
some adjustment process and depending on the speed of that 
withdrawal and the response of other financial market 
participants, it could either go smoothly or abruptly.
    Mr. Moore. Could it have any impact on our interest rates 
in this country?
    Mr. Orszag. It potentially could, yes.
    Mr. Moore. In what respect? Good or bad impact?
    Mr. Orszag. Once would anticipate there would be some 
upward pressure on interest rates and the extent of that upward 
pressure would depend on the factors I was just mentioning.
    Mr. Moore. Because people would have to, in this country, 
would have to finance the debt, and there would be competition 
for the funds available?
    Mr. Orszag. Having more people sell public debt would drive 
the price down and the interest rate on that debt up.
    Mr. Moore. How much was the interest in dollar figures on 
our national debt last year, if you know?
    Mr. Orszag. 200 and--a little above--I was going to say 220 
billion. $227 billion.
    Mr. Moore. Do you have an estimate for what the interest 
would be on that debt this year?
    Mr. Orszag. 235.
    Mr. Moore. Billion dollars.
    Mr. Orszag. Correct.
    Mr. Moore. And the gross is over $400 billion?
    Mr. Orszag. That was net interest on publicly held debt 
that I was giving.
    Mr. Moore. Who is going to end up paying for this?
    Mr. Orszag. Those outlays are part of the Federal budget 
and ultimately will have to be financed either through 
reductions in other spending or increases in revenue.
    Mr. Moore. Or passed along to our children and 
grandchildren to pay it.
    Mr. Orszag. But ultimately that is not sustainable if one 
can't just continue to pass more debt on to future generations 
because ultimately you would have a debt spiral that----
    Mr. Moore. We are passing substantial debt on to our 
children and my seven grandchildren right now; isn't that 
correct?
    Mr. Orszag. We as a nation are not saving very much. That 
means we are not passing on as much capital to future 
generations as we could. I think we do need to remark upon the 
low level of national savings in the United States, which has 
one of two consequences. Either it means we will invest very 
little in the United States or we have to borrow substantial 
amounts from foreigners. In recent years we are mostly doing 
the latter.
    Mr. Moore. Thank you.
    Chairman Spratt. Mr. Lungren.
    Mr. Lungren. Thank you, Mr. Chairman.
    Doctor, it is nice to see you here. I am not an economist 
and I am not even a country lawyer. I am just a plain old 
lawyer.
    Mr. Orszag. Boy, am I getting nervous.
    Mr. Lungren. But I am not a tax elixir, as someone 
suggested over there and restated they meant tax cut elixir, 
suggesting that is what we are looking for over here.
    My problem is I come from a different perspective having 
been gone for 16 years. I was here in the 1970s and 1980s. Do 
you have a figure of what the average unemployment rate was 
during the 1970s?
    Mr. Orszag. I don't have it off the top of my head. We can 
get it for you. It was higher than it was today.
    Mr. Lungren. The interest rate.
    Mr. Orszag. Higher than what it is today.
    [The information follows:]

                      CBO Response to Mr. Lungren

    The average unemployment rate from fiscal years 1970-1979 was 6.1 
percent. From 1980 through 1989, the average rate was 7.3 percent.

    Mr. Lungren. The tax rates in the 1970s.
    Mr. Orszag. Higher than it is today.
    Mr. Lungren. Is there any impact on the employment rate as 
a result of lower tax rates helping stimulate a private 
economy?
    Mr. Orszag. I think it is very difficult to draw that 
connection. For example, someone put up a chart earlier about 
growth rates during the 1990s when tax rates were also--
growth--job growth rates were higher than they were.
    Mr. Lungren. But the tax rates were significantly lower 
than they were in the 1970s?
    Mr. Orszag. That is correct.
    Mr. Lungren. There was a chart put up there I think when 
Mr. Allen was speaking, and it talked about the dip that we had 
in receipts, that we had in receipts and apparently the graph 
didn't take into consideration your testimony because it showed 
a leveling off of receipts below 18 percent, about 17.5 or 6 
percent. As I understand your testimony, revenues measured as a 
percentage of GDP have grown in the last several years. And I 
believe you state here increasing from 16.3 percent in 2004 to 
17.6 percent in 2005 to 18.4 percent in 2006 and that the last 
figure is, quote, slightly higher than the average, 18.2 
percent of the past 40 years; is that correct?
    Mr. Orszag. That is correct.
    Mr. Lungren. So we are now in the range of receipts as a 
percentage of GDP that has prevailed over the last 40 years?
    Mr. Orszag. That is correct.
    Mr. Lungren. Even though the tax rates are significantly 
less than they were in the first 20 of those 40 years?
    Mr. Orszag. That is correct also.
    Mr. Lungren. How much would it cost to fill the donut hole?
    Mr. Orszag. Now that we have information on actual 
enrollment in part D, we will be providing an updated estimate 
of that in the near future.
    Mr. Lungren. Do you have any range of what we are talking 
about there?
    Mr. Orszag. Rather than give you an incorrect number, if I 
would be allowed to----
    Mr. Lungren. Do you have a suspicion it will be an 
insignificant number?
    Mr. Orszag. It is clearly a significant number.
    Mr. Lungren. When you talk about the employment 
participation rate, and you project that forward, does that 
consider any changes in immigration policy?
    Mr. Orszag. That does not consider a change in immigration 
policy. It assumes roughly a million people per year in net 
immigration and that is new entrants minus people who leave.
    Mr. Lungren. Isn't it a fact without immigration at the 
levels we now have, legal immigration, let us just now talk 
about that, we would have an even worse situation in terms of 
being able to sustain the Medicare/Medicaid/Social Security 
that we have built into the system as we look forward?
    Mr. Orszag. Or another way of putting it is higher 
immigration can help a bit but the effect is not as large as 
one would initially think. And it depends in part on the skill 
mix of people coming in. The reason is that you get more 
revenue, but for example under Social Security you also then 
have higher benefits based on the work history of immigrants.
    Mr. Lungren. I thought one of the simple ways of looking at 
our Social Security problem is the number of people working 
versus the number of people who qualify for Social Security 
versus what happened in the earlier years. And if we had 
declining birth rates such that we do not have more people 
coming into the work force over time, you build yourself into a 
tremendous problem such as we see in Europe now and that 
without some continuing immigration, such as we have seen in 
this country traditionally, we have become another Europe.
    Mr. Orszag. And again, the effect, though, tends to be 
relatively modest because there is some effect on benefits and 
it really does also depend on the skill mix. For example, if 
low wage immigrants are disproportionately the increment, then 
because the Social Security benefit formula is progressive, the 
net effect is not as large as if they are high wage immigrants. 
Greatly disproportionate.
    Mr. Lungren. Thank you very much.
    Chairman Spratt. Mr. Cooper.
    Mr. Cooper. Thank you, Mr. Chairman.
    Well, according to CBO, the New England Patriots are in the 
Super Bowl this weekend because under this sort of baseline 
analysis, when you only look at the past, the Patriots look 
mighty good. In fact, they looked really good in the first and 
second quarter of the playoff game. But then everything 
changed.
    So my point is I am very worried that as interesting as 
this academic exercise is, it really tells us very little about 
the future. Fortunately both parties have reason to question 
the validity of the baseline. You don't want to see all of the 
tax cuts revealed. We don't want to see other things happen. 
But when, for example, as you said earlier in your testimony, 
just keeping the level of paying with AMT, that would cost us a 
trillion dollars. That is not reflected in these numbers. That 
shows you the extreme variability of the analysis.
    It is interesting to me, too, what you said that the 
requirement that CBO do this is under an expired law that lives 
on as informal practice. I am not faulting you or CBO. I think 
you have done as well as could be done given this constraint. 
But this is a very poor way of looking at the future. The 
President bragged in the State of the Union Address he would 
have a balanced budget in 5 years. According to your numbers, 
if we do nothing, if Congress ceases to exist for 5 years, we 
would have a balanced budget in 5 years. So, you know, the 
President has basically stated as a claim, you know, what you 
say we would achieve on automatic pilot.
    My purpose is to not fault CBO or the methodology. I just 
want realism in the numbers and to me we are not achieving that 
with this exercise. So I would like to work with you in the 
coming months to figure out a better way to come up with 
projecting into the future so that we have a more realistic 
handle on things.
    Can you think of any ways right now that we could do this?
    Mr. Orszag. Having grown up in Massachusetts, I am still 
having to get over your first comments.
    There are a lot of different ways of trying to construct a 
baseline and obviously I think having the budget committees 
revisit those baseline rules to explore whether some updates or 
tweaks would make sense and would be welcomed. But I would say 
there has to be a core principle behind the combination of the 
baseline and the scoring rules which is that the cost of a 
policy change shows up at some point. So it shows up either 
when you score the provision and then it can be carried forward 
in the baseline or it shows up--the full cost has to show up at 
some point, and we don't want a situation in which costs just 
disappear from the combination of the baseline and the scoring 
process.
    So, for example, one can imagine a system in which a tax 
change that was officially temporary would be scored as 
permanent. So an AMT change for 1 year would be scored as 
permanent and then from thereafter that would be included in 
the baseline. That may or may not lead to more clarity about 
future budgetary outcomes, but I think what is important is 
that the costs show up at some point. The current system 
achieves that objective and any alternative system needs to 
achieve that objective also even though there are different 
ways of achieving it.
    Mr. Cooper. If you look at your analysis under Medicare you 
assume that we are going to cut physician's pay 10 percent next 
year. That is wildly unrealistic if you look at congressional 
behavior in the last 4 years. We have always saved the doctors 
at the last minute. So many of our assumptions seem to be based 
on premises like this, and by the way, just freezing doctor 
reimbursement under Medicare would cost $5 trillion. That is 
not giving the docs a pay raise. That is freezing reimbursement 
because the formula under BBA 97 is skewed to expect a 30 
percent cut in finance pay. Who thinks that is going to happen? 
So I am just worried that this is a little bit like the 
medieval argument how many angels can dance on the head of a 
pin.
    In my 30 remaining seconds, the gross interest that America 
had to spend last year to service its debt was $406 billion. 
That is on page 74 of your analysis, and you point out very 
helpfully that the rate of growth of interest, spending growth, 
interest spending is four times faster than the rate of 
increase for the non-interest spending. That should alarm the 
members of this committee. If you look at the CR we will pass 
this week, that is, what, $463 billion we are going to spend, 
406 billion just on interest. So that is the tax you can't 
repeal. That is a tax that can never go away unless you bill 
budget surpluses and that is the tax that is growing at a rate 
four times faster than all other spending. So I would urge my 
colleagues to focus on pages 71 through 74 of your analysis 
because while we can't trust the future necessarily, we can 
trust the historical numbers.
    Mr. Orszag. If I could make two comments, Mr. Chairman. The 
first is obviously the pressure that is put on the baseline 
process and then relatedly the scoring process when provisions 
are wildly anticipated to be continued, are written in official 
law as being temporary, and you could perhaps include the 
sustainable growth rate formula under Medicare in that and 
perhaps include the revenue provisions in that also. I know you 
know this, but I think it is worth pointing out that that 
creates awkwardness regardless of how either we are going to 
ignore the official law or not ignore it but reflect it in a 
different way, or we are going to have baselines like the one 
that we presented to you today that many observers may not 
believe are realistic.
    And just very briefly since I have been asked and I know 
there is interest in gross debt, since I was able to find it, 
the publicly held debt, that did rise from $3.3 trillion in 
2001, at the end of 2001, to 4.8 trillion at the end of 2006.
    Mr. Cooper. Thank you.
    Chairman Spratt. Mr. Bonner.
    Mr. Bonner. Doctor, I would like to follow my colleague 
from Tennessee in hoping for realism in the numbers. I guess I 
would like to get your views on the realism and the facts. Many 
people who run for Congress or other jobs in life made campaign 
promises and then when we catch that car, they have to try to 
reconcile their promises with the reality of the job. In your 
view, if we allow the tax cuts of 2001 and 2003 to expire, is 
that in effect a tax cut or a tax hike for those who promised 
that they would never raise taxes?
    Mr. Orszag. I am not going to get into the semantics game. 
If they allow those provisions to expire, the revenues would be 
higher if they did not expire.
    Mr. Bonner. Okay. Many people outside of this body back in 
our communities and our States sometimes believe that many of 
us inside this body have done a very poor job of handling the 
exploding growth in entitlements. What in your view are some of 
the principal factors in the structure of the entitlement 
programs that have fostered such a rapid growth and, in 
general, what kinds of options are available to us in Congress 
to alter the structure of these programs to make them more 
sustainable for the long term?
    Mr. Orszag. With regard to the first question, the ongoing 
increases in Medicare, Medicaid and Social Security, 
particularly the first two of those where most of the projected 
increase occurs, reflects both ongoing health care cost growth, 
which exceeds economic growth. Over the last 40 years, health 
care costs per beneficiary have grown 2.5 percentage points a 
factor than economic growth.
    Then, secondarily, the aging of the population. So, as the 
population ages, costs go up in both Medicare--in both the 
health programs and in Social Security.
    In terms of options for restraining the emerging imbalances 
in our different entitlement programs in some sense it is very 
simple. Spending is projected to exceed revenue, so you need 
some combination of lower spending and higher revenue. The 
combination is really up to you, but the precise details are 
obviously what is important, and there again I think it is 
really up to the Congress and to the President to decide the 
best way forward.
    What I would say is that, on the health care side, as--
returning to the discussion we had before, there is at least 
some opportunity for constraining cost growth, spending growth, 
in a way that neither impairs innovation nor harms health, 
which is the ultimate objective of those programs, and that is, 
in a sense, a central--I think should be a central focus of 
effort, to find the ways in which we can take cost growth out 
of the health system without impairing health or innovation.
    Mr. Bonner. Sticking with health and going back to my 
previous question about people who run for office making 
campaign promises, we have a Presidential election coming up in 
2 years, and some of the candidates are already promising, one 
in particular, every American should have universal health care 
within 6 years.
    Since health care is such a dominant part of the topic 
today, can you envision, as a noted and respected economist, a 
scenario where we can afford to provide universal health 
coverage for all Americans and, at the same time, get a handle 
on the growth of this very explosive part of our economy?
    Mr. Orszag. I am told that when a health economist died and 
went to heaven, St. Peter let him ask one question. He said, 
will we have universal health insurance? And St. Peter said, 
yes, but not in my lifetime.
    I think that, obviously, there are ways of getting to 
universal health insurance systems; and evaluating the cost is 
something that we are very actively engaged in. I wouldn't want 
to characterize the costs as being either insignificant or 
catastrophic. It depends in part on precisely what you do; and 
we are seeing different models emerging from the States, from 
Massachusetts, California and others, in terms of how one 
could, at the State level, move to a more universal coverage.
    Mr. Bonner. Mr. Chairman, if there is no objection, my 
colleague--our colleague Mr. Garrett had one other question. 
Could I give the balance of my time to Mr. Garrett?
    Chairman Spratt. Sure.
    Mr. Garrett. I would like to join the gentleman from 
Tennessee to be so willing to raise the issue that you raise as 
far as reforming. This question goes on the baseline issue. 
Correct me if I am wrong. If you are looking at a tax on the 
law on the books that is set to expire in x number of years, 3 
or 4 years, your baseline will assume that it will end at that 
time for your projections going forward?
    Mr. Orszag. With one caveat, which is that revenues that 
are dedicated to particular trust funds are assumed to 
continue. But, generally, yes.
    Mr. Garrett. And, secondly, you are looking at a spending 
program that is authorized and the authorization is going to 
expire in X--the same number of years, you will assume what in 
that case, on the spending side of the equation?
    Mr. Orszag. Generally, that they are continued, but, again, 
there are exceptions on that side, also.
    Mr. Garrett. Can you explain why you treat one as 
continuing even though the law has expired and the other one 
you treat differently?
    Mr. Orszag. Again, I think the key concept is that the 
costs show up at some point. So, for example, SCHIP is coming 
up for reauthorization. When that program is scored, even if 
the reauthorization only applies for 5 years, we will assume 
that those changes continue out and score those changes. So the 
costs are paid for at some point. In that case, you know, when 
the reauthorization occurs; and then those higher levels would 
be carried out and incorporated into a future baseline.
    One could do the same thing on the revenue side. So, for 
example, one could say, you do a 1-year AMT fix, we are going 
to score that as a 10-year change, and then that will be 
incorporated into the baseline thereafter. The key thing is 
that the costs show up at some point. The existing system 
basically achieves that.
    There are others--and we would look forward to working with 
you on it--that could achieve it also and that might address 
some of the at least perceived asymmetries that you have 
touched upon.
    Mr. Garrett. Thank you again. I appreciate working with the 
gentleman on that.
    Chairman Spratt. Thank you, Mr. Garrett.
    Mr. Berry.
    Mr. Berry. Thank you, Mr. Chairman.
    Dr. Orszag, God bless you for taking on this job; and we do 
appreciate very much you being here.
    Mr. Orszag. Thank you.
    Mr. Berry. You say that we are going to save or have $265 
billion less spent on the Medicare Part D over the next 10 
years than we had anticipated. That is less money that the 
government is going to spend?
    Mr. Orszag. Correct.
    Mr. Berry. Do you have any information about how that 
impacts--how our seniors are impacted and the people who 
participate in the program? Are they spending more or less or--
and also the providers?
    Mr. Orszag. There would be a corresponding--well, we need 
to parse a couple of the pieces. The cost per beneficiary 
piece, which is the majority of the change resulting in lower 
government spending, would also have beneficial consequences 
for beneficiaries. In other words, as the bids come in from the 
prescription drug plans at lower amounts, there can be benefits 
for consumers, also. Correspondingly, there is lower income to 
the plans, but that is because they have figured out that they 
can offer the plans at lower rates and still be profitable.
    Mr. Berry. Right. The anecdotal information I have is our 
concern is the seniors that are involved in these plans are 
actually getting to be worse off because their copays are going 
up, their premiums are going up, and the actual service that 
they have available is not--actually not as good, even though 
they are offering more plans. The plans are making money, but 
the pharmacies are not making money, and the seniors are having 
more difficulty getting their medicine.
    We have absolutely just an onslaught of seniors coming to 
our office asking for help. So I would love to see some 
information on that, if you have it available.
    Mr. Orszag. Sure. Let me just actually note--there is one 
discussion about cost, there is another about confusion and 
complexity, and especially at the beginning part of this 
program there did seem to be concerns about how complicated 
some of the choices were for senior citizens, for beneficiaries 
to make.
    Mr. Berry. Right.
    The other comment I would have is not so much a question. I 
guess in the end it will be a question, but, since 1981, I have 
been told over and over again, you know, if you just cut taxes, 
that this wonderful economy is just going to bubble up out of 
the ground and everything is just going to be absolutely 
magnificent for the United States of America; and we did that 
as a Nation as a matter of public policy.
    Then I remember so well a fellow named Daniels, who was 
Director of OMB at that time, in April of 2001 coming to the 
Blue Dogs and explaining to us that, if we just did that, that 
the great danger that it presented to the country was that we 
would pay off all the debt and there wouldn't be a safe place 
for people to invest their money because you couldn't buy a 
U.S. Treasury bond. And that not only did we have a projected 
$5 trillion surplus at that time, but it would grow and 
compound itself to the point where we would just be run over 
with money.
    It appears to me, you know, I don't think you have got to 
be all broke out in brilliance to just see if we keep doing 
what we are doing that we can in not too distant in the future, 
not too far away, we can bankrupt the Nation and hand over to 
our children and grandchildren a God-awful situation.
    I agree with my colleague from Tennessee. We could have one 
little segment here of these numbers--we have got your 
baseline, then we have got the on-budget, and then we have got 
the off-budget. And just pick one, and you can come up with a 
scenario that would be absolutely wonderful to present to the 
American people, but, in the end, we owe this money. We are 
borrowing more money all the time, and when you cut taxes and 
borrow the money to pay for it and actually increase spending, 
it appears to me that that would also stimulate the economy on 
the short term in an irresponsible way.
    I don't know if any of this that I am saying makes any 
sense to you. I know you are a lot smarter than I am. I never 
would question that.
    Mr. Orszag. I don't know about that.
    Mr. Berry. But at some point if we are going to be a 
successful Nation, don't we have to change what we are doing 
and be more responsible about it and deal with health care 
costs and be responsible about taxes and expenditures?
    Mr. Orszag. I think there is no question that there is a 
very broad consensus among analysts, economists and others that 
constraining health care cost growth and, in particular, 
raising national savings would both be beneficial over the long 
term for our economic performance.
    Mr. Berry. Thank you.
    Chairman Spratt. Mr. Conaway.
    Mr. Conaway. Thank you, Mr. Chairman.
    Doctor, thanks for being here. I appreciate earlier the 
conversations, your hesitation to use the word ``pay'' for tax 
cuts. I am going to count it, and earners, wage earners and 
businesses pay taxes. Governments collect it. So we don't pay 
for tax cuts in that traditional term, and I appreciate you not 
using that phrase any more often than we are all subject to 
using it. We all use adjectives in an attempt to try to 
influence, to try to move people one direction or the other.
    My good colleague put up a slide earlier on job growth and 
admitted during his presentation that it was inaccurate, but he 
put it up, I guess, to try to influence it. I guess at some 
point in time it was better than it is right now.
    I would caution you in your reports for use of adjectives. 
Under economic outlook, you talk about post-solid gains, which 
is a positive adjective--this is under page five, just to make 
sure you know I read all the way to the end of your deal. Just 
be careful with your use of adjectives as you talk about things 
going up and things going down, because it is always in the eye 
of the beholder as to which is important.
    I agree with my colleague from Tennessee that the 
projections are wrong on their face most times. We can project 
next quarter. We can project pretty good this year. Who knows? 
The last 2 years, the other side has--and Mr. Berry did 
earlier--reflected back on the projections from the late 1990s 
which projected trillion dollar surpluses. Those were 
inaccurate at the time they were done, but yet we seem to have 
to cling to them as if they have some authority today. Yet they 
really don't because the circumstances on which those 
projections were based didn't turn out to be the reality we 
faced. It is not good/bad. It is just the way it is, and to 
continue to use those dated projections as some sort of an 
argument to support arguments I think is misplaced. So I agree 
with Mr. Cooper in his comments that we have got to be careful 
in how we use those.
    Broad numbers, we are currently spending about 20 percent 
of GDP on the Federal budget. Federal spending projections at 
CBO and other places show that in the next 50 years or 45 years 
growing close to 50 percent of GDP. My comment is that, at 50 
percent, you know, free market enterprise or our system of 
government, it is more of a threat to our way of life at that 
level than at almost any other thing we have got going on these 
days.
    In your judgment--you know, I don't think the Federal 
Government take half, the central government take half, and you 
and I and our families take the other half and continue to grow 
and prosper and provide the opportunities we all want to hand 
off to our grandkids. Where in your mind is the crossover? I 
think 20 percent is the gag threshold now. But where in your 
mind is Federal spending and related revenues--if we are going 
to have a balanced budget, Federal spending as a percentage of 
GDP, where do you think it is unsustainable from a free market 
system so that we then have to go to some other kind of an 
economic way of life that would sustain that continued growth? 
Where is that number in your mind?
    Mr. Orszag. I don't think that there is a single number, in 
part because how you raise revenue affects the economic 
implications. So, you know, corporate income tax is different 
from an individual income tax that is different from a value-
added tax. And we see a variety of experiences in European 
countries. In the Scandinavian countries, there has been 
relatively good overall economic performance with higher 
revenue-to-GDP ratios, but that partially reflects the mix of 
revenue that they have.
    Mr. Conaway. Did it also reflect their--okay, Scandinavian 
country with an economy of where on the scale against the 
United States? The United States is the largest economy in the 
world. Scandinavian country----
    Mr. Orszag. Tends to be small.
    Mr. Conaway. Where? Less than some of our States, I would 
argue.
    Mr. Orszag. Certainly less than California, yeah.
    Mr. Conaway. I am curious, being able to look at small 
models like that and projecting that onto an economy that is as 
large as the one we have here, if that is accurate.
    Mr. Orszag. Oh, I didn't mean to imply any----
    Mr. Conaway. Sweden, we could stand 70 percent rates here 
and spend that.
    Mr. Orszag. No, I don't mean to imply that at all. All I 
was saying is that there are countries that have relatively 
high revenue-to-GDP ratios that still experience relatively 
rapid growth, but they have particular mixes of taxes, not to 
say that that would work or it has any implications for the 
United States but just to say that the mix of revenue does 
matter.
    Mr. Conaway. All right. So you think we can sustain a 50 
percent of GDP----
    Mr. Orszag. I didn't say that.
    Mr. Conaway [continuing]. On the largest economy in the 
world, is that your statement?
    Mr. Orszag. No.
    Mr. Conaway. Okay. We are at 20 now. We are muddling along 
ever so poorly. Give me a range. Where do you think--is it 30 
percent, 35, 40? Where is it--we hit the wall, if you run a 
marathon, it is at 20 miles. Where is it that we hit the wall 
in this? I can't hold you to this, obviously. But----
    Mr. Orszag. It all depends; and, as a marathon runner, I 
know from experience that where you hit the wall, if you do, 
depends on what kind of----
    Mr. Conaway. So your testimony is, Peter, 50 percent will 
work if you have the right mix of tax collection scheme.
    Mr. Orszag. No. I do think at 50 percent of GDP--and I 
don't want to be pinned down to a specific number, but at 50 
percent of GDP there would be significant economic consequences 
from raising that much revenue as a share of GDP.
    Mr. Conaway. Okay. Just--so, in other words, reducing 
spending and related revenues--I mean, somewhere in there we 
have got a wreck.
    Mr. Orszag. Again, this goes back to where why I think we 
need to bend that health care curve. But, yes, trying to meet 
the entire projected increase in health care spending solely on 
the revenue side----
    Mr. Conaway. Government spending.
    Mr. Orszag. Government spending, but it is mostly health.
    Mr. Conaway. Yeah. But we still have to pay for national 
defense and all those other kinds of things.
    Mr. Orszag. Would involve significant adverse economic 
consequences ultimately.
    Mr. Conaway. Thank you, Mr. Chairman.
    Chairman Spratt. For her patience and forbearance, the 
gentlelady from Connecticut, Ms. DeLauro.
    Ms. DeLauro. I thank the chairman, and I want to say thank 
you to Dr Orszag. I appreciate the content of your testimony, 
the breadth of knowledge and the clarity with which you address 
the issues.
    Let me move to a different topic. I don't think it has been 
discussed, at least I haven't heard it since I have been 
sitting here; and it may be that because I have just become the 
Chair of the Agriculture Subcommittee of Appropriations that I 
am going to move in the direction of farm programs.
    Mr. Orszag. Okay.
    Ms. DeLauro. And just a couple questions in this area with 
this preface. As I understand it, and just that in terms of the 
2007 baseline, what CBO has done is to revise its cost estimate 
for the main farm support programs from what was an August, 
2006, forecast. The areas of change is in the commodity price 
programs, mandatory conservative programs, crop insurance.
    In the commodity price support program, again my 
understanding is is that there has been about a $30.8 billion 
drop in the forecast. Let me just--the drop projected 
essentially because of CBO's forecast for continued high crop 
prices over the long term that are substantially above the 
historic average in the area of corn and wheat and soybeans, 
and one of the, again, premises of this effort is the strong 
demand for corn-based ethanol.
    The question is--two questions--is what is the budget 
impact if crop prices do not maintain historically high levels? 
And in terms of past projections in a historical context here, 
what happened in the Congress's reauthorization of the 1996 
Farm Bill? Because this will impact the discussion over the 
farm bill which is coming up for reauthorization.
    Under the estimates for the 1996 bill, how long did CBO 
project crop prices to remain high? How long did it take until 
the agricultural market shifted the crop prices and crop prices 
fell? What were the results in terms of the Federal farm 
support costs?
    Mr. Orszag. So, first, with regard to the change in 
projections----
    Ms. DeLauro. What happens if we do not maintain these 
historically high?
    Mr. Orszag. If you have lower crop prices, that drives up 
the cost of the price support programs, and it also drives up 
the cost of--sorry--if we had lower prices, the price support 
programs go up in cost, and I think what we have seen in this 
baseline relative to August is, for example, higher corn prices 
and other grains prices driving down the cost of, in 
particular, the Commodity Credit Corporation, which is I think 
the roughly $30 billion reduction over 10 years that you 
referred to. If prices do not remain high and instead go, you 
know, are lower, the cost level would be higher than we 
project.
    Ms. DeLauro. Mm-hmm. But is the impact of the--let me just 
ask the question on the high price projected on the strong 
demand for corn-based ethanol, with oil prices going from $75 
to $55, any concern that that would drive down the cost for--
the demand for corn-based ethanol?
    Mr. Orszag. I would note that we do in the assumptions 
assume some sort of walking back from current pricing for a 
variety of factors, and I would also note we consult in depth 
with a variety of experts in the agricultural field in order to 
undertake these projections. So there is a little bit of 
softening in prices relative to current levels that is embedded 
in the baseline; and in the outyears, for example, the price 
per bushel for corn is somewhat lower than it is for 2007.
    But I think the underlying structural point that you noted 
is that we do see significant demand for corn coming from 
ethanol-related activities, and that is a structural change 
that is likely to keep prices higher than they would otherwise 
be in the absence of that source of demand.
    Ms. DeLauro. With what, 20 seconds left, what is, again, 
the historical perspective and what happened in 1996 and what 
were the results in terms of the Federal farm support cost?
    Mr. Orszag. Prices were projected to be relatively high at 
the time of enactment. They turned out to be lower than 
projected. The, you know, farm prices are highly cyclical. But 
I would note that, while that did happen and it may happen 
again, this underlying driver of ethanol-related demand makes 
it somewhat different than the situation we faced in the mid-
1990s.
    Ms. DeLauro. Okay. Thank you very much. Thank you, Dr. 
Orszag. Thank you, Mr. Chairman.
    Chairman Spratt. Another question?
    Mr. Scott. I did have another question, Mr. Chairman.
    Just for the record, we did find out the revenue increases 
in the 40 years prior to the Bush administration, revenues 
increased 38 of those 40 years. During the Bush administration, 
revenues decreased in each of the first 3 years of the 
administration. The records that we are using only went back to 
1938. We were unable to find any time where the revenues 
actually decreased three consecutive years.
    Chairman Spratt. The gentleman's point is so noted, and the 
record will show it.
    Dr. Orszag, we appreciate very much your being here, your 
diligence in answering these questions, and we look forward to 
working with you in particular on the analysis of the 
President's budget which will be coming on Monday. We need it 
as soon as we can possibly get it from you, because we are 
trying to get to the floor by the week after February 15, out 
of committee by the 15th and on the floor the week after. So 
that is an ambitious schedule.
    Mr. Orszag. Did you say February 15?
    Chairman Spratt. Yeah. That is too ambitious. March the 
15th.
    Mr. Orszag. You gave me a little bit of a heart attack, but 
that is fine.
    Chairman Spratt. But we hope we can have it by the 1st of 
March, if at all possible.
    Mr. Orszag. That is our goal.
    Chairman Spratt. Thank you so much and for your superb 
staff for the excellent work you do for us.
    Mr. Orszag. Thank you very much, Mr. Chairman.
    Chairman Spratt. Before we adjourn, I would like to ask 
unanimous consent, Mr. Scott, that all members be allowed to 
submit an opening statement for the record. Without objection.
    Mr. Scott. I have no objection, Mr. Chairman.
    Chairman Spratt. I would also ask unanimous consent that 
members who were not allowed--did not have the opportunity to 
ask questions be given 7 days to submit questions for the 
record.
    Thank you very much.
    [Whereupon, at 12:27 p.m., the committee was adjourned.]

                                  
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