[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]



 
                THE PRESIDENT'S FISCAL YEAR 2010 BUDGET

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


                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

             HEARING HELD IN WASHINGTON, DC, MARCH 3, 2009

                               __________

                            Serial No. 111-4

                               __________

           Printed for the use of the Committee on the Budget


                       Available on the Internet:
       http://www.gpoaccess.gov/congress/house/budget/index.html




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                        COMMITTEE ON THE BUDGET

             JOHN M. SPRATT, Jr., South Carolina, Chairman
ALLYSON Y. SCHWARTZ, Pennsylvania    PAUL RYAN, Wisconsin,
MARCY KAPTUR, Ohio                     Ranking Minority Member
XAVIER BECERRA, California           JEB HENSARLING, Texas
LLOYD DOGGETT, Texas                 SCOTT GARRETT, New Jersey
EARL BLUMENAUER, Oregon              MARIO DIAZ-BALART, Florida
MARION BERRY, Arkansas               MICHAEL K. SIMPSON, Idaho
ALLEN BOYD, Florida                  PATRICK T. McHENRY, North Carolina
JAMES P. McGOVERN, Massachusetts     CONNIE MACK, Florida
NIKI TSONGAS, Massachusetts          JOHN CAMPBELL, California
BOB ETHERIDGE, North Carolina        JIM JORDAN, Ohio
BETTY McCOLLUM, Minnesota            CYNTHIA M. LUMMIS, Wyoming
CHARLIE MELANCON, Louisiana          STEVE AUSTRIA, Ohio
JOHN A. YARMUTH, Kentucky            ROBERT B. ADERHOLT, Alabama
ROBERT E. ANDREWS, New Jersey        DEVIN NUNES, California
ROSA L. DeLAURO, Connecticut,        GREGG HARPER, Mississippi
CHET EDWARDS, Texas                  [Vacant]
ROBERT C. ``BOBBY'' SCOTT, Virginia
JAMES R. LANGEVIN, Rhode Island
RICK LARSEN, Washington
TIMOTHY H. BISHOP, New York
GWEN MOORE, Wisconsin
GERALD E. CONNOLLY, Virginia
KURT SCHRADER, Oregon

                           Professional Staff

            Thomas S. Kahn, Staff Director and Chief Counsel
                 Austin Smythe, Minority Staff Director


                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, March 3, 2009....................     1

Statement of:
    Hon. John M. Spratt, Jr., Chairman, House Committee on the 
      Budget.....................................................     1
    Hon. Paul Ryan, ranking minority member, House Committee on 
      the Budget.................................................     2
        Prepared statement of....................................     3
    Hon. Peter R. Orszag, Director, Office of Management and 
      Budget.....................................................     4
        Prepared statement of....................................     7
        Responses to questions submitted from:
            Mr. Blumenauer.......................................    66
            Mr. Etheridge........................................    69
            Mr. Langevin.........................................    70
            Mrs. Lummis..........................................    72
            Mr. McHenry..........................................    73
            Mr. Ryan.............................................    77


                THE PRESIDENT'S FISCAL YEAR 2010 BUDGET

                              ----------                              


                         TUESDAY, MARCH 3, 2009

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 11:05 a.m., in Room 
210, Cannon House Office Building, Hon. John Spratt [chairman 
of the committee] presiding.
    Present: Representatives Spratt, Schwartz, Kaptur, Becerra, 
Doggett, Blumenauer, Berry, Boyd, McGovern, Tsongas, Etheridge, 
McCollum, Melancon, Yarmuth, DeLauro, Scott, Langevin, Larsen, 
Bishop, Moore, Schrader, Ryan, Hensarling, Garrett, Diaz-
Balart, Lummis, Austria, Nunes, and Harper.
    Chairman Spratt. I will call the committee to order.
    The committee convenes today to consider the 
administration's request for a budget for the fiscal year 2010. 
President Bush has left President Obama an economy in crisis 
and a budget in deficit. Spending will overtake revenues by an 
unprecedented $1.3 trillion during this fiscal year alone. 
President Obama has responded with a budget which shows that he 
is not flinching or stalling but meeting the challenge head-on.
    The President has recognized that we have not one but two 
deficits. The first is an economy clicking on four cylinders, 
running at 6.8 percent, or $1 trillion below its full 
potential. To move our economy closer to its potential, the 
President has signed into law a package of stimulus measures 
totaling $787 billion--trillion--billion. Excuse me. We are in 
the stratosphere.
    He then turned to the budgets and, at the White House 
summit, stated his determination to cut the deficit by half by 
2013. It is almost impossible to balance a budget when the 
economy is in recession; even harder when we do what we must to 
make the economy better because it frequently makes the deficit 
worse, at least for the short run.
    But here is the stark reality that confronts us this 
morning. The deficit that President Bush left behind will 
constitute 12.3 percent of GDP. To be fair, if you simply take 
measures that are solely contributable and are confined to the 
Bush administration, it is 9 percent of the GDP. In any event, 
it is a substantial number.
    And here is President Obama's response: Over the next 4 
years, under his budget, the deficit will be pared down to 3.1 
percent, or 3 percent, of GDP in the year 2013. That is an 
ambitious goal. President Obama's budget slices the deficit by 
more than half, to $533 billion, in 5 years.
    But it is not so committed to deficit reduction that it 
overlooks other compelling needs. It takes on topics, indeed, 
that have been ignored by earlier budgets as too tough to 
tackle--climate change, health care for the 46 million who are 
uninsured--and it slows down defense spending and fixes the 
alternative minimum tax.
    Now, critics will single out instances where additional 
revenue is raised, for example by allowing certain concessions 
for upper-bracket taxpayers to expire at the end of 2010. The 
biggest picture will show that this budget leaves in place the 
middle-income tax cuts adopted in 2001 and 2003, the 10 percent 
bracket, the child tax credit, and marriage penalty relief. The 
budget indexes the alternative minimum tax to keep it from 
burdening middle-income taxpayers for whom it was never 
intended. It extends the estate tax at 2009 levels. And it 
helps working families by renewing Make Work Pay.
    More detail is needed before we can write a budget 
resolution. And, in that connection, it is important to note 
that some of the President's initiatives must be implemented 
via reserve funds yet to be funded. So this is just the 
beginning, but it is a bold beginning for the 2010 budget 
process.
    Many in Congress, myself included, are pleased to see the 
deficit decline through 2013, but we want to see it declining 
thereafter. So this is not, by any means, the end of the 
process. In the weeks ahead, I hope we can improve the budget 
in this and many other ways.
    Now, before going further with our testimony from Mr. 
Orszag, let me turn to Mr. Ryan for any statement he wishes to 
make.
    Mr. Ryan. Thank you, Chairman. And thank you for this 
hearing. I look forward to having a number of these hearings on 
this budget.
    What a week we just had last week. Let's go through it for 
a second. On Monday, we had the Fiscal Responsibility Summit. 
On Tuesday, we witnessed a very eloquent, ambitious, and even 
inspiring speech by the President of the United States, echoing 
those themes of fiscal responsibility. And on Wednesday, 
Congress passed a bloated $410 billion spending bill with 9,000 
earmarks. And on Thursday, we received the mother of all 
budgets, a truly sweeping transformation of a Federal 
Government the likes of which we have not seen since the New 
Deal.
    Finally, on Saturday, the President threw down the 
gauntlet. Rather than echoing the theme of changing the tone in 
Washington or bringing people together to forge a bipartisan 
compromise, he essentially said, you are either with me or you 
are against me. He claimed opponents of this transformative 
budget are, quote, ``tools of special interests and the 
powerful.''
    This is not changing the tone of Washington or forging a 
compromise. This is staking out an ideological conquest. It is 
playing the oldest political trick in the book, which is, if 
someone disagrees with you, impugn their motives, don't debate 
the facts, destroy their credibility, and win the argument by 
default. This power play strikes me as an incredible gamble 
with the U.S. economy and with those principles that built this 
country.
    Now, the facts surrounding this budget are disturbing. It 
proposes to bring the size of our government to its largest 
level ever since World War II. It doubles the national debt in 
8 years. During a recession it seeks to impose a $1.4 trillion 
tax in our economy--on work, on savings, investment, energy, on 
manufacturing. Even with the rosiest of economic assumptions, 
this budget never even comes close to achieving a balanced 
budget during the time we have an insolvency that goes 
permanently for Medicare and Social Security.
    But what is most distressing about this budget is that it 
takes a decidedly ideological turn away from the principles 
that built this country and built this economy toward the type 
of governing system we see in Europe that provides the kind of 
economic and social stagnation we have not seen here in 
America.
    You know, I was asked this past weekend, what can 
Republicans do about this? Candidly, Republicans, we don't have 
the votes to really do anything about this. So I guess the 
question will become this year, will all Democrats march in 
lockstep with this vision, with this type of transformation?
    Our goal, our role, our job in the minority is to give the 
American people the facts, is to give the American people the 
truth, is to give the American people a good, vigorous, and 
civilized debate over this budget and to offer them a real 
choice in alternative, how we would do things differently. And 
that is exactly what we intend to do while we have this 
vigorous debate and while we ask the tough questions.
    Thank you, Mr. Chairman.
    Chairman Spratt. Thank you, Mr. Ryan.
    Our witness this morning is no stranger to this committee. 
He served ably and well as the director of the Congressional 
Budget Office before moving on to bigger things as the director 
of the Office of Management and Budget.
    Dr. Orszag, Peter, welcome to the hearing today. Before you 
begin, let me attend to a few housekeeping details.
    I would ask unanimous consent that all members be allowed 
to submit an opening statement for the record at this point.
    [The prepared statement of Mr. Ryan follows:]

Prepared Statement of Hon. Paul Ryan, Ranking Member, Committee on the 
                                 Budget

    Transcribed from Mr. Ryan's handwritten pre-hearing notes.

    What a week we've just had.
     On Monday, we had the bipartisan ``fiscal responsibility 
summit.''
     On Tuesday, we witnessed an eloquent, ambitious, and even 
inspiring speech by the President repeating the theme of fiscal 
responsibility.
     Then on Wednesday, Congress passed a bloated $410 billion 
spending bill with 9,000 earmarks.
     And on Thursday, we received the mother of all budgets, a 
truly sweeping transformation of the federal government, the likes of 
which we have not seen since the New Deal.
     Finally, on Saturday, the President threw down the 
gauntlet. Rather than echoing the campaign theme of ``changing the tone 
in Washington * * *'' or bringing people together to forge bi-partisan 
compromise, he essentially said, ``You're either with me or against 
me.'' He claimed opponents of this transformative budget are ``tools of 
special interests and the powerful.''
     This is not changing the tone or forging compromise * * * 
this is staking out an ideological conquest.
     It's playing the oldest political trick in the book * * * 
which is, if someone disagrees with you, impugn their motives. Don't 
debate the facts. Destroy their credibility. Win the argument by 
default.
    This power play strikes me as an incredible gamble with the U.S. 
economy and with the ideals that built this country.
    The facts that surround this budget are disturbing.
     Increases government to its largest level since WWII.
     Doubles the national debt in eight years.
     Adds $1.4 trillion in new taxes on work, saving, 
investing, energy, and manufacturing.
     Even with the rosiest of economic assumptions, this budget 
never even comes close to achieving a balanced budget--all while 
Medicare and Social Security go permanently insolvent.
    But what is most disturbing about this budget is that it takes a 
decidedly ideological turn away from the principles that built this 
country and economy, and toward the type of governing system we see in 
Europe that provides the kind of economic and social stagnation we have 
not seen here before.
    I was asked this past weekend what we Republicans can do about 
this. Candidly, we don't, by ourselves, have the votes to stop this. So 
the question is, are all the Democrats in Congress going to march lock-
step in favor of this? Is this the kind of change Americans want?

    Chairman Spratt. Mr. Orszag, we welcome you to the 
committee today. The written testimony of all witnesses will be 
made part of the record, and you may summarize yours. But you 
are the only witness today, so take your time and walk us 
slowly through it so that we can get the major points.
    Thank you for coming. We look forward to what you have to 
say.

 STATEMENT OF PETER ORSZAG, DIRECTOR, OFFICE OF MANAGEMENT AND 
                             BUDGET

    Mr. Orszag. Thank you, Chairman Spratt, Mr. Ryan, members 
of the committee. I come before you at a time of great 
consequence, both for our economy and for our fiscal future. 
When the President took office on January 20th, he inherited an 
economic crisis more severe than any since the Great 
Depression.
    Over the past 13 months, 3.5 million jobs have been lost, 
the greatest number since World War II. In December and January 
alone, 1.2 million jobs were lost. The economy contracted at 
more than 6 percent on an annualized basis in the fourth 
quarter of last year. And trillions of dollars in wealth have 
been destroyed, harming workers and families on the verge of 
retirement.
    Why has this happened? A central cause was the collapse in 
credit and capital markets, itself fueled by inadequate 
oversight, insufficient disclosure, distorted incentives, and 
excessive conflicts of interest.
    But the roots do run deeper. We have lived through an era 
of irresponsibility in which we have failed to address deep 
problems in energy, education, and health care, and in which 
the primary theory of the case was that the only determinant of 
economic performance was the marginal tax rate on the wealthy 
and that the way to promote market competition was to channel 
significant subsidies to corporations.
    The result is a pair of trillion-dollar deficits. The first 
is the output gap, shown in my first slide, the gap between how 
much the economy could produce each year and how much it is 
producing each year--$1 trillion a year, both this year and 
next year. The purpose of Recovery Act was to start filling in 
that hole, jump-starting the economy and returning us to a path 
of economic growth.
    The second deficit is the budget deficit. And, as the next 
slide shows, under the policies that we are inheriting, we face 
trillion-dollar deficits out over time. And let me just pause 
and recognize that the influence of the economic crisis itself, 
over this year and next year combined, amounts to $2 trillion 
for the budget deficit. That comes from $600 billion that 
reflects a weaker economy, which drives down revenue and drives 
up spending on things like unemployment insurance; $650 billion 
in the steps that have been necessary so far and that may 
become necessary to address instability in our financial 
markets; and the $787 billion Recovery Act, which, as I already 
noted, was intended to start filling in that output gap.
    Looking forward, we must change course. If we don't adopt 
the policies that are in this budget, the budget deficit over 
the next decade will be $2 trillion higher and we will not have 
addressed problems in our energy market, in our educational 
system, and in our health care system.
    So let me be a little bit more specific about the budget.
    First, the budget starts by giving an honest depiction of 
where we stand. We do not play the budget games that have been 
embodied in previous budgets, in which you assume that the 
Nation will never again face a hurricane or disaster; in which 
you assume that the alternative minimum tax will gradually 
overwhelm the Tax Code; in which you assume that Medicare 
physician payments will be reduced by 20 percent and yet 
Medicare beneficiaries will still somehow have the opportunity 
to see their doctors; in which you assume that the cost of a 
war will immediately disappear. All in, the budget includes 
$2.7 trillion in costs over the next decade that would have 
been excluded from previous budgets. That sets a high bar, but 
it is an honest bar.
    With the scope of the problem recognized, the budget then 
starts the hard process of reducing those deficits, as the next 
chart shows. In particular, we cut the deficit in half by the 
end of President's first term. Where does that deficit 
reduction come from? It comes from four sources.
    First, eventually the economy will recover, and that does 
help to reduce the budget deficit. Second, winding down the war 
will reduce costs. Third, we do seek after 2011 to restore some 
balance to the Tax Code, and that brings in additional revenue. 
And, finally, we take a variety of steps to improve the 
efficiency of government, for example, by eliminating 
unwarranted subsidies to middlemen on educational loans and by 
improving program integrity so that the right person gets the 
right benefit at the right time. Those two steps alone reduce 
the deficit by $100 billion over the next decade.
    Contrary to the analysis of many pundits, this budget is 
not a big-spending budget. Unlike what has occurred in the 
past, we pay for our initiatives in energy, in education, and 
in health care. Furthermore, if you look at non-defense 
discretionary spending--that is the basic operations of the 
government--relative to the economy, which is shown on the next 
slide, that spending, non-defense discretionary spending, as a 
share of the economy is projected to be 4.1 percent of the 
economy this year. Under our budget, it would average 3.6 
percent over the next decade. And by the end of the budget 
window, it would reach 3.1 percent of GDP, the lowest since the 
data begin in 1962. This is simply not a big-spending 
budgeting.
    We do, however, reorient our priorities towards long-term 
economic efficiency and productivity in energy, education, and 
especially in health care.
    First, on energy: The budget includes $15 billion a year in 
investments to reduce our dependence on foreign oil and improve 
energy efficiency. To finance that along with tax relief in a 
fiscally responsible manner, the budget proposes a market-
friendly cap-and-trade program on greenhouse gas emissions, 
which will not only raise revenue but also help to address a 
key threat to our planet.
    In education, the budget invests substantial resources in 
early education, since all of the evidence suggests that that 
has significant payoff, and also works to improve college 
access, both by providing more solid funding for the Pell Grant 
Program, continuing the American Opportunity college tax 
credit, and simplifying the application process so that more 
students can aspire to college and not face unwarranted 
obstacles in obtaining assistance to attend college.
    Finally, let me turn to health care. As the next slide 
shows, and as you have probably seen me repeat over and over 
again, health care is the key to our fiscal future. I think 
that chart illustrates it. The light blue area of the curve is 
Medicare and Medicaid. It is obvious from that graph that the 
thing driving our long-term fiscal issue is the rate at which 
health care costs grow.
    Health care costs, though, are not only a fiscal issue, 
they also affect workers, reducing workers' take-home pay 
already to a degree that I think is under-appreciated and 
unnecessarily large, and also imposes burdens on State 
governments. For example, rising health care costs are crowding 
out State support for higher education, which, in turn, is 
raising tuition and forcing painful cutbacks at public 
universities.
    The Recovery Act starts the process of health care reform, 
and there are very substantial opportunities to reduce health 
care costs without harming health outcomes. I want to turn to 
the next slide, which illustrates that point.
    We have very substantial variation in how much health care 
costs across different parts of the United States, with the 
darker areas of the country having much higher cost per 
beneficiary than the lighter areas, for reasons that one cannot 
explain based on the severity of the conditions facing patients 
in those areas or the cost of building a hospital or the 
salaries for doctors. Rather, what varies is the intensity of 
treatment for the same type of condition across different parts 
of the United States.
    And the kicker is that the more-intense, higher-cost 
approaches don't seem to generate better outcomes than the 
less-intrusive, less-costly approaches. Researchers at 
Dartmouth College suggest that as much as $700 billion a year 
in health care costs could be eliminated from the system 
without harming health outcomes if we could move the parts of 
the country where medicine is practiced in the higher-cost ways 
towards the practice norms in the lower-cost areas of the 
country.
    The Recovery Act starts the process that will be necessary 
to capture that opportunity and invests heavily in health 
information technology; in comparative effectiveness, which 
measures what works and what doesn't; and in prevention and 
wellness.
    The budget built upon that by creating a $634 billion 
reserve fund as a downpayment on further health care reform, 
half of which comes from efficiencies in the health system 
itself, including moving to a competitive bidding process for 
the private plans--Medicare Advantage plans--that cover 
Medicare beneficiaries and that, the evidence suggests, costs 
Medicare $1,000 more per beneficiary than covering those same 
beneficiaries under the traditional Medicare system.
    Now, some say that health reform is a luxury we can't 
afford now. As I have been saying for a long time, I say that 
reducing costs and improving quality in health care is a 
necessity that we need to act upon this year. None of this is 
going to be easy, whether it is in education, in energy, in 
health care, responsibly reducing the deficit in an honest way 
over the medium term. But, as the country music singer Toby 
Keith once put it, ``There ain't no right way to do the wrong 
thing.'' And this budget reflects that notion. In being honest 
and reducing our medium-term deficit by $2 trillion and 
investing in education and energy and in moving toward a more 
efficient health care system with lower costs and higher 
quality, I hope you will all work with us to do the right 
thing.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Peter Orszag follows:]

    Prepared Statement of Hon. Peter R. Orszag, Director, Office of 
                         Management and Budget

    Chairman Spratt, Ranking Member Ryan, and Members of the Committee, 
thank you for giving me the opportunity to discuss the President's 
Fiscal Year 2010 Budget.
                           executive summary
    My full written statement delves into the details, but before we 
turn to those specifics let me step back and provide a broader overview 
of where we stand and where we need to go.
    When the President took office on January 20th of this year, his 
Administration inherited an economic crisis unlike any we have seen 
since the Great Depression. Over three and a half million jobs were 
lost over the past 13 months, more than at any time since World War II. 
In December 2008 and January 2009 alone, nearly 1.2 million people lost 
their jobs. Manufacturing employment has hit a 60-year low. Our capital 
markets are virtually frozen, making it difficult for businesses to 
grow and for families to borrow money to afford a home or college 
education for their kids. Trillions of dollars in wealth have been 
wiped out, leaving many families with little or nothing as they 
approach their retirement years.
    A central cause of this economic crisis has been a meltdown in our 
credit and capital markets--one fueled by years of inadequate 
oversight, insufficient disclosure, and excessive conflicts of interest 
among market gatekeepers. But the problems in our markets are not the 
only cause of the current crisis. The roots run deeper.
    We have arrived at this point because of an era of profound 
irresponsibility--in which we threw fiscal caution to the wind and ran 
up trillions of dollars in debt * * * in which the tax code was used to 
exacerbate income and wealth disparities, not mitigate them * * * and 
in which we failed to confront the deep, systemic problems that over 
time have only become a larger drag on our economic growth--from the 
rising costs of health care to the state of our schools, from how we 
power our economy to our crumbling infrastructure.
    The result is a pair of twin deficits, each in the range of $1 
trillion per year. The first trillion dollar deficit is the gap between 
how much the economy has the potential to produce and how much it is 
actually producing each year. This output gap of roughly $1 trillion in 
2009 would represent nearly 7 percent of the estimated potential output 
of the economy. This gap is why it was so necessary that Congress 
passed the American Recovery and Reinvestment Act, in order to start 
filling this hole, to put Americans back to work, and to jumpstart the 
economy.
    The other trillion-dollar deficit is the budget deficits we are 
inheriting. Over the last eight years, our national debt nearly 
doubled. The record surplus that was inherited by the previous 
Administration turned into a post-war record budget deficit. So let's 
be clear: the Obama Administration was faced with a $1.3 trillion 
deficit when we walked in the door.
    We project that the deficit for the current fiscal year, including 
the recovery and stability plans, will be $1.75 trillion, or 12.3 
percent of GDP. Of that, $1.3 trillion, or 9.2 percent of GDP, was 
already in place when we assumed office.
    The President is determined to cut this $1.3 trillion deficit by at 
least half in four years. This would bring the deficit down to $533 
billion by fiscal year 2013. More importantly, it would reduce the 
deficit to about 3 percent of GDP.
    The economic crisis we faced when taking office has made our fiscal 
situation, dramatically and quickly, much worse--raising the budget 
deficit we are inheriting by a total of about $2 trillion for this year 
and next year.
     The weak economy, by reducing revenue collected and 
expanding the budget's automatic stabilizers (such as unemployment 
insurance), expands the deficit by more than $600 billion.
     Because of problems in financial markets, the costs of 
stabilization may amount to $650 billion or more--including the 
placeholder should additional efforts prove necessary to address the 
crisis we have inherited.
     To combat the recession, we had to act--through the $787 
billion Recovery Act--to jumpstart job creation and growth.
    Without the change in policies contained in the budget, our budget 
deficits would be another $2 trillion bigger over the next decade--and 
we wouldn't have begun to make the investments in American-made, 
alternative energy; better education; and more efficient and higher 
quality health care that are crucial to long-term economic and fiscal 
sustainability.
    Let me be clear: there are two paths that our country can take. We 
can continue the policies of the past--dig an even deeper fiscal hole 
and once more put off the critical investments needed for long-term 
economic growth. Or we can reduce the deficit by $2 trillion over the 
next decade, cut the deficit inherited by this Administration in half 
by the end of the President's first term, and make needed investments 
in clean energy, affordable health care, and world-class schools.
    In his budget overview, the President laid out his way forward for 
our nation.
    It begins with presenting an honest budget--one that is 
straightforward with the American people about the fiscal challenges we 
face. That's why we include the likely future costs of the wars in Iraq 
and Afghanistan and other possible overseas military operations, the 
cost of fixing the AMT each year, and reimbursements to Medicare 
physicians. We offer a 10-year rather than a five-year look into our 
fiscal situation, and we budget for the possibility that there may be a 
hurricane, earthquake, flood, or other disaster sometime over the next 
decade.
    This honesty comes at a cost--$2.7 trillion or more over 10 years 
on our bottom line. But it's critical to begin tackling our fiscal 
challenges.
    With the scope of the problem recognized, the President's budget 
reduces our medium-term deficits to a sustainable level through both 
spending restraint and rebalancing of our tax code. And it addresses 
health care, the key to our longer-term fiscal future.
    Broadly speaking, the medium-term deficit reduction comes from 
responsibly winding down the war in Iraq and reforms to the defense 
acquisition and procurement system; restoring balance to the tax code 
by returning to the pre-2001 tax rates for families making more than a 
quarter of a million dollars a year (while giving 95 percent of working 
families a tax cut), closing loopholes, and eliminating subsidies to 
special interests; and improving the efficiency of government.
    Contrary to the instant analysis of many pundits, this is a budget 
that entails substantial spending restraint. Unlike what's occurred in 
the past, we make sure that we pay for new initiatives. And the budget 
reduces non-defense discretionary spending--that is, the spending 
appropriated each year outside of defense--to its lowest level as a 
share of GDP since data began to be collected in 1962.
    Let me underscore this last point. The average level of non-defense 
discretionary spending between 1969 and 2008 was 3.8 percent of GDP. In 
2009, such spending is estimated to represent 4.1 percent of GDP.
    The President's budget proposes a gradual reduction of this non-
defense discretionary spending as a share of economy. Spending averages 
3.6 percent of GDP over the next decade and declines to 3.1 percent by 
the end of the 10-year budget window.
    Over the longer term, however, the single most important step we 
could take to put the nation back on a path to fiscal responsibility is 
to address rising health care costs. As I have said before, health care 
is the key to our fiscal future. We cannot afford inaction.
    That's why in the Recovery Act the President began the process that 
will rein in health care costs with significant investments toward 
computerizing America's health care records, accelerating comparative 
effectiveness research, and scaling up prevention and wellness 
programs. All of these will help move us toward a health system with 
lower costs and higher quality.
    In this budget, the President builds on these investments with a 
major commitment of $634 billion over 10 years to serve as a down 
payment for comprehensive health care reform. This reserve fund is 
financed half through walking back (to Reagan Administration levels) 
the itemized tax deductions allowed for families with incomes more than 
a quarter of a million dollars, and roughly half through efficiencies 
and savings from Medicare and Medicaid.
    We must act now to begin the process of bending the curve on health 
care costs, and over time, realizing substantial savings for our 
nation--and improvements in health care quality and outcomes.
    Health care is just one of three critical areas that for too long 
have been neglected and are deserving of significant investment now in 
order to create economic growth in years to come. The others are clean 
energy and education--and this budget makes significant investments in 
both.
    The budget invests $15 billion a year to reduce our dependence on 
foreign oil and improve energy efficiency. It finances those 
investments, along with tax relief for consumers, through a market-
based cap-and-trade system to reduce greenhouse gas emissions.
    The budget also makes important investments in our most precious 
resource--our people--through a major new commitment to early childhood 
education, scaling up innovative new programs in our schools, and in 
improving college access for all our children. We can save almost $50 
billion over the next decade by ending inefficient subsidies for 
student loan lenders. The budget would also invest in making college 
more accessible, by making the $2500 American Opportunity Tax Cut 
permanent, increasing the size of Pell Grants and putting the program 
on more solid footing, and simplifying the application process. These 
steps will help us reach the President's goal of having the United 
States lead the world in the proportion of college graduates by 2020.
    Some may say that now is not the time to make these investments--
that our fiscal and economic situation is too precarious. I share their 
concern about the fiscal health of our nation--and the President does 
as well. As he has said repeatedly, part of our long-term economic 
security is how we handle these deep, fiscal challenges--and we are 
already taking aggressive action to meet that challenge.
    . But the bottom line is that that we simply cannot afford to stay 
on the course that we've been on. If we do not begin to address the 
high costs of health care, our families will continue to be squeezed, 
our businesses will have trouble competing, and our nation will remain 
on an unsustainable fiscal path. If we do not invest in education and 
clean energy, our prospects for long-term economic growth will be 
diminished. And if we do not make government more efficient, we will 
continue to waste the precious resources we do have.
    It'll take time to work through the challenges we have inherited--
and change doesn't come easy. But as in most difficulties in life, we 
must adapt, adjust, and overcome. I am confident that if we confront 
our problems honestly and take responsibility for our future, our 
nation will rebuild, recover, and emerge stronger than ever.
              a pair of trillion dollar inherited deficits
    I come before the Committee at a time of great peril for our 
economy and for our nation's fiscal future. The new Administration has 
inherited an economic crisis unlike any we have seen in our lifetimes. 
Our economy is in a deep recession, which threatens to be more severe 
than any since the Great Depression. More than three and a half million 
jobs were lost over the past 13 months, more than at any time since 
World War II. In addition, another 8.8 million Americans are under-
employed. Manufacturing employment has hit a 60-year low. Our capital 
markets are virtually frozen, making it difficult for businesses to 
grow and for families to borrow money to afford a home, car, or college 
education for their kids. Trillions of dollars of wealth have been 
wiped out, leaving many workers with little or nothing as they approach 
retirement.
    The result of this bleak economic picture, as well as the misplaced 
policy priorities of previous years, is a pair of twin deficits, each 
in the range of $1 trillion per year. The first trillion dollar deficit 
is the gap between how much the economy has the potential to produce 
and how much it is actually producing each year. This output gap of 
roughly $1 trillion in 2009 would represent nearly 7 percent of the 
estimated potential output of the economy. This gap is why it was so 
necessary that Congress passed the American Recovery and Reinvestment 
Act, to start filling this hole and jumpstart the economy through 
fiscal stimulus that increases short-term demand for goods and 
services.
    Because fiscal stimulus boosts aggregate demand through increases 
in government spending or reductions in taxes, such policies raise 
budget deficits in the short term. That effect is desirable because it 
reflects the delivery of increased aggregate demand to the economy. 
Contemporaneous changes elsewhere in the Budget--tax increases or 
reductions in spending--designed to offset these short-term deficit 
effects would be counterproductive, because they would reduce or 
eliminate the stimulative effect. During an economic downturn, the key 
to economic growth is the demand for the goods and services the economy 
could produce with existing capacity--and in that situation, temporary 
increases in the deficit are necessary to put the economy back on 
track.
    As the economy recovers, however, the effect of deficits on the 
economy reverses. At that point, the key to economic growth switches 
from boosting demand for goods and services (so existing capacity is 
fully used) to increasing the rate at which we expand the capacity for 
producing goods and services. Large budget deficits become harmful in 
this situation because they entail some combination of reduced funds 
available to finance domestic investment or increased borrowing from 
abroad to finance that domestic investment. Either way, budget deficits 
reduce future national income--either because the nation does not have 
as much productivity-enhancing capital in the future or because we owe 
larger liabilities to foreign creditors. In the extreme, sustained 
deficits could seriously harm the economy. Large deficits would also 
limit our maneuvering room to handle crises in the future.
    This brings me to the second trillion dollar deficit that the new 
Administration is inheriting. Under current policies, we face fiscal 
deficits of almost $1 trillion a year on average over the coming 
decade. OMB projects that the baseline deficit for FY 2009 will be 
about $1.5 trillion, or 10.6 percent of GDP. Over the ten-year budget 
window, from FY 2010 to FY 2019, aggregate baseline budget deficits 
will total nearly $9.0 trillion and average almost 5 percent of GDP. 
Over longer periods of time, the deficit reaches even higher shares of 
GDP primarily because of rising health care costs.
    Over the medium to long term, the nation is thus on an 
unsustainable fiscal course. We need to act, both to address the 
dramatic shortfall in national output in the near term and to tackle 
the medium- and long-term deficits that would ultimately become a drain 
on the nation's potential for economic growth. The Recovery Act that 
Congress passed a few weeks ago was a bold and important first step 
toward addressing the first of the twin deficits we inherited. I will 
spend the remainder of my time today talking about the Administration's 
plans, detailed in the President's Budget, for dealing with the second 
of these inherited deficits, along with a few of the key investments 
the Budget would make in the nation's economic future.
                       return to honest budgeting
    The first step in addressing our nation's fiscal problems is to be 
honest about them. Too often in the past several years, budget tricks 
were used to make the government's books seem stronger than they 
actually were. If this Budget used the gimmicks employed in recent 
budgets, it would show a bottom line that would appear about $2.7 
trillion better over ten years. Instead, the Budget acknowledges 
additional deficits of about $230 billion, or about 1.3 percent of GDP, 
in 2013 alone--deficits that previous budgets would have simply 
pretended didn't exist. Appearances can be deceiving, and omitting 
likely future costs is an accounting trick, not reality.
    Unless we are straightforward about the scope and scale of our 
nation's medium- and long-term fiscal problems, we cannot hope to reach 
agreement on a plan for solving them. As a result, the President's 
Budget returns the Nation to an honest budget footing by recognizing, 
rather than omitting, an array of future Federal government costs. 
Among these are:\1\
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    \1\ The following cost estimates include interest expenditures; in 
addition, the estimate for the AMT policy assumes extension of the 2001 
and 2003 tax cuts.
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     Including the likely future costs of overseas contingency 
operations. Our Budget includes funding over ten years for overseas 
contingency operations, raising projected deficits by about $580 
billion over the next ten years compared to the treatment in prior 
budgets. These prior budgets generally did not assume any funding for 
overseas contingency operations in the out-years. We include estimated 
costs of these operations in the out-years to be fiscally conservative, 
but they do not reflect any specific policy decisions. Several strategy 
reviews are underway that will inform out-year costs, and it would be 
premature at this time to prejudge those reviews.
     Indexing fully the alternative minimum tax for inflation 
rather than assuming that AMT relief will suddenly expire. Our Budget 
includes an AMT fix in all years, raising projected deficits by about 
$1.4 trillion over the coming decade. In contrast, past budgets have 
generally included AMT fixes for only the current year. Almost everyone 
agrees, however, that policymakers will not allow the AMT to take over 
the tax over time, and our Budget reflects that reality rather than 
pretending it does not exist.
     Incorporating reimbursements to Medicare physicians, 
without assuming deep and sudden cuts in those payments. Our Budget 
includes the Administration's best estimate of future SGR relief given 
the agreed-to fixes for Medicare physician reimbursement in past years. 
As a result, projected deficits are about $400 billion higher over the 
next ten years than they would otherwise be. In contrast, past budgets 
accounted for no SGR relief in any years. (Although our Budget baseline 
reflects our best estimate of future SGR relief given past policy 
actions on SGR, as discussed below we are not asserting that this 
should be the future policy and we recognize that we need to move 
toward a system in which doctors face stronger incentives for providing 
high-quality care rather than simply more care.)
     Recognizing the statistical likelihood of Federal costs 
for natural disasters instead of assuming that there will be no such 
costs. Our Budget accounts for the statistical probability of Federal 
government costs for future disasters, raising our projected deficits 
by more than $270 billion over the coming decade. Recent budgets 
generally did not assume that there would be such costs over the budget 
window.
     Offering a ten-year rather than five-year look into our 
fiscal situation. Our Budget uses a ten-year budget window. With the 
baby boom generation moving into retirement, slowly at first but more 
rapidly as the years pass, the costs of Medicare and Social Security 
will increase with time. For that reason, a ten-year view of the budget 
gives a better sense of the effect of the budget on the long-term 
fiscal picture than a five-year view. Recent budgets employed only a 
five-year budget window.
                the long-term fiscal gap and health care
    The principal driver of our nation's long-term budget problem is 
rising health care costs. If costs per enrollee in our two main Federal 
health care programs, Medicare and Medicaid, grow at the same rate as 
they have for the past 40 years, those two programs will increase from 
about 5 percent of GDP today to about 20 percent by 2050. (As the 
Congressional Budget Office (CBO) and others have noted, there are 
reasons to expect cost growth to slow in the future relative to the 
past even in the absence of policy changes. But the point remains that 
reasonable projections of health care cost growth under current 
policies shows that they are the central cause of the nation's long-
term fiscal imbalance.) Many of the other factors that will play a role 
in determining future fiscal conditions--including the actuarial 
deficit in Social Security--pale by comparison over the long term with 
the impact of cost growth in the Federal government health insurance 
programs. Health care is the key to our nation's fiscal future, and 
health care reform is entitlement reform.
    The Administration has signaled its understanding of health care's 
centrality to our nation's fiscal future through its actions in its 
first weeks and through the submission of this Budget. Two weeks ago, 
the President signed the American Recovery and Reinvestment Act, which 
devotes resources now to develop the infrastructure for lowering health 
spending in the long run, including key investments in computerizing 
medical records, comparative effectiveness research, and prevention and 
wellness interventions.
    To build on these steps, the President's Budget sets aside a 
reserve fund of more than $630 billion over 10 years dedicated to 
financing reforms to the American health care system. While a very 
large amount of money and a major commitment, the Administration 
recognizes that $630 billion is not sufficient to fully fund 
comprehensive reform. But this is a first crucial step in that effort, 
and we are committed to working with Congress to find additional 
resources to devote to health care reform. The Administration will 
explore all serious ideas that, in a fiscally responsible manner, 
achieve the common goals of constraining costs, expanding access, and 
improving quality.
    Although reforming health care is the key to our nation's fiscal 
future, other programs--including Social Security--do contribute to our 
long-term deficit. The long-term shortfall in Social Security, though, 
is modest relative to the possible effect of health care on the budget. 
As I just mentioned, if costs per enrollee in Medicare and Medicaid, 
grow at the same rate as they have in the last four decades, the costs 
associated with these two programs would increase by 15 percentage 
points of GDP--rising from 5 percent of GDP today to about 20 percent 
by 2050. By comparison, the cost of Social Security benefits is 
expected to increase by 1.5 percentage points of GDP over this same 
period, according to the Social Security actuaries, and the system, 
without any changes, is expected to be able to pay full benefits 
through 2041. After we reform health care, the Administration looks 
forward to working with Congress to strengthen Social Security's 
finances.
                        health care reserve fund
    The $630 billion reserve fund is financed roughly 50-50 between a 
combination of re-balancing the tax code so that the wealthiest pay 
more and specific health care savings in three areas: promoting 
efficiency and accountability, aligning incentives toward quality, and 
encouraging shared responsibility.
    Lowering health care costs and expanding health insurance coverage 
will require additional revenue. The Budget includes a proposal to 
limit the tax rate at which high-income taxpayers can take itemized 
deductions to 28 percent. The initial reserve fund would be about half 
funded through this provision, which would raise $318 billion over 10 
years. In the health reform policy discussions that have taken place 
over the past few years, a wide range of other revenue options have 
been discussed--and these options are all worthy of serious discussion 
as the Administration works with Congress to enact health care reform.
    On the savings side, the Budget proposes health savings for the 
reserve fund that would total $316 billion over 10 years, which would 
simultaneously help to improve the quality and efficiency of health 
care without negatively affecting the care Americans receive. These 
savings include:
     Reducing Medicare overpayments to private insurers through 
competitive payments. Under current law, Medicare pays Medicare 
Advantage plans 14 percent more on average than what Medicare spends 
for beneficiaries enrolled in the traditional fee-for-service program. 
This is because the current system bases payments on administratively 
determined benchmarks that are set well above the cost of providing 
fee-for-service Medicare benefits. Medicare pays roughly $1,000 per 
beneficiary more each year as a result, and MedPAC estimates that the 
Federal government pays $1.30 for each $1.00 increase in Medicare 
Advantage supplementary benefits. Even with these subsidies, the 
evidence suggests that Medicare Advantage does not provide better 
quality of care.
    The Budget would replace the current mechanism used to establish 
payments with a new competitive system in which payments would be based 
upon an average of plans' bids submitted to Medicare. The 
Administration's proposal would better align plan payments with the 
actual cost of coverage. This would allow the market, not Medicare, to 
set the reimbursement limits. This is similar to the process used for 
establishing payments for the Medicare Part D drug benefit. Our 
proposal would save taxpayers more than $175 billion over 10 years as 
well as reduce Part B premiums.
     Reducing drug prices. The Budget would accelerate access 
to affordable generic biologic drugs through the establishment of a 
workable regulatory, scientific, and legal pathway for generic versions 
of biologic drugs. To retain incentives for the research and 
development of breakthrough products, a period of exclusivity would be 
guaranteed for the original innovator product, which is generally 
consistent with the principles in the Hatch-Waxman law for traditional 
products. Brand biologic manufacturers would also be prohibited from 
reformulating existing products into new products to restart the 
exclusivity process, a process known as ever-greening. Furthermore, the 
Administration would prevent drug companies from blocking generic drugs 
from consumers by prohibiting anticompetitive agreements and collusion 
between brand name and generic drug manufacturers intended to keep 
generic drugs off the market.
    In addition, the Budget would bring down the drug costs of Medicaid 
by increasing the Medicaid drug rebate for brand-name drugs from 15.1 
percent to 22.1 percent of the Average Manufacturer Price, applying the 
additional rebate to new drug formulations, and allowing states to 
collect rebates on drugs provided through Medicaid managed care 
organizations.
     Improving Medicare and Medicaid payment accuracy. The 
Government Accountability Office (GAO) has labeled Medicare as ``high-
risk'' due to the billions of dollars lost to overpayments and fraud 
each year. The Budget proposes $311 million in FY 2010 for program 
integrity activities for the Centers for Medicare and Medicaid Services 
(CMS) initially targeted to remedy the vulnerabilities in Medicare and 
Medicaid, including Medicare Advantage (MA) and the prescription drug 
benefit (Part D). CMS will be able to respond more rapidly to emerging 
program integrity vulnerabilities across these programs through an 
increased capacity to identify excessive payments and new processes for 
identifying and correcting problems. With this additional funding, CMS 
will be better able to minimize inappropriate payments, close 
loopholes, and provide better value for program expenditures to 
beneficiaries and taxpayers.
     Improving care after hospitalizations and reducing 
hospital readmission rates. Nearly 18 percent of hospitalizations of 
Medicare beneficiaries result in the readmission of patients who have 
been discharged from the hospital within the last 30 days. Sometimes 
such readmissions cannot be prevented, but many are avoidable. Under 
the policy in the Budget, hospitals would receive bundled payments that 
cover not just hospitalization, but care from certain post-acute 
providers for the 30 days after hospitalization, and hospitals with 
high rates of readmission would be paid less if patients are re-
admitted to the hospital within that 30-day period. This combination of 
incentives and penalties should lead to better care after a hospital 
stay and result in fewer readmissions--saving roughly $26 billion of 
wasted money over 10 years.
     Expanding the Hospital Quality Improvement Program. The 
health care system tends to pay for the quantity of services delivered, 
not their quality. Experts have recommended that hospitals and doctors 
be paid based on delivering high quality care, or what is called ``pay 
for performance.'' The Budget proposes to link a portion of Medicare 
payments for acute inpatient hospital services to hospitals' 
performance on specific quality measures. This program would improve 
the quality of care delivered to Medicare beneficiaries and is 
estimated to save more than $12 billion over 10 years.
               long-term containment of health care costs
    By identifying specific health savings for the health care reserve 
fund, the Administration is making a down payment on expanding health 
care coverage to all Americans and also on containing the growth in 
health care costs required to restore long-run balance to the nation's 
fiscal outlook.
    Yet there are additional steps that can be taken to address the 
fundamental inefficiencies of our nation's health care system. Across 
the country, health care costs vary substantially from region to 
region, and yet higher-cost areas do not generate better health 
outcomes than lower-cost areas. Even among our Nation's leading medical 
centers, costs vary significantly--with costs at some centers twice as 
high as others--but higher-cost centers do not achieve higher quality 
than lower-cost centers. Some researchers believe health care costs 
could be reduced by a stunning 30 percent--or about $700 billion a 
year--without harming quality if we moved as a Nation toward the proven 
and successful practices adopted by lower-cost areas and hospitals.
    Capturing this opportunity would help to boost family take-home pay 
and put the Nation on a sounder fiscal path. It will require expanding 
the use of health information technology, more aggressively studying 
what works and what doesn't, promoting prevention and healthy living, 
and experimenting with different payment systems to health care 
providers.
    The Administration is committed to bringing about these reforms in 
order to slow health-care cost growth over the long run and has already 
initiated many of them through the Recovery Act, including 
computerizing America's health records in five years, developing and 
disseminating information on effective medical interventions, investing 
in prevention and wellness, and reforming the physician payment system 
to improve quality and efficiency.
                     medium-term deficit reduction
    The health care reforms I have described will reduce the growth of 
health care costs over time, and thus address the most important 
contributor to the Nation's long-term fiscal shortfall. These changes 
will take time, however. In the meanwhile, we also need to begin making 
the hard choices that will, as the economy recovers, reduce deficits in 
the medium term.
    Without using the gimmicks of previous budget proposals, the Budget 
cuts in half, by the end of the President's first term, the deficit 
this Administration inherited when it took office. Over the next four 
years, the deficit would fall to about three percent of GDP under the 
Administration's policies and remain stable through the remainder of 
the coming decade. The Budget reaches this path by proposing policies 
that pare back deficits by a total of $2.0 trillion over the next ten 
years. This brings us to a sustainable and realistic fiscal course for 
the coming decade.
    The Budget features four main deficit reduction mechanisms:
     First, economic recovery, aided substantially by the 
Recovery Act, will help to reduce deficits by automatically dampening 
spending in safety net programs and raising revenues.
     Second, the Budget would return fairness to the tax system 
by closing tax loopholes, eliminating subsidies for special interests, 
enhancing enforcement, and returning to the pre-2001 tax rates for 
high-income families making more than $250,000 per year.
     Third, the Budget reflects savings from responsibly 
redeploying our military forces engaged in overseas contingency 
operations, as well as reforms that would allow us to get more for the 
money spent on defending the nation.
     Finally, the Budget includes significant spending 
constraints and puts the nation on a path to reducing non-defense 
discretionary spending as a share of GDP. The average level of NDD 
spending between 1969 and 2008 was 3.8 percent of GDP. In contrast, the 
President's Budget proposes a gradual reduction in NDD spending as a 
share of the economy. Such spending averages 3.6 percent of GDP from 
2010 to 2019 and declines to 3.1 percent by the end of the budget 
window--the lowest since the government began collecting the data in 
1962.
    These measures facilitate some key investments in productivity-
enhancing areas like education and infrastructure (discussed later in 
this testimony) while also producing a net deficit reduction of $2 
trillion over the next decade.
    I will now discuss a number of these sources of deficit reduction 
in greater detail.
                  returning fairness to the tax system
    The Budget returns fairness and balance to the tax system. While 
providing tax cuts to 95 percent of working families, the Budget raises 
additional revenue from the corporations and individuals most able to 
pay.
    After year upon year of tax reductions that disproportionately 
benefited the wealthiest Americans, we have been left with a tax system 
that is insufficient to meet national needs. Under current policies, 
even after the economy recovers, revenue would be below its 1990s 
average--despite rising health care costs and other new burdens the 
government faces. After the end of the recession, the Budget therefore 
raises revenue to a level that, as a share of GDP, is still lower than 
in the latter half of the 1990s. The Budget includes the following 
revenue proposals:
     Allowing the 2001 and 2003 tax cuts to expire for high-
income Americans. The Budget proposes allowing most of the 2001 and 
2003 tax cuts to expire in 2011, as scheduled, for couples making more 
than $250,000 and individuals making more than $200,000 per year. 
Additional revenues gained would be devoted to deficit reduction. These 
tax cuts were both unaffordable and unfair at the time they were 
enacted, and remain so today. This Budget would simply return the 
marginal tax rates for these wealthiest Americans to what they were 
prior to 2001. Altogether, allowing these tax cuts to expire would 
reduce the deficit by about $750 billion over the next ten years 
relative to current policy.
     Eliminating tax subsidies for corporations and high-income 
individuals. The current tax system is undermined by subsidies that 
benefit only narrow and often well-heeled interest groups. The 
President's Budget would eliminate a range of such subsidies. The 
Budget proposes to do away with tax subsidies for oil and gas companies 
described further below and to no longer allow the managers of private 
equity and other partnerships to enjoy a low capital gains rate on part 
of their labor income--instead, treating their compensation like other 
forms of compensation. Further, the Budget lays the groundwork for 
reforming our tax code so multinational corporations pay taxes more 
like domestic companies, rather than being able to defer taxation of 
profits earned by their subsidiaries.
     Closing tax loopholes for oil and gas companies. The 
Budget proposes the elimination, starting in 2011, of an array of tax 
advantages for domestic oil and gas producers. Although the 
Administration supports the responsible production of oil and natural 
gas as part of a comprehensive energy strategy, excessive government 
subsidies distort market signals and slow the transition of the economy 
from fossil fuels to clean, renewable sources of energy. (To take just 
one example, the Administration proposes to repeal the expensing of 
intangible drilling costs such as labor, chemicals, and grease. Under 
the existing provision, if $80,000 of a $100,000 investment in an oil 
well were spent on intangible drilling costs, that $80,000 could be 
immediately written off by a producer, rather than amortized over the 
life of the asset, as would be the rule for the costs of labor and 
materials used to build a factory, for example.)
     Enhancing enforcement. According to the latest estimate, 
the net tax gap--the gap between what corporations and individuals owe 
under the tax law and what they paid either voluntarily or as a result 
of enforcement actions--stands at nearly 3 percent of GDP. To give a 
sense for the magnitude of this number: This is nearly five times what 
the Federal government spends each year on veterans and about equal to 
what it currently spends on Medicare. We can and must do better than 
this.
    This Budget proposes measures that would enhance enforcement, 
making more corporations and individuals pay the taxes they already owe 
under current law. For instance, the Budget would attack sham tax 
transactions by codifying the principle that corporations and 
individuals cannot avoid paying taxes by engaging in transactions for 
no other reason than to lower their tax liability. It would also 
require increased reporting of rental payments to the IRS so this 
income is properly reported by the recipient. Furthermore, the Budget 
proposes targeting tax havens and expanding international tax 
enforcement efforts--efforts that, while still in the planning stages, 
are expected to raise considerable revenues over time.
    Redeploying Military Forces Engaged in Overseas Contingency 
Operations and Restraining Growth of Other Defense Spending
    As we look to the challenges facing our nation, it is imperative 
that we invest our defense dollars effectively and wisely.
    The Budget reflects savings from two sources in the defense budget:
     Redeployment of military forces engaged in overseas 
contingency operations. The Budget funds the Administration's strategy 
to increase our troop levels in Afghanistan and to responsibly remove 
combat brigades from Iraq. Under this strategy, the costs of operations 
in the two countries combined are expected to fall. Under the 
President's Budget, as troop levels decrease, the combined cost of Iraq 
and Afghanistan operations would decrease by about $50 billion in 2009 
and $65 billion in 2010, compared with the 2008 level of $187 billion 
(adjusted for inflation). Beginning in 2011, the Budget reflects a 
placeholder cost of about $50 billion per year, which is included to be 
responsible but does not reflect any specific policy decisions. Several 
strategy reviews are underway that will inform out-year costs, and it 
would be premature at this time to prejudge those reviews.
     Restraining growth of other defense spending while 
maintaining key priorities. For FY 2010, the Budget requests $533.7 
billion for the Department of Defense (DoD), an increase of $20.4 
billion, or 4 percent, from the 2009 enacted level of $513.3 billion 
(excluding $7.4 billion from the Recovery Act). This growth is greater 
than the post-Cold War average of 2.9 percent but less than the nearly 
7 percent annual growth over the last eight years.
    This level of growth maintains a strong Defense Department, 
allowing DoD to address the President's highest priorities. These 
priorities including increasing the size of the Army and Marine Corps, 
giving a 2.9 percent pay raise to our men and women in uniform, 
improving DoD facilities (especially military housing), and improving 
the medical treatment of wounded service members. Taking into account 
the importance of managing defense priorities in a cost-efficient 
manner, the Budget also emphasizes acquisition reform. The 
Administration will work to set realistic requirements and incorporate 
``best practices'' to control the cost growth and schedule slippage of 
DoD's weapons programs.
                   line-by-line review of the budget
    The Administration believes that we should be investing taxpayer 
dollars in efforts and programs with proven records of success and 
reallocating or eliminating programs that do not work or whose benefits 
are not worth their cost. To this end, the Administration has begun an 
exhaustive line-by-line review of the Federal budget, starting with one 
of its most important lines--health care. The first stage of this line-
by-line review will be reflected in the spring release of the full FY 
2010 Budget and will continue in subsequent years. However, the 
Administration has already identified a number of policies to drive 
savings. These include:
     Increasing Federal government health savings, as specified 
earlier in my testimony.
     Phasing out and eliminating certain inefficient 
agriculture subsidies, such as direct payments to high-revenue crop 
producers and storage subsidies for cotton producers. These measures 
would cut deficits by about $19 billion over the next ten years.
     Eliminating subsidies to banks participating in the 
student loan program. As I discuss in greater detail later in my 
testimony, banks that make government-guaranteed loans are entitled to 
subsidies that are set by Congress. In the Budget, we propose to 
eliminate these subsidies while providing a more stable source of 
financing for student loans. This reduces deficits by another $60 
billion over the next ten years.
     Reducing erroneous payments in Federal programs and 
increasing tax enforcement by investing in ``program integrity.'' The 
Budget also makes significant investments in activities to ensure that 
taxpayer dollars are spent correctly, expanding oversight of the 
largest benefit programs and increasing investments in tax compliance. 
These efforts are expected to reduce deficits by about $64 billion over 
the coming decade.
     Targeting other inefficient or ineffective programs. The 
Budget not only focuses on ``big dollar'' initiatives. It also 
recognizes that, even if relatively small amounts of money are at stake 
compared to the scale of the Federal budget, taxpayers' funds should be 
used wisely. The Budget, for instance, proposes eliminating small, 
ineffective HUD programs and increasing collection of delinquent tax 
from Federal contractors.
    This list gives a flavor of the program eliminations and 
investments in efficiency included in the Budget. We expect to propose 
further such measures as we move forward with our intensive review of 
Federal government programs.
                     reforming how government works
    The President's Budget also begins the process of reforming how 
government works, increasing efficiency, transparency, and simplicity. 
The initiatives both protect taxpayer dollars and, also, make it easier 
for the American people to interact with their government. This reform 
process is not one that can be completed overnight, and the 
Administration will continue to develop new ways to make government 
work better for the people. The Budget is a starting point and an 
important step forward.
                   improve administrative performance
    Reforming how government works is not only a question of cutting 
and eliminating ineffective programs, but also making worthwhile 
programs work better by improving performance. For decades, the 
argument in Washington has been between those who say that government 
is the cause of every problem and those who say it is the answer. What 
has become clear over the past eight years, especially in light of the 
Federal government's response to Hurricane Katrina, is that what really 
bothers Americans is bad government--government that does not do its 
job effectively and efficiently.
    To make government more effective, the Administration will 
undertake a number of initiatives. These include:
     Streamlining government procurement. The Administration 
will implement the GAO's recommendations to reduce erroneous Federal 
payments, reduce procurement costs with purchase cards, and implement 
better management of surplus Federal property.
     Reforming Federal contracting and acquisition. The 
Administration will take several steps to make sure that taxpayers get 
the best deal possible for government expenditures. We will review the 
use of sole source, cost-type contracts; improve the quality of the 
acquisition workforce; and use technology to create transparency around 
contracting. We will review acquisition programs that are on the GAO 
high-risk list for being over-budget and prone to abuse. The 
Administration also will clarify what is inherently a governmental 
function and what is a commercial one; critical government functions 
will not be performed by the private sector.
     Enforcing standards in addition to measuring performance. 
The Administration will fundamentally reconfigure the Program 
Assessment Rating Tool (PART). We will engage the public, Congress, and 
outside experts in the development of an open performance measurement 
process that improves results and outcomes for Federal government 
programs while reducing waste and inefficiency. The Administration will 
develop goals Americans care about and that are based on congressional 
intent and feedback from the people served by government programs. 
Programs will not be measured in isolation, but assessed in the context 
of other programs that are serving the same population or meeting 
similar goals. I will ask each major agency to identify a limited set 
of high priority goals over the next few months that will serve as the 
basis for the President's meetings with cabinet officers to review 
their progress toward meeting performance improvement targets. We will 
also identify opportunities to engage the public, stakeholders, and 
Congress in this effort.
     Improving program integrity. With hundreds of billions of 
dollars being spent in programs such as Medicare, Medicaid, and Social 
Security, it is important that they are run efficiently and 
effectively. For every $1 spent to combat health care fraud, for 
example, evidence suggests that the government recoups $1.60. The 
Administration will expand oversight activities in our largest benefit 
programs--so that the right payment is made to the right person or 
provider at the right time--and increasing investments in tax 
compliance and enforcement activities. We expect these investments to 
save a total of $48.5 billion over the next ten years in these areas.
     Cutting the government's electricity bills. The Federal 
government is the largest energy consumer in the world. Making 
substantial investments to reduce the government's energy consumption 
can spur job creation while delivering long-term government savings 
through lower energy bills. The Budget will build upon the more than 
$11 billion provided for building modernization in the Recovery Act to 
achieve the Administration's 25 percent energy efficiency improvement 
goal by 2013.
                               education
    While aiming to make government work better overall, the Budget 
also focuses its reforms on certain priority areas. When it comes to 
education policy, the Budget seeks to increase efficiency, simplicity, 
and transparency through a number of initiatives including:
     Eliminating government-created subsidies for banks in the 
student loan program and shifting savings to students. Right now, banks 
that make government-guaranteed loans are entitled to subsidies set 
through the political process. Because of turmoil in the financial 
markets, the bank-based program has needed additional government 
supports over the last year, and even so, lender instability has forced 
thousands of students to change lenders abruptly. Meanwhile, last year 
more than 800 schools enrolled in the direct loan program, and nearly 
half made direct loans last year, all without significant disruption. 
Student satisfaction with direct loans is high, while cost to taxpayers 
is low, because the program uses competitively selected, private 
providers to service loans. The Budget would originate all loans in the 
direct loan program beginning in the 2010-11 school year. Analysis by 
CBO, GAO, and OMB shows this approach would save taxpayers large sums 
of money; by our estimates, it would save more than $4 billion a year.
     Making it easier to apply for student aid. To apply for 
student aid, students must complete a complicated form. Our plan, while 
still in development, would considerably simplify the process through 
such measures as streamlining the form itself and/or using tax data to 
automatically populate the form with an applicant's answers. This is 
not merely a question of saving time, but also encouraging more 
eligible students to participate in the program.
     Increasing transparency of the Pell program. In addition 
to increasing the maximum Pell award to $5,550 for the 2010-11 school 
year, the President's Budget makes the program's funding more 
transparent by converting the program from a discretionary to a 
mandatory program. This would end the dishonest practice of 
``backfilling'' billions of dollars in Pell shortfalls each year and 
provide certainty to families about the level of Pell Grant funding 
available each year.
     Preparing and rewarding effective teachers and principals. 
Building on the investments in the Recovery Act, the Administration 
will invest in efforts to strengthen and increase transparency around 
results for teacher and principal preparation programs, including 
programs in schools of education, alternative certification programs, 
and teacher and principal residency programs. The Budget supports 
additional investments in state and local efforts, developed in 
consultation with teachers and other stakeholders, to implement systems 
that reward strong teacher performance and help less effective teachers 
improve or, if they do not, exit the classroom.
     Determining what works. The Budget also increases funding 
for rigorous evaluation as a first step toward doubling the Department 
of Education's support for education research. The Department would use 
this funding to conduct rigorous evaluations of approaches to improve 
student learning and achievement with a focus on evaluating and scaling 
up promising innovative practices while improving or ending programs 
that are ineffective.
                        making it easier to save
    To make government programs more effective, the President's Budget 
also looks beyond the traditional mechanisms. The Budget seeks to 
harness new insights into human behavior in designing government 
programs.
    Thus, to encourage greater saving, the Budget not only expands 
financial incentives for low- to middle-income Americans to save more, 
which it does by making the Saver's Credit refundable and thus 
available to a much wider population; it also requires that employers 
automatically enroll their employees in some form of savings vehicle 
when they start work--either a workplace pension plan or, if the 
employer does not offer such a plan, a direct-deposit IRA. Employees 
can then elect not to participate if they so choose. Extensive research 
has shown that merely changing the default from non-participation to 
participation in a retirement plan can dramatically increase 
participation rates, despite the fact that workers can voluntarily stop 
saving. Experts estimate that, for workers generally, participation 
rates could about double as a result of automatic enrollment and that 
the effect is even larger for those with lower incomes.
    This is the type of innovation the Administration is committed to 
applying more generally. Without expanding financial incentives, 
imposing penalties, or otherwise constraining people's options, 
programs can still encourage desired behaviors. Increasing saving rates 
is just one such application.
                         making key investments
    The Budget also expands Federal investment in certain key 
priorities. This goes hand-in-hand with making government work better 
for all Americans. Making government work better requires not only 
reducing or eliminating failing programs and increasing programmatic 
efficiency and simplicity but also enhancing programs that do work and 
deserve additional resources.
    Many of these investments will increase economic growth by building 
the Nation's capital stock, both physical and human, and spurring 
technological innovation. Government investment is key to long-term 
economic growth, and this investment has, in recent years, been 
critically low in a number of respects. In addition to making these 
investments, the Budget also provides more resources to deserving 
populations, such as our nation's veterans.
                               education
    I have described how our proposals would reform education policy by 
increasing efficiency, simplicity, and transparency. The Budget goes 
beyond this by investing resources in programs that expand opportunity 
and increase quality.
     Investing in early childhood education. We know that a 
dollar invested in early education will pay off handsomely as these 
children get older. That is why the Administration is proposing to help 
states strengthen their early education programs. The Budget would 
broaden the reach of these programs and boost their quality, 
encouraging new investment, a seamless delivery of services, and better 
information for parents about program options and quality. In addition, 
through funds from the Recovery Act and this Budget, the Administration 
will double the number of children served by the Early Head Start 
program and expand Head Start, both of which have proven to be 
successful with younger children. Finally, the Department of Health and 
Human Services will begin a major new effort to ramp up the Nurse-Home 
Visitation program. Rigorous research has shown that a well-structured 
program can have large and measurable impacts in helping at-risk 
expectant and new parents give their children a healthy start in life.
     Expanding higher education opportunities. Because the 
Administration is committed to making college affordable for all 
Americans, the Budget, in addition to making the Pell program 
mandatory, builds on the Recovery Act by supporting a $5,550 Pell Grant 
maximum award in the 2010-2011 school year. The Budget would also index 
the Pell grant award to the Consumer Price Index plus 1 percent in 
order to account for inflation in this sector. Along with expansion of 
the Pell program, the Recovery Act created a new $2,500 American 
Opportunity Tax Credit, making college tax incentives partially 
refundable for the first time. As a result, many high school seniors 
who receive no tax incentives under the current system will, for the 
first time, receive a tax cut to make college affordable. The Budget 
proposes to make this tax cut permanent.
     Helping at-risk students complete college. It is not 
enough for our nation to enroll more students in college; we also need 
to graduate more students from college. A few states and institutions 
have begun to experiment with these approaches, but there is much more 
they can do. The Budget includes a new five-year, $2.5 billion Access 
and Completion Incentive Fund to support innovative state efforts to 
help low-income students succeed and complete their college education. 
The program will include a rigorous evaluation component to ensure that 
we learn from what works.
                             infrastructure
    Today, too many of our nation's railways, highways, bridges, 
airports, and neighborhood streets are aging and congested due to lack 
of investment and strategic long-term planning. In the short term, 
modernizing our infrastructure would create new jobs and provide a 
boost to the economy. In the longer term, infrastructure investment 
would provide our nation a foundation for long-term economic growth. 
The Budget proposals include:
     Establishing a National Infrastructure Bank. The Budget 
proposes to expand and enhance existing Federal infrastructure 
investments through a National Infrastructure Bank designed to deliver 
financial resources to priority infrastructure projects of significant 
national or regional economic benefit. The mission of this entity will 
be to not only provide direct Federal investment but also to help 
foster coordination through State, municipal, and private co-investment 
in our nation's most challenging infrastructure needs.
     Investing in our nation's roads, bridges, and mass 
transit. The President is committed to instituting accountability for 
the $35.9 billion provided in the Recovery Act and to responsibly 
reauthorizing the nation's highway and mass transit programs. Further, 
our surface transportation system must generate the best investments to 
reduce congestion and improve safety. To do so, the Administration will 
emphasize the use of economic analysis and performance measurement in 
transportation planning. This will ensure that taxpayer dollars are 
better targeted and spent.
     Improving and modernizing air traffic control. Because of 
an outdated air-traffic control system and over-scheduling at airports 
already operating at full capacity, an ordinary trip to a business 
meeting or to visit family can become marred by long delays. The Budget 
provides $800 million for the Next Generation Air Transportation System 
(NextGen) in the Federal Aviation Administration, a long-term effort to 
improve the efficiency, safety, and capacity of the air traffic control 
system.
     Maintaining rural access to the aviation system. The 
Administration is committed to maintaining small communities' access to 
the National Airspace System. The Budget provides a $55 million 
increase over the 2009 level to fulfill current program requirements as 
demand for subsidized commercial air service increases. However, the 
program that delivers this subsidy is not efficiently designed. Through 
the budget process, the Administration intends to work with the 
Congress to develop a more sustainable program model that will fulfill 
its commitment while enhancing convenience for travelers and improving 
cost effectiveness.
     Expanding access to broadband. As a country, we have made 
significant public investments so that, regardless of economic status 
or location, Americans have access to telephone service and 
electricity. The Recovery Act does the same for broadband, and our 
Budget would expand upon these efforts. The Recovery Act includes $7.2 
billion for broadband expansion and the Budget includes $1.3 billion in 
USDA loans and grants for the Department of Agriculture to increase 
broadband capacity and improve telecommunication service as well as 
education and health opportunities in rural areas.
                                science
    Like investments in physical infrastructure, investments in 
scientific knowledge also increase productivity and economic growth. 
The Budget proposes:
     Doubling funding for key basic research agencies. The 
President's Budget would double funding over 10 years for three key 
basic research agencies: the National Science Foundation, the 
Department of Energy's Office of Science, and the Department of 
Commerce's National Institute of Standards and Technology. The Recovery 
Act includes a $5 billion investment in these agencies, which is an 
almost 50 percent increase for these programs over 2008 and represents 
a significant down payment toward the President's plan to double 
funding. This initiative will help fund cutting edge research done by 
universities, government laboratories, and private industry. It is 
especially important for the government to fund such activities since 
basic research tends to have positive spillover effects that flow 
across the economy.
     Increasing funding for research into cutting edge 
technologies. The Budget also increases support for promising but 
exploratory and high-risk research proposals that could fundamentally 
improve our understanding of climate, revolutionize fields of science, 
and lead to radically new technologies. Such research includes 
interdisciplinary work like that conducted by researchers at Cornell 
University, who have developed a tiny nanotechnology particle that 
could ultimately both deliver a drug to a specific cell and monitor the 
cell's response to the drug; a therapeutic combination that would 
revolutionize medicine. In addition, the Budget funds cutting-edge, 
fundamental research to help transform the nation's air transportation 
system, increase airspace capacity and mobility, enhance aviation 
safety, and improve aircraft performance while reducing noise, 
emissions, and fuel consumption.
                                 energy
    The Budget lays the groundwork for an agenda that would transform 
our nation's energy consumption. As we have known for many years now, 
the United States' dependence on oil and other fossil fuels undermines 
the country's national security, and a growing wealth of scientific 
evidence also suggests that this dependence is contributing to global 
warming, jeopardizing our economy and our entire planet.
    As a down payment on an energy-independent, clean-energy economy, 
this Budget proposes:
     Funding vital investments in a clean energy future 
totaling $150 billion over 10 years, starting in FY 2012. To finance 
these investments in a fiscally responsible manner, while also 
providing tax relief to consumers, the Administration proposes a 
market-friendly cap-and-trade program to reduce greenhouse gas 
emissions.
     Beginning a comprehensive approach to transform our energy 
supply and slow global warming. The Administration is developing a 
comprehensive energy and climate change plan to invest in clean energy, 
end our dependence on oil, and address the global climate crisis. The 
Administration plans to work expeditiously with key stakeholders and 
Congress to develop an economy-wide emissions reduction program to 
reduce greenhouse gas emissions approximately 14 percent below 2005 
levels by 2020, and approximately 83 percent below 2005 levels by 2050. 
This program will be implemented through a cap-and-trade system.
     Building on the Recovery Act's investments in a new 
economy that is powered by clean and secure energy. The Budget will 
build on the Recovery Act's investments by significantly increasing 
funding for basic research and transformational science to accelerate 
solutions to our Nation's most pressing problems. The Budget also 
supports the transition to a low-carbon economy through increased 
support of the development and deployment of clean-energy technologies 
such as solar, biomass, geothermal, wind, and low-carbon emission coal 
power, and it builds on the $11 billion provided in the Recovery Act 
for smart grid technologies, transmission system expansion and 
upgrades, and other investments to modernize and enhance the electric 
transmission infrastructure to improve energy efficiency and 
reliability.
     Creating a New Energy innovation fund. The Budget includes 
funds for HUD to drive the creation of an energy-efficient housing 
market--including the ``retrofitting'' of older, inefficient housing--
and catalyze private lending for this purpose in the residential 
sector. Partnering with the Department of Energy on this initiative, 
HUD will contribute to the Administration's broader effort to combat 
global warming, jumpstart the creation of a clean-technology economy, 
and reduce utility bills.
                                veterans
    While investing for the future, the Budget also devotes more 
resources to deserving populations, such as our nation's veterans. The 
Budget expands support for our nation's veterans by:
     Increasing funding for Veterans Affairs (VA) by $25 
billion over the next five years. The President's Budget increases 
funding for VA by $25 billion over the next five years in order to 
honor our nation's veterans and expand the services they receive. Some 
of these funds will be used to transform the VA into a 21st-century 
organization, including investments in information technology that 
directly benefit veterans in the areas of both health care and 
benefits.
     Dramatically increasing funding for VA health care. The 
President's Budget provides VA medical care with the resources it needs 
to provide 5.5 million veterans with timely and high quality care.
     Restoring health care eligibility for modest-income 
veterans. For the first time since January 2003, the President's Budget 
restores eligibility for VA health care to non-disabled veterans 
earning modest incomes. By 2013, this initiative will bring over 
500,000 additional veterans into the VA health care system while 
maintaining high quality and timely care for the lower-income and 
disabled veterans who currently rely on VA medical care.
                               conclusion
    The President's Budget strikes a new course for America. It 
presents the fiscal path with honesty, and deficits are projected to 
fall in half by the end of the President's first term compared to the 
deficit inherited by the Administration when it came to office in 
January 2009. Altogether, the policies in the Budget would reduce the 
deficit by $2 trillion over the next 10 years, begin to address the key 
contributor to the nation's long-term fiscal short-fall by proposing 
health savings measures that could help ``bend the curve'' on long-term 
health costs, begin the process of reforms to improve how government 
works, and, finally, make key investments that would provide much-
needed jobs now and boost long-term economic growth
    The country faces grave challenges, both in terms of its short-term 
economic health and its long-term fiscal future, and working our way 
out of these difficulties will not happen overnight. The policies 
proposed in this Budget and those enacted last month in the Recovery 
Act represent an important first step on the path back toward economic 
and fiscal health. I look forward to working with you in the weeks and 
months ahead to continue the process of addressing the challenges 
facing our nation.













    Chairman Spratt. Thank you, Director Orszag.
    There are several--well, many significant features to the 
budget request you brought before us, but none more salient 
than the one you just discussed, namely health care.
    This budget creates a health care reserve fund and calls 
for funding of $634 billion over 10 years. Will that amount of 
money cover the cost of the proposal that the administration 
has in mind?
    Mr. Orszag. Mr. Chairman, as we described, the health 
reserve fund is a downpayment, a very significant downpayment, 
on funding a health care reform.
    Chairman Spratt. Is that 50 percent? 60 percent?
    Mr. Orszag. It is likely to be the majority of the cost, 
but whether it is 50, 60, 70 will depend on the details 
whatever is finally done. And you will hear more about this on 
Thursday when we hold our health summit, and you will hear more 
about it as we move through the legislative process.
    But we are trying to avoid the mistakes of the past, in 
which, you know, we came to Congress--or an administration came 
to Congress and said, ``Here is the health plan.'' We want to 
work with you in an interactive way to get health care reform 
done this year, and we are putting a significant downpayment on 
the table to get that process started.
    Chairman Spratt. Will that include possibly some revenues 
from auctioning of emission limits and cap and trade?
    Mr. Orszag. The budget does propose that, but that is, sort 
of, in the energy area. In health care, we do have a revenue 
proposal which would return the tax break for itemized 
deductions for the top--it will affect 1.2 percent of 
taxpayers--return that tax break to the level that existed at 
the end of the Reagan administration after 2011, and with the 
revenue dedicated to health reform.
    Chairman Spratt. Can you outline the basic outlines of the 
health care proposal the administration will send us? Or is it 
too early to do so?
    Mr. Orszag. Well, the budget includes key principles on the 
health reform. But, again, you are going to hear more about 
this on Thursday. We want to work with you interactively. What 
we wanted to do in this budget is put some money on the table 
to get the process started, and that is what we did.
    Chairman Spratt. The stimulus bill contained a very 
significant item, over $19 billion as I recall, for information 
technology. That is a substantial sum of money. When you were 
at CBO, CBO wrote a critical analysis of a number of 
information technology claims to astounding sums of money and 
debunked many of these.
    Do you think HI, health information technology is a source 
of real revenues that will pay dividends and help fund the cost 
of health care in the future?
    Mr. Orszag. Health information technology is necessary but 
not sufficient by itself to move to a more efficient health 
care system.
    So, remember that map that I put up with huge variation 
across the United States in how health care is practiced. If 
you look across regions of the United States, you see this. If 
you look across hospitals within a region, you see this. If you 
look across doctors within a hospital, you see this. You see 
very substantial variation in health care practices, with the 
higher-cost approaches not backed by specific evidence that 
they work any better than less-costly approaches. And health 
information technology is one of the key ways that we need to 
flesh out and get the information necessary for doctors to 
figure out how to practice in a more efficient way.
    Let me give you two examples. If you look in the last 6 
months of life for Medicare beneficiaries, if you look at two 
of our leading medical centers, at one of them the average cost 
is $25,000 a year; at another, $50,000 a year; and the quality 
indicators, if anything, suggest that the quality is better at 
the $25,000ayear medical center. All that we seem to be getting 
in exchange for $25,000 a year now--that is your taxpayer 
dollars--is more tests, more visits to specialists, more days 
in the hospital, none of which seem to actually help, other 
than raising costs.
    In addition, if you look within a hospital, it has been 
demonstrated that if you sit doctors down and say, do you 
realize, two groups of doctors, that you are practicing 
medicine in much different ways, they will often evolve towards 
the less-intrusive, less-costly approach, but they often lack 
the data to do that. Most of the data that we have today are 
based on insurance claims. That tells you what happens to a 
patient but not what the result is. Health information 
technology will help you figure out both what is done to a 
patient and what the result is, so that medical professionals 
can figure out more effective ways of practicing medicine.
    Chairman Spratt. Now, let me turn to defense spending. You 
showed us what non-defense discretionary will do, namely come 
down as a percentage of GDP over the next several years. What 
happens to defense spending over that period of time, the other 
half of discretionary spending?
    Mr. Orszag. Defense spending also declines as a share of 
GDP. In 2009, it is projected to be 4.9 percent of GDP. And, on 
average over the next decade, it is 3.6 percent of GDP.
    Secretary Gates has stated that it is time for the Defense 
Department to begin the process of reorienting its priorities 
and, in particular, redesigning the procurement and acquisition 
system to become more efficient. And I am deferring to his 
judgment in terms of how he does that. But he believes that 
this budget is a healthy budget for the Defense Department, 
both in terms of the funding for the troops and in terms of 
providing the beginning point for starting to turn the ship 
towards a more effective, especially, procurement and 
acquisition system.
    Chairman Spratt. Our analysis shows--and I am not sure we 
have the chart ready at hand--but analysis shows that defense 
spending over the next 10 years, under your budget, keeps pace 
with inflation and then some, barely above--there we go. The 
blue bar being the President's budget, and the red bar being 
current services, which would be existing defense adjusted, 
basically, for inflation and other changes.
    Mr. Orszag. Yes.
    Chairman Spratt. Basically, the President is just a bit 
ahead of current services, just a bit ahead of inflation.
    Mr. Orszag. That is correct for the base defense budget.
    Chairman Spratt. But we are fixing the level of expenditure 
at a pretty high level historically.
    Mr. Orszag. There has been a very significant increase in 
the defense budget. And this budget, the President's budget, 
starts the process of improving efficiency in the Defense 
Department, again, especially in the procurement area.
    Chairman Spratt. Now, for supplementals, you are doing away 
with supplementals, but don't have any numbers for the out-
years other than the $50 billion plug that you put in the 
budget after next year.
    When do you expect to refine that forecast so you can give 
us the actual numbers that fit into the $50 billion plug?
    Mr. Orszag. Well, first, let's step back and realize there 
will be a supplemental submitted this month for this fiscal 
year on military operations. In the budget, you have details on 
that; it will be slightly in access of $75 billion.
    As you go out over time, as you noted, we have in 2011 and 
thereafter a $50 billion placeholder for overseas contingency 
operations. You have already started to see some of the policy 
announcements coming out from the administration on troop 
levels, both in Iraq and in Afghanistan and other areas. It 
will be ongoing policy development that is done to back up what 
the out-year costs may be.
    Again, maybe I should have said this at the beginning. We 
have had 5 weeks in office. The budget process normally takes 5 
to 6 months. So we are taking our best guess or best shot at a 
variety of things, and there is going to be a lot more detail 
to come with the full budget in April.
    Chairman Spratt. Along that line, and one last question 
from me, at least in the outline of the budget which we have 
here, the blue book, there is not a lot of attention given to 
the long-run sustainability of the major entitlements, 
particularly Medicare and Social Security.
    What is the administration's position on those with respect 
to this budget? Are you looking upon it as something that has 
to be done outside this budget, separately and independently 
from it?
    Mr. Orszag. I would take a slightly different view, Mr. 
Chairman. Again, as the chart that I put up shows, the key to 
our fiscal future, the key entitlement problem is health care. 
And this budget is going--we want to get health care reform 
done this year. And, in doing so, we want to do it in a way 
that will help to reduce the long-term growth rate in health 
care costs.
    Health care reform is entitlement reform. If we bend the 
curve on health care cost growth, it is the single most 
important thing we can do to get our long-term entitlements 
under control. So, to my mind, given that graph that I put up 
with the rising Medicare and Medicaid costs, it makes sense to 
start with health care, which is what we want to do.
    And then, as my testimony points out, after we have dealt 
with the key to our fiscal future, Social Security also does 
face an actuarial deficit, and it would be desirable to address 
that problem after we have dealt with the bigger one, which you 
can see in this graph is Medicare and Medicaid.
    Chairman Spratt. Thanks very much.
    Mr. Ryan?
    Mr. Ryan. Thank you, Chairman.
    As you noticed, I have a few, couple criticisms with this 
budget.
    Mr. Orszag. I did notice.
    Mr. Ryan. But let me first start with a couple compliments.
    Number one, I am glad to see we are finally putting the AMT 
in the budget, in the baseline. And you ought to be commended 
for that.
    Number two, I am glad to see you are putting a means test 
on the Part D benefit. That is something we have put in our 
Republican budgets. You did, and I want to compliment you for 
that.
    And, number three, I am glad to see it sounds like you guys 
are serious about agriculture reform. It is time we stop 
subsidizing very large interests in agriculture, in my opinion, 
and I think a lot of us are going to agree with that.
    So those are the good parts I see in this budget, and I 
just want to make sure we establish that there are a few things 
that we like.
    Mr. Orszag. I appreciate that, Mr. Ryan, I do.
    Mr. Ryan. I want to talk about the economic assumptions in 
this budget. Looking at your--you see it here, but looking at 
your Table S-8 in your budget, the Blue Chip consensus forecast 
is about a percentage point lower, meaning your economic 
assumptions over the first 5 years are about a full percentage 
point higher than the Blue Chip forecast. Your inflation rate 
is about half a percentage point lower over the next 5 years 
than the Blue Chip.
    Now, have you run the numbers to show what the deficits 
would look like if the Blue Chip consensus forecasts prevailed? 
I mean, obviously, I hope your forecasts prevail, but they seem 
to be much higher than anyone is forecasting, CBO or the Blue 
Chips. Have you run those numbers and shown what the deficit 
impact would be if those prevailed?
    Mr. Orszag. Well, I am glad that you asked this question, 
because let's compare ourselves to CBO, you know, an 
independent arbiter. The CBO analysis was done before the 
Recovery Act was enacted. CBO yesterday released a letter on 
the macroeconomic effects of the Recovery Act. If you add in 
their estimated impact from the Recovery Act to their baseline 
forecast, which excluded the Recovery Act, you wind up with a 
forecast that is right in line with the administration's. They 
have a high and low impact from the Recovery Act, and we are 
right in the middle of it.
    Now, since both of those forecasts were done, the incoming 
data suggest a more negative economic outlook----
    Mr. Ryan. That was exactly my next question.
    Mr. Orszag. Fair enough. But we have a process here where 
the assumptions are locked down at a point in time, and, you 
know, incoming data can wind up being slightly better or 
slightly more negative than what was assumed when the 
assumptions were locked in.
    I just wanted to point out we are consistent with CBO once 
the Recovery Act is included in the analysis.
    Mr. Ryan. But you won't recalibrate those assumptions given 
the last period of time of economic turmoil, you are going to 
stick with these current assumptions, is that correct?
    Mr. Orszag. As you know, the budget process is based on a 
set of assumptions that are locked down. I don't think it is 
productive for us to be chasing our tail, in no small part 
because we are going to get a lot of different data over the 
next few weeks and months. And we can obviously reassess the 
situation at the appropriate time in the process, at least for 
the mid-session review if not before.
    Mr. Ryan. Yeah, I think it is important to point out that 
the numbers in this budget are staggeringly high. If these 
scenarios in this baseline don't play themselves out, then they 
will be even higher. And that is just something I think we all 
ought to keep our minds on.
    I want to talk to you about--you know, the media has talked 
about all this savings you have achieved, the $2 trillion in 
savings. Isn't about $1.6 trillion in savings in BA from the 
fact that you had these inflated war costs, where you assume 
surge level spending in the war for 10 years, inflate those, 
and then because of the inevitable drawdown that would have 
occurred under either administration's plan, you call that 
savings? Isn't that where the bulk of the savings come from? 
And then isn't the rest of that savings not actual spending 
cuts but tax increases?
    Mr. Orszag. Well, let me break that down into two parts.
    First, with regard to the savings on the war, the 
traditional way of reflecting discretionary spending is to take 
a base level and project that out over time, which is exactly 
what we have done----
    Mr. Ryan. Okay, can I ask you just right there?
    Mr. Orszag. Sure.
    Mr. Ryan. But the base level you are projecting over time 
is the surge levels, correct?
    Mr. Orszag. It is the level from 2008.
    Mr. Ryan. The surge.
    Mr. Orszag. Correct, the last full year of funding that has 
been provided.
    Mr. Ryan. So you assume in your budget that we were going 
to have the surge for 10 years, even though a surge, by 
definition, is up, then back down, you assume we are going to 
be at the surge level in Iraq for 10 years. Is that correct?
    Mr. Orszag. That is the traditional way in which budget 
projections have been done. I would also say I think it is--if 
you just look at a simpler way of looking at it, we are going 
to spend $140 billion this year on the war. The President is 
going to walk that down or end things more quickly than I think 
would have been the case if he hadn't won the election, and 
that saves money.
    But let me also point out, that is not the only source of 
savings in the budget. The gross savings are much larger than 
$2 trillion. We have, as I already mentioned, $50 billion in 
program integrity savings, $50 billion in savings from 
eliminating subsidies on educational loans, the middlemen in 
educational loans. In the health care area, we have $175 
billion in Medicare Advantage subsidy reductions.
    So you can go through the budget and add up all the gross 
savings, and then some of those are plowed back into different 
areas, including education, energy, and health care.
    Mr. Ryan. So, to go back, $1.6 trillion of these savings is 
because you are saying, ``We are not going to have a surge for 
10 years; we are going to ramp it down''?
    Mr. Orszag. About a trillion and a half dollars is because 
the war ends more quickly under this budget than we think the 
alternative would have been.
    Mr. Ryan. Than 10 years of surges.
    Discretionary spending--can you bring up the chart, Jose, 
that your non-defense discretionary as a share of GDP, please?
    And this is something we have been battling, no matter what 
administration, no matter what budget, this is something we are 
always dealing with.
    I notice you show a pretty precipitous drop in non-defense 
discretionary as a percent of GDP. In 2010, the request here 
for the VA is a 10 percentage point increase and then, in 2011, 
a 2.2 percent increase. In HUD, an 18 percent increase for this 
fiscal year, this upcoming fiscal year, and a .2 percent 
increase the next year. Transportation, a 2.8 percent increase 
in their budget, and then followed by a negative 11.5 percent 
decrease. Labor, 4.7 percent increase, followed by, in 2011, a 
.8 percent increase.
    The Environmental Protection Agency in the stimulus package 
received an increase of 92 percent in its budget. In fiscal 
year 2010, you are proposing an additional 35 percent increase. 
And in fiscal year 2011, you want a 1 percent increase. And I 
am assuming this does not include cap-and-trade administrative 
costs, because that hasn't been, sort of, implemented 
yesterday.
    Do you think it is realistic--and, you know, we have seen 
all of these different administrations--do you think it is 
realistic that you are going to have these incredible double-
digit increases in these agency budgets and then you are going 
to have these incredible decreases the following year?
    Mr. Orszag. Well, it is not decreases, but slower growth. 
But I think the answer is yes, because--here is the context. 
From our perspective, there have been key areas that have been 
underinvested in or starved of resources. We need some 
reprioritization. But then, once that is accomplished, it will 
be sustainable to have slower growth rates.
    So this budget is not based--those NDD numbers are not 
based on just kind of making the numbers up in the out-years. 
It is programatically based. So, for example, in 2019 we build 
into the Commerce Department additional funding because we know 
the next census will be coming up.
    So I think this is a very important question. We think 
there is some reorienting of priorities that is necessary, and 
some reinvestment, and then we think it will be sustainable to 
perpetuate that over time.
    Mr. Ryan. Yeah, I think the problem around here is the most 
permanent thing is a temporary increase. And that is what 
Congress ends up usually doing with these budgets. And we will 
join you in helping you restrain the growth of these programs, 
because I think you are going to have a hard task at hand. I 
recall the last administration was deeply criticized for doing 
the same kinds of things.
    Then, I don't want to take up all of the time, but this is 
obviously what all administrations start with. They give us a 
blueprint, sort of a ``CliffsNotes'' version of the budget. You 
only had 5 weeks, so we understand that. You are going to bring 
the big, full budget in April some time.
    Mr. Orszag. Correct.
    Mr. Ryan. But I am assuming we are going to have a markup 
in this committee on the budget before April. So that means 
there are lots of questions that we would like to get answers 
to before we start moving a budget resolution going to the 
floor.
    So, in the interest of time, I have some questions I would 
like to submit to you for the record to get more details to 
what you are planning on rolling out in April so that we can 
make better decisions when this committee begins to mark up the 
budget resolution. And if you could respond to me on these in a 
prompt way before we actually consider our budget resolution, I 
sure would appreciate that.
    Chairman Spratt. Without objection, so ordered.
    Mr. Ryan. Thank you. I yield back.
    Chairman Spratt. Ms. Schwartz.
    Ms. Schwartz. Thank you, Mr. Chairman. And thank you for 
this first hearing on the budget.
    And, Peter Orszag, welcome back. We saw a good bit of you 
over the last few years. And congratulations on your new 
position and your new challenges for this administration.
    We certainly appreciate how well you have laid out the 
crisis, both economically in this Nation and the fiscal demands 
and situation that this country faces and the President and you 
face, all of us face. And I think you have made clear that this 
is a very different kind of budget. It is more honest in laying 
out our expectations for the future and makes very clear that 
we need to move towards fiscal balance, recognizing that that 
is going to be hard to do. And it is very clear about the 
investments that we have to make if we are going to be 
economically competitive and certainly if we are going to be 
able to grow in the future and meet that fiscal balance.
    I did want to follow up specifically on health care. The 
Chairman [JF1]did very well, but it is a very big part of--as 
you said, health care is key to the financial future, in terms 
of meeting our obligations as a Nation and meeting our budget 
goals. But it is also very important to families and to 
businesses. I hear a great deal about the cost of health care, 
the fact that it has risen in the last 8 years about 75 percent 
for businesses covering health benefits. It means a lot more of 
those costs passed along to employees. And of course I hear 
from families who are deeply worried about the costs, both the 
cost-sharing and the bankruptcies it often causes when they 
don't have full coverage.
    I wanted to ask you to flesh out a little bit further both 
some of what we already have set out in the economic recovery 
package. We did major work--I want to congratulate all of us, 
at least on this side of the aisle; we did not get the 
bipartisan support we would have liked, even though I think 
there is a good bit of agreement on the other side--on health 
IT in particular, that we ought to be making this kind of very 
significant investment, and what that can mean for us moving 
forward in terms of improving quality and saving lives and 
saving dollars.
    Could you flesh out two things? One is, what additional 
policy changes, reforms do you think that we need to be making, 
not only to affect Medicare/Medicaid but also that could have 
an effect in the private sector, on cost in the private sector? 
And I am talking about the comparative effectiveness.
    We have gotten a good start, in terms of the $1 billion you 
have set aside. There are a lot of questions about how that is 
going to really improve quality. Payment reform, physician 
decision support, and really the kind of savings going forward. 
These raise some questions and concerns; I wonder if you could 
flesh that out for us. Basically, I am talking about what else 
might you be encouraging us to do so that we can actually see 
the kind of improvement in quality and savings?
    And secondly, if you could also speak to, if we don't do 
this, what effect it might have on our economic competitiveness 
and on our budget if we, in fact, don't tackle health care 
costs going forward.
    Mr. Orszag. Well, let me start with that question. Again, 
remind yourself of that graph with Medicare and Medicaid just 
rising, rising nonstop over time. If we don't act to reduce the 
growth rate in health care costs, nothing else from a fiscal 
perspective is going to save us from a fiscal crisis 
eventually. Those rising costs of health care are going to 
become so burdensome, not just for the Federal Government but 
also for State government and for workers, that we simply have 
to start the hard process of bending the curve on health care 
costs.
    The Recovery Act takes an important step. As you already 
mentioned, health information technology, so that we have more 
data. Not only that--let me just also stop for a second since 
we shouldn't get lost in the policy details, and also realize 
that, as patients--I mean, I am looking forward to a world in 
which I don't have to fill out medical forms over and over 
again every time I go to a new doctor, because it is a nuisance 
that none of us needs.
    But in addition to that, it leads to a more efficient 
health care system in which errors are reduced and higher 
quality is produced. Comparative effectiveness is about 
measuring what works, evaluating what works and what doesn't, 
and then having medical professionals evaluate ways of changing 
practices so that we get the stuff that does work and not the 
stuff that doesn't.
    And then, finally, you already mentioned incentives. Right 
now we have a health care system that pays for more care rather 
than better care. And it is not surprising that what we get is 
more care. What we want is better care. And the budget includes 
a variety of proposals, from bonus-eligible organizations, to 
incentives to reduce readmission rates, to incentives for 
hospitals to improve quality, and so on and so on and so on, 
that will start to reorient the payment system towards 
efficiency and quality and not towards just higher costs.
    Ms. Schwartz. Well, thank you. I think we are going to be 
seeing a lot more of that fleshing out. But you make a very, 
very important point--and my time is up--but that this is 
actually intended to create efficiencies but improve quality, 
and not, in fact, limit access to care but improve that 
quality. And that will save lives and save money.
    Thank you.
    Chairman Spratt. Thank you, Ms. Schwartz.
    Mr. Hensarling is next.
    Let me tell everyone the clock is not working. So when you 
get down to 4 minutes and you have 1 minute to go, I will tap 
the gavel. When you have 5 minutes, I will rap the gavel.
    Mr. Hensarling?
    Mr. Hensarling. Thank you, Mr. Chairman.
    Welcome back, Dr. Orszag.
    Since Congress has come under Democrat control, they have 
recently achieved a trifecta of trillions. We have a trillion-
dollar government stimulus bill that includes a fleet of cars 
for government employees, more money for the National Endowment 
for Arts, more subsidies to Amtrak. Then we had about 2 weeks 
later, less than 2 weeks later, a trillion-dollar 
appropriations bill, first time in our Nation's history, 
complete with thousands of pork-barrel projects, including 
lobster research protection for mouse habitat. Now we have a 
trillion-dollar budget deficit to boot. On top of that, now, we 
have the Democrat administration proposing a budget with red 
ink as far as the eye can see.
    Two questions, Dr. Orszag, to make sure I have my facts 
right. At 27 percent of GDP, would this be the largest peace-
time budget in our Nation's history?
    Mr. Orszag. The budget that we are inheriting, yes, for 
peace time, that is correct.
    Mr. Hensarling. Oh, I am sorry, are you inheriting this 
budget, or are you proposing this budget?
    Mr. Orszag. The 27 percent is for a year in which we are in 
the midst of a severe recession and includes the steps that 
have been necessary to address the downturn.
    Mr. Hensarling. Well, I am just looking for a simple--so 
the answer is yes.
    Mr. Orszag. Yes.
    Mr. Hensarling. Thank you. Also, with this budget, would 
this double the national debt in 8 years? Is that true?
    Mr. Orszag. Under current policies, the debt increase would 
be even larger. We reduce the deficit, but there still is a 
significant----
    Mr. Hensarling. But is it true that, in 8 years, that the 
debt would be doubled under this budget?
    Mr. Orszag. Yes. But, again, the debt increase is less than 
if we fail to act.
    Mr. Ryan. Could I ask one?
    Mr. Hensarling. I would be happy to yield to the ranking 
member.
    Mr. Ryan. Is that if you include the surge that lasts for 
10 years?
    Mr. Orszag. That is if you include the traditional way of 
doing baselines, yes.
    Mr. Ryan. Okay.
    Mr. Hensarling. You said earlier in your testimony that you 
wanted to avoid the mistakes of the past. Let me read you a 
quote from one of our former Secretaries of Treasury. Quote, 
``We are spending more than we have ever spent before, and it 
does not work. We have never made good on our promises. And 
after 8 years of this administration, we have just as much 
unemployment as when we started and an enormous debt to boot.'' 
You probably recognize the quote. It was President Roosevelt's 
Treasury Secretary, Henry Morgenthau, and that quote was given 
in 1939.
    I have no doubt, Dr. Orszag, that you have also studied 
carefully the lessons of Japan that had a similar real estate 
bubble that burst, and I am sure you have studied their lost 
decade.
    Recently, the New York Times, not exactly a bastion of 
conservative thought, wrote about the experience, where it 
talks about, ``Japan accumulated the largest public debt in the 
developed world while failing to generate a convincing 
recovery''--this coming from the New York Times. Quote, ``This 
has led many to conclude that spending did little more than 
sink Japan deeply into debt, leaving an enormous tax burden for 
future generations. Among ordinary Japanese the spending is 
widely disparaged for having turned this nation into a public-
works-based welfare state and making regional economies 
dependent on Tokyo for jobs'' unquote.
    My question is, given our own history, given the Japanese 
history, what historical precedent is the administration basing 
its budget on and its belief that they can borrow and spend our 
way into national prosperity?
    Mr. Orszag. Well, let me take the Japanese example. I think 
the lesson from the Japanese example is that the failure to 
deal aggressively and up front with problems in the financial 
system ultimately proved to be a big mistake, in which the lost 
decade occurred.
    I am going to defer to Secretary Geithner and the other 
members of the administration's economics team in terms of how 
to address problems in the financial market, but I know that 
they are motivated by a desire to avoid that mistake. So I 
think the key to avoiding that outcome to is to get at the nub 
of the problem that occurred in Japan, which was the, sort of, 
rope-a-dope strategy on the banking and financial market 
problems.
    Mr. Hensarling. Okay. Let's move on to taxes in the limited 
time I have left. Is it not true that, under this budget, we 
are looking at a $636 billion tax increase that would be a tax 
on carbon-based energy used by almost everyone in our Nation, 
and a tax on small businesses since the overwhelming majority 
of small businesses pay tax at the top two individual rates? 
And, if so, how is this going to help the family budget? How is 
it going to help create jobs?
    Mr. Orszag. Let's talk about small businesses. The budget 
proposes some tax changes starting in 2011 that will affect the 
top 3 percent of small-business owners. The rest will not be 
affected. And, in fact, many of them will receive a net tax cut 
through other provisions in the budget, including a zero 
percent capital gains rate on qualified stock owned in small 
businesses.
    But I think more important than any of that, the problem 
facing most small businesses today is the lack of economic 
activity and the lack of access to credit. The most important 
thing we could do to get small businesses back on their feet is 
get the economy moving again and get credit flowing. The budget 
includes $28 billion in loan guarantees to help small 
businesses, including through the so-called 7(a) program that 
has been very effective in the past. I think that is the key to 
getting them back on their feet----
    Chairman Spratt. The gentleman's time has expired.
    Mrs. Kaptur?
    Mrs. Kaptur. Thank you, Mr. Chairman.
    I would like to begin by saying to my colleague from Texas 
that there isn't a single Member on this side of the aisle that 
belongs to the Democrat Party. We belong to the Democratic 
Party. So the party you were referring to doesn't even exist. 
And I would just appreciate the courtesy, when you refer to our 
party, if you are referring to the Democratic Party, to refer 
to it as such. We wouldn't say Republic Party in the instance 
of the party that you belong to. And I think that that really 
was unnecessary.
    Mr. Hensarling. Would the gentlelady yield?
    Mrs. Kaptur. Not on my time. You will have to wait. But I 
think the gentleman heard the message.
    I would like to thank Director Orszag, Dr. Orszag for being 
here today, and say that America's needs your razor-sharp mind, 
and we are really happy to have you in the position that you 
are in.
    May I ask you, did the Bush administration, in its 8 years 
in office, ever produce a balanced budget that was submitted to 
this Congress?
    Mr. Orszag. No.
    Mrs. Kaptur. No, it did not. And may I ask you, of the 
enormous debt that we are facing, do you have the numbers with 
you or could you provide to the record how much of that deficit 
is due to unpaid war costs in Iraq and Afghanistan and also 
money for Wall Street bailouts that was not paid for?
    Mr. Orszag. Yeah, we can provide you with that in writing.
    Mrs. Kaptur. All right. Would you say that those together 
constitute over a trillion dollars at this point?
    Mr. Orszag. Again, it depends how you do the accounting, 
but the cost of the war in Iraq is close to that figure by 
itself.
    Mrs. Kaptur. I thank the gentleman very much, and we will 
appreciate those figures for the record.
    Let me move to the topic of the frozen credit lines, which 
you referenced on the first page of your testimony, in the 
banking system of this country.
    I am very concerned about the lack of involvement at full 
measure of the Federal Deposit Insurance Corporation and the 
Securities and Exchange Commission in helping to resolve this 
serious credit crunch problem. Through TARP, which adds to our 
deficit every day, the U.S. Treasury has replaced less than 
half of the capital that mark-to-market accounting has 
destroyed across our banking system.
    Do you have the ability, as the Director of the Budget 
Office, to convene at the executive level the FDIC, the SEC, 
the Treasury, and the Fed to conduct an overarching policy 
discussion of mark-to-market accounting and its contribution to 
the financial crisis that we are facing?
    Mr. Orszag. Congresswoman, I think that question is 
probably best directed to Secretary Geithner, and that would be 
the appropriate official with whom to have that conversation.
    Ms. Kaptur. I will ask him that tomorrow, but I am hoping 
in your role, as you look at the budgets for these different 
agencies, such as FDIC and SEC, that you might play an 
important role understanding how these accounting practices 
work, and we can't possibly, through the taxpayers, keep 
dumping all of this money into Treasury without dealing with 
the accounting side of the ledger.
    I thank the gentleman very much.
    Let me also ask you, the enormous challenge to our country 
to change the psychology of debt to one of savings, every 
American family has to participate in this. Could you as a 
leader in the new administration convene principals in the 
administration to look at the U.S. savings bond campaign in a 
manner that would create an effort in very small denominations, 
even down to postage-stamp-sized denominations, selling them 
like stamps, to involve large numbers of the American people? 
We have to change an entire psychology of the Nation. I am just 
suggesting that to you. These bond campaigns occur every year. 
I know who manages them inside the government over at Treasury. 
But I think in your role, with your intelligence, you could 
really have an influence within that administration, and I ask 
you to consider that.
    Mr. Orszag. Thank you. Let me touch upon savings for a 
minute. One of the provisions that has not gotten very much 
attention in the budget is something that I think maybe we can 
all work together on to get done very quickly.
    The evidence strongly suggests that the best way of getting 
Americans to save for retirement is to make it easy and simple 
so that they are automatically enrolled in a 401(k) but have an 
opportunity to opt out.
    Most of us with kids or busy lives, we don't want to be 
handed a big binder by our employer who says wade through this 
and get back to me if you want to sign up. I would prefer, and 
I think most Americans prefer, to know that if they don't take 
action, something good is happening anyway. And if they want to 
wade through the binder, great. And then they can make their 
own decisions. But most of us are too busy with other things to 
spend the time doing this. The evidence suggests that has a big 
impact.
    You all have already moved to make automatic enrollment 
opt-out 401(k)s more prevalent among companies, and that has 
occurred over the past several years. The budget includes a 
proposal to move towards universal accounts outside of Social 
Security by creating an automatic IRA at those firms that don't 
offer a 401(k) plan.
    The point would be that, whenever someone went to work at a 
new employer, the worker would be automatically enrolled in 
some form of savings vehicle unless they opted out. The 
evidence strongly suggests that is a very effective way of 
getting people to save, and I am hoping we can get that done 
soon.
    Ms. Kaptur. I would just ask for the record if you could 
please provide an estimate of how many homes you expect to be 
foreclosed this year in the United States, and whether that 
number is above or below last year's number, and where in your 
analysis do you account for the trillion dollar trade deficit 
and how that impacts on GDP?
    Thank you, Mr. Chairman.
    Chairman Spratt. Thank you, Ms. Kaptur.
    Mr. Garrett.
    Mr. Garrett. Thank you, Mr. Chairman.
    Thank you, Director, and thank you for being here. Again, I 
join my colleagues for complimenting you for enacting some of 
the reforms that we have supported in the past such as the AMT 
patch and the so-called doc fix in the baseline. While I 
certainly don't agree with all of the decisions you and the 
administration made on accounting aspects, I do agree with 
those that you made there.
    I do have a few questions about some of the accounting 
methods that you have had going forward. And to give you an 
idea what I am talking about, I am referring back to the other 
day with what the Department of the Treasury and the Fed has 
done with regard to AIG.
    Under the latest bailout, the Treasury Department will set 
up a new $30 billion fund that AIG can draw down from as needed 
in exchange for preferred stock for the Federal Government. 
Treasury will also exchange $40 billion in the preferred shares 
it already has received in AIG for new shares that ``more 
closely resemble common equity,'' similar to what the 
administration did on Friday with respect to Citigroup.
    Both of these moves greatly increase the risk to taxpayers 
if the institutions fail. As I am sure you are aware, preferred 
shares usually are the first in line to be paid when a company 
liquidates, but these common shares will be last in line. And 
these shares will not pay a dividend as well, which in the past 
would be compared to the interest that we were getting. So, 
without this dividend or interest payments and with the 
substantial increase in risk to the taxpayers, these outlays by 
the Treasury Department appear to be less and less like a loan 
and more and more like a direct outlay.
    Furthermore, it was announced that the Federal Reserve will 
reduce a $60 billion credit facility in exchange for taking a 
preferred interest in AIG's subsidiaries, such as American Life 
and American International Insurance Company, Limited.
    The Fed's exposure to AIG now totals something like $93 
billion, and this could put it in line for sizable losses 
should the value of those stakes deteriorate. This is just one 
of many, many unusual acts, for the Federal Reserve's 
terminology, they do during exigent circumstances, enacted by 
the Treasury Department and the Federal Reserve over the last 
year and a half.
    For example, back on February 18, a week ago, Secretary 
Geithner announced plans to double the size of U.S. funding 
commitments to the GSEs Fannie and Freddie to $400 billion. And 
in March of this year, the Federal Reserve set up a special 
limited liability corporation to hold the portfolio of J.P. 
Morgan, which was too risky for them to take in its fire-sale 
prices.
    I refer you also to what is happening in Britain. The 
British government there has just announced that they intend to 
classify Lloyd's of London and the Royal Bank of Scotland as 
public corporations. Their liabilities now will be assumed of 
$1.5 trillion pounds, and that will be added to the taxpayers' 
balance sheet. This reclassification will more than double the 
British national debt.
    So in the budget document here, it says that the budget 
supports the administration's new financial stability plan as 
well as the management of the TARP, emphasizing effective 
transparent accounting programs. In addition, it says that the 
President's budget includes $250 billion contingent reserves 
for further efforts to stabilize the financial system, which 
would support the $700 billion in asset purchases.
    So while I appreciate your desire to make some accounting 
corrections to anticipate future policies that could be enacted 
to stabilize the financial sector, my question is, do you feel 
that the OMB has done enough to accurately account for all of 
the actions taken by both the Federal Reserve and the Treasury 
Department in your baseline? And secondly, as the Fed continues 
to take risky actions under their and 13-3 exigent 
circumstances charter, is there any way for us to account for 
this in the budget?
    Mr. Orszag. Again, I think what we need to do is separate 
Treasury activities from Federal Reserve activities just given 
the way the Federal budget works.
    The Federal Reserve's activities are reflected in the 
Federal budget only through the transmission of net profits 
from Federal Reserve back to the Federal Government. So a lot 
of what is happening there is not reflected in the Federal 
budget, and that has always been the case.
    Mr. Garrett. And if you want an honest budget, shouldn't 
that be on the line?
    Mr. Orszag. There are complicated issues in bringing the 
Federal Reserve's full balance sheet.
    Mr. Garrett. Complications aside, should it be included?
    Mr. Orszag. I don't know that I would say it should or 
shouldn't be included. I think I can understand the motivation 
for looking both at the budget and the Federal Reserve's 
activities combined.
    But focusing just on what is covered by the Federal budget, 
this document does reflect, you mentioned AIG. As you know, 
that is covered under the existing TARP legislation that is 
embodied in the budget.
    Another way of putting the same point, we are hearing about 
large numbers, and there are very large numbers that are 
involved in the financial stabilization effort, even the part 
covered by the Federal budget. If you include the placeholder 
that we hope is not necessary to stabilize financial markets 
but nonetheless is incorporated to be responsible in the 
budget, there is something like $2 trillion in purchases of 
financial assets that is reflected in these numbers.
    As you know, the way the budget is done, it is on a net-
subsidy basis, so the number that shows up in the budget is 
smaller than that. But the gross value of financial asset 
purchases that is consistent with the numbers in this budget is 
something like $2 trillion. Obviously a substantial sum.
    Mr. Garrett. And so should we be able to move towards the 
British system to include the entire risk that is assumed by 
these, not just the numbers that you are saying are out there?
    Mr. Orszag. Again, there is some attempt to incorporate 
risk in the Federal budget already, but it is a partial 
reflection. So, across a whole variety of areas, the treatment 
of risk in the Federal budget I think is an important topic. It 
is not just with regard to financial market transactions but 
also with regard to a whole variety of other proposals.
    This came up with regard to Social Security several years 
ago and how risk was reflected in the budget there. It comes up 
in area after area, and I would say the treatment of risk in 
the budget is somewhat inconsistent, and that is an area that 
would be beneficial to move towards a more coherent or 
consistent system of treating risk in the Federal budget. It is 
not currently the case, and that is going to be difficult work, 
and it will take time to do.
    Chairman Spratt. The gentleman's time has expired.
    Mr. Becerra.
    Mr. Becerra. Thank you, Mr. Chairman.
    Dr. Orszag, good to see you again. Congratulations on your 
appointment.
    We are hearing quite a bit about this deficit and the long-
term debt, much of which the President has indicated he came 
into office having to live with. We all inherit things from our 
families and otherwise, and we make the best we can with that, 
and I appreciate that the President is trying to make due with 
the fact that, and I don't think he wanted to come into office 
facing a $1.4 trillion deficit and trillions of dollars of 
added debt over the next several years.
    Be that as it may, we appreciate very much that he has come 
out with an honest budget that really does give Americans a 
chance to understand how the government will be collecting 
revenues and spending the taxpayer money that it collects.
    On health care reform, I appreciate that the President in 
his budget articulates a vision for how we will reform a very 
broken system where we have some of the best technology and 
some of the best care, and perhaps the best trained 
professionals, but we still have close to 50 million people 
without health care. I am wondering if you can give me a sense, 
I believe you dedicate about $634 billion for health care 
reform?
    Mr. Orszag. That is correct.
    Mr. Becerra. I don't recall seeing that where we, in a 
budget presented by a President, had that much money ready to 
invest in real meaningful health care reform. Can you give us a 
comparison, say for example, of the cost of the Iraq war? How 
much have we spent, more or less, on financing the cost of the 
Iraq war over the last 5 or so years?
    Mr. Orszag. I would have to get back to you with an exact 
number, but I believe the cumulative cost is now in the range 
of a trillion dollars.
    Mr. Becerra. So we could do health care reforms to provide 
universal coverage, make it far more cost-effective for people 
with insurance to be able to send their families to a decent 
doctor or hospital for far less than the cost, than what we 
have paid so far in our involvement in the Iraq war?
    Mr. Orszag. Well, I would say a couple of things.
    One is, clearly, there is a time dimension to this. But 
more importantly, I do want to make clear the $634 billion is 
historic and substantial, but it is also only a down payment. 
More is necessary to reform the system, to bring down the cost 
and improve quality.
    Mr. Becerra. If you take into account the trillion dollars 
you estimate for the Iraq war so far, plus the money we will 
continue to spend, even if we are successful as the President 
hopes to bring that war to a close, we will have spent 
significant moneys that could have been used to take us a long 
ways toward resolving this health care crisis that Americans 
face day in and day out.
    AMT relief. Do you have a sense of how much it would cost 
over the next several years, 10-year window, to try to provide 
relief to the Americans who never believed that they would fall 
within the jaws of the alternative minimum tax?
    Mr. Orszag. The budget includes $576 billion in such 
relief.
    Mr. Becerra. And didn't the President, when taking office, 
have to live with a financial bailout for the financial 
services industry totaling $700 billion?
    Mr. Orszag. Yes.
    Again, coming back to the point that I made earlier, if you 
look at the situation that the President inherited along with 
the steps that have been necessary to address it, so the impact 
of the weaker economy on revenue, the imperative for a recovery 
act to jump start the economy, and the need for financial 
stabilization efforts, the total impact on the deficit for this 
year and next year combined is $2 trillion.
    Mr. Becerra. So if we look at what we did in the past and 
realize that had we had different policies and done things 
differently, we could have planned better for this country and 
its people. There are many things we could do, including, for 
example, our small business community. More than 91 percent of 
small businesses have income of less than $250,000. If I recall 
correct, with the different initiatives and proposals you have, 
small business men and women and their employees are likely to 
receive tax cuts under the President's policies and budget that 
you have proposed?
    Mr. Orszag. That is correct.
    I want to come back to the point I made earlier, which is, 
in addition to that, and I started and ran a small business, 
the most important thing for small businesses is economic 
growth and access to credit. That is what we are focused on 
doing over the next year or two. The recovery act is intended 
to get the economy moving again. There are proposals as both 
the financial stabilization efforts and in this budget to get 
credit flowing again to small businesses so that they can play 
the role in our economy that they traditionally have played.
    Mr. Becerra. I appreciate your being here.
    I yield back the balance of my time.
    Chairman Spratt. Mr. Harper.
    Mr. Harper. Thank you, Mr. Chairman.
    Congratulations and good luck in your job. I know it is 
going to be a lot of fun, isn't it?
    Mr. Orszag. Everything is relative.
    Mr. Harper. That is right.
    In the President's speech last week, he started out by 
saying we had gone to a new high level of importing foreign 
oil, and he said we pay a high price for our dependence on oil; 
he did not say on foreign oil. Are you anticipating that we are 
getting away from, in this budget, from going after our 
existing supply of fossil fuels that we do have available? Is 
there anything in this budget that calls for increased domestic 
supply of oil and gas that you see?
    Mr. Orszag. The way I would put it is, given the dependence 
on foreign oil that exists, we can either try to heavily 
subsidize and promote to sort of beyond what the market would 
otherwise produce domestic production, or we can try to move 
towards a cleaner energy future in which overall dependence on 
oil is reduced and that has the very significant benefit of 
also reducing our dependence on foreign oil. The budget chooses 
that latter course because I think that is the more sustainable 
path to choose.
    Mr. Harper. When we talk about the economy and the activity 
that you talked about, in my State, when the gas prices hit $4 
a gallon, it killed the small businesses. I don't know how we 
can endure another episode of that, and we have done nothing to 
try to increase that supply. So if we have another great 
fluctuation in the price at the pump, it is going to be very 
hard to sustain that.
    One thing that I noticed also in the President's speech and 
a question I had as I looked at the summary here, I didn't see 
any mention of nuclear energy. I saw some discussion about what 
to do with nuclear waste, but nothing about nuclear energy. And 
of course, that is not considered a renewable, although it is 
extremely clean. What does the President's budget call for 
regarding the use of nuclear power?
    Mr. Orszag. Well, as you noted, there are proposals in 
there with regard to the end part of the nuclear fuel cycle. I 
guess what I would say is we are going to have a legislative 
debate over climate change. Clearly, one of the things that is 
affected by whether carbon emissions has a price associated 
with it or not is nuclear power, and that discussion will occur 
as we move forward on climate change legislation.
    Mr. Harper. From a global warming perspective, nuclear 
would be good, would it not?
    Mr. Orszag. The evidence suggests that nuclear energy has 
lower carbon emissions than, for example, coal-fired power 
plants.
    Mr. Harper. We had a protest yesterday, and I understand 
some people couldn't get here because of winter weather, for 
the global warming protest, which is always of some interest 
there. But aren't the citizens ultimately going to be the ones 
who pay the cost of the cap-and-trade system?
    Mr. Orszag. Ultimately, one of the things that will happen 
as part of a cap-and-trade system will be higher energy prices 
which will be borne throughout the economy.
    I want to back up and say two things. One is, we have 
significant investments in energy efficiency which will help 
mitigate any upward pressure on energy prices. If we actually 
get the battery technology in place, if we actually build the 
electricity superhighway so that wind from North Dakota can 
reach Chicago, all of the energy price effects are 
substantially dampened.
    Secondly, we do have compensation that is included in the 
budget through the Tax Code for middle- and moderate-income 
families. The vast majority of families all in are going to be 
substantially better off under this budget than without it.
    Mr. Harper. And I know our time is almost up. One final 
question dealing with the national defense. Of course, in the 
news was the fact that the President indicated he was willing 
to talk about removing missile defense as some part of 
components talking with Russia in working with Iran. Does this 
budget call for any continued development of the missile 
defense system, or is that now off the table?
    Mr. Orszag. Again, I am going to defer to both Secretary 
Gates and Secretary Chu with regard to a variety of our Defense 
and related programs. I think you will be hearing more from 
them on those topics.
    Mr. Harper. Thank you for your time.
    Thank you, Mr. Chairman.
    Chairman Spratt. Mr. Doggett.
    Mr. Doggett. Thank you, Mr. Chairman.
    And thank you, Dr. Orszag, for your excellent testimony and 
your important work on this budget.
    Like President Obama's address to the Nation last week, 
your presentation on the budget recognizes that we cannot 
postpone resolving the dual challenges of both the health care 
crisis and the global warming energy challenge, nor can we 
expect the American people to share in the burden of climbing 
out of the giant hole in which failed Republican policies have 
placed our country unless there is greater tax fairness.
    On this latter point, I appreciate your specifically 
including codification of the economic substance doctrine to 
void transactions that no fool would engage in except to dodge 
taxes. It is a proposal Republicans have blocked consistently 
since I first introduced it in 1999.
    Your budget outline also refers generally to the thriving 
business of international tax evasion. I would just ask, as you 
prepare your more complete budget document, that you consider, 
as Senator Levin and I have asked you, to include the Stop Tax 
Haven Abuse Act that he, Congresswoman DeLauro, and a number of 
members of this committee, and last year when I introduced it, 
Rahm Emanuel and, over in the Senate, a Senator named Obama 
joined as cosponsors of it.
    Mr. Orszag. So you think that would mean favorable reviews 
within the administration?
    Mr. Doggett. The new evidence out is over 80 percent of our 
largest corporations use tax haven subsidiaries, and I think it 
is long past time to try to stop some of this offshore tax 
abuse, especially from those who turn to the government for 
bailouts with taxpayer dollars at the same time they have 
dozens of offshore companies.
    But let me turn to the issue you were just discussing about 
global warming because I believe that the vote we will take on 
this budget resolution will be the first major test of our 
commitment here in Congress to support President Obama in 
implementing an effective cap-and-trade or cap-and-invest 
system to place a price on carbon pollution and transition to 
an economy that is both more energy-independent and more 
carbon-independent.
    Like the hearing that you participated in over in the Ways 
and Means Committee with us last September, we had another 
hearing on this subject in Ways and Means last week. And, 
unfortunately, the Republican reaction ranged from many old-
fashioned globalwarming deniers to those who aggressively 
attack any role for government regulation.
    I would like you to explain, if you would, why you and our 
President recommend auctioning 100 percent of pollution 
allowances rather than just giving away pollute-free cards to 
the polluters. I believe the revenues that you have included, 
and I think it is conservative, it is kind of, the bottom end 
of the revenues through 2019 in this budget outline is about 
$650 billion. How is it that the American people are better 
served by auctioning the revenue instead of just returning the 
value to the polluters who created the problem?
    Mr. Orszag. The reason is, if you didn't auction the 
permit, it would represent the largest corporate welfare 
program that has ever been enacted in the history of the United 
States. In particular, all of the evidence suggests that what 
would occur is that corporate profits would increase by 
approximately the value of the permits. So whatever that is, 
$600 billion, $800 billion, whatever the value is, would go in 
a sense almost directly into corporate profits rather than 
being available to fund energy-efficiency investments and to 
provide a cushion or some compensation to American households. 
That is why the President, I think, has made absolutely the 
right choice in saying that the permits should be auctioned.
    Mr. Doggett. In that regard, we learn from the misadventure 
and experience of the Europeans who did give away many of those 
permits, and the revenues that you get from auctioning off 
those permits and then letting the free market set the price 
for carbon market reliance, those revenues, $650 billion or 
more, are a very essential part of your budget proposal; are 
they not?
    Mr. Orszag. They play an important role. There are lots of 
pieces to the budget, and I want to come back. We need to move 
to a clean energy future, and we need to do it in a fiscally 
responsible way. This is a way to do it.
    Mr. Doggett. Thank you.
    Chairman Spratt. Mrs. Lummis.
    Mrs. Lummis. Thank you, Mr. Chairman.
    Dr. Orszag, we heard such good things about you when we 
were looking at the new CBO appointee and what big shoes that 
person had to fill.
    Mr. Orszag. He is doing a good job.
    Mrs. Lummis. It is a pleasure to meet you.
    My first question is about the cumulative effect of the 
stimulus and the budget and now the proposed budget. The 
President has acknowledged the need for program elimination and 
reductions after a line-by-line Federal budget analysis, but I 
am looking at it from the perspective of someone who has been 
voting on these bills that have been coming before us. And 
since he took office, he has helped enact a $787 billion 
stimulus bill, and then he now appears to be willing to sign 
the $410 billion omnibus appropriations bill that had something 
like 8,500 earmarks. And his budget proposes to increase 
nondefense spending by over 9 percent.
    My first question is this: Did he consider freezing 
spending for his first budget so we, as Congress and the 
President, could go shoulder to shoulder with the American 
people who are trying to make ends meet and are trying to 
hopefully use the stimulus package that passed to recover the 
economy, why would we want to raise discretionary spending in 
this budget after we just passed a $1.1 trillion stimulus 
package that by itself should have been able to stimulate 
economic growth?
    Mr. Orszag. Let's come back to nondefense discretionary 
spending. The graph I put up shows over time this budget does 
reduce nondefense discretionary spending to the lowest share of 
GDP, to the lowest share of the economy on record, by the end 
of the budget window.
    As I said earlier, there are certain areas that require 
some reprioritization, and that is what is occurring. I will 
give you an example. One of the problems that we have that has 
occurred over the past several years, if you look at government 
contracting and procurement, the contracts have more than 
doubled, acquisitions have more than doubled over the last 8 
years. The number of contract officers has stayed flat. The 
result has been significant cost overruns and problems in 
administering those contracts. We need to address that problem. 
Once you start to address that problem, you don't need to keep 
growing thereafter. This is a one-time fix that is necessary. 
And that is why, that is one reflection; it is a little 
microcosm of what we are trying to do in this budget, address 
some of the problems that have arisen and then put us on a path 
to a sustainable spending level. And again, that graph shows 
you, this is not a big spending budget.
    Mrs. Lummis. Did the President consider freezing spending 
for this very first budget in order to give you all time to 
incorporate the big spending that we have been doing in the 
last 2 months into the American recovery effort? The question 
is, did he consider, did he consider freezing spending?
    Mr. Orszag. I am not positive, I don't remember whether 
that proposal was discussed with the President or not.
    Let me just talk about it for a second. As one example, 
take the defense budget, which came up earlier, the budget 
includes a 2.9 percent increase in pay for our soldiers and 
other military personnel. If you have a flat-line, zero-growth, 
either you are not going to finance their health care or you 
are not going to provide them a pay raise, or it is going to be 
implausible that you are going to turn the ship so quickly that 
you can get all of the necessary funding out of procurement and 
other parts of the Defense budget. That is just one example. It 
is the kind of thing that I think it would be nice if it 
worked, but especially after years in which problems have 
arisen, it is not the standard that the Defense budget, for 
example, should be held to.
    Mrs. Lummis. Mr. Chairman, I am going to mention something 
that I am tremendously concerned about in this budget, and then 
go on to another question. That is the abandoned mine land 
moneys. You are proposing that you change the law in this 
budget that was passed in 2006 to ensure that States that 
produce coal receive their abandoned mine land dollars over a 
15-year period, and now you are using this budget to reverse 
the law. And I am curious about what your justification is for 
doing that?
    Mr. Orszag. And I was actually just confirming you were 
from either Wyoming or Montana.
    This is the kind of thing that I think as you go through 
the budget, there is not a single line in the budget that 
doesn't have some backer or someone who cares a lot about that 
line. We can talk specifically about the abandoned mine land 
payment system.
    There was a program put in place to clean up abandoned 
mines. As part of legislation a couple of years ago, it was 
decided that we would provide payments to States for cleaning 
up mines even after they had finished cleaning up their mines.
    So what we are proposing is that we would no longer 
continue providing funding for cleaning up mines after the 
mines have been cleaned up. And that is what that provision 
does.
    I understand nothing is easy in this life. But if we want 
an example of what is involved in changing the course of our 
budget, that is an example.
    Mrs. Lummis. One more question, Mr. Chairman.
    Speaking of changing the course of our budget, the 
President as a candidate went over and over and over his 
commitment to end pork barrel spending, and yet he is going to 
sign a bill that has 8,500 earmarks, when he said he was 
opposed to earmarks. So when can we expect him to put out an 
earmark policy, and what will it look like?
    Mr. Orszag. Let me comment on that because I know that this 
has received a lot of attention. Are the level of earmarks in 
the omnibus bill larger than the President would like? Yes. Are 
they reduced relative to the peak in 2006? Yes. Does the 
President want to reduce them further and move towards a more 
transparent system for earmarks? Yes.
    I think you will be seeing in the very near future a 
statement of principle from the President on working with the 
Congress on how to address earmarks.
    But we also face this question that this was a deal that 
was done by basically the past Congress, and unless we are 
going to, you know, up-end the government and not continue to 
provide FBI protection and homeland security protection and 
what have you, we do need to move past this. I know I have been 
criticized for saying, but this was a deal done last year. This 
is last year's business. Does it contain more provisions like 
that beyond what the President would like? Yes. But we need to 
move on. Part of moving on will be to move to a new system in 
which earmarks are yet more transparent. There has been 
progress that has made, but yet more transparent and further 
reduced.
    Mrs. Lummis. Thank you.
    I yield back the balance of my time.
    Chairman Spratt. Mr. Blumenauer.
    Mr. Blumenauer. Thank you, Mr. Chairman.
    Mr. Orszag, I appreciate your point. We have, I think, a 
quarter of the earmarks, as opposed to what the Republicans had 
when they were in charge. I think putting that in perspective 
is important.
    I agree with my friend, Mr. Ryan. There are areas of 
agreement. I think it is important to acknowledge them. I agree 
with him about the point about agriculture reform. There are a 
number of people who have been working on this for a number of 
years. You have identified items in this budget, and if we 
could have gotten an up-or-down vote on the floor last time, 
that probably would have been enacted into law, for example, 
agreeing with President Bush in a bipartisan group to take it 
down to a quarter million dollars a year. What I would like is 
your assistance in framing for us what the impact is going to 
be on the typical farmer in America, not rich sugar and rice 
farmers on a large basis, but focus on the average farmer and 
the benefits that they are going to get from health care, from 
energy, from the opportunity for the tax cuts. The vast 
majority of farmers don't get a half million dollars a year, 
but they are going to be getting tax cuts. If you could help us 
frame a picture of that, would that be possible?
    Mr. Orszag. Absolutely. Under Secretary Vilsack's 
leadership, the budget includes substantial benefits for family 
farms, not only with regard to micro-enterprise provisions, not 
only with regard to moving towards green farming, not only with 
regard to a dramatic expansion in rural broadband.
    Mr. Blumenauer. I would like your help in bringing it 
forward. Could you help us frame this in terms of how many 
farmers there are, how many would be affected, how many would 
get benefits from the tax health care and energy? I think it 
would help us move forward.
    I just want to note one area of transportation, and this is 
not your area, I know. But we are going to have, the chairman 
indicated, a hearing on transportation. The budget, as I think 
Mr. Ryan pointed out, drives off the cliff because of the 
structural deficit in the Highway Trust Fund going forward. We 
are going to have a hearing on Transportation. I wonder if we 
can work with you to have the appropriate people in the 
administration who could be a part of the discussion with us. 
We have a large and growing consensus out in the real world, 
from the chamber to organized labor, environmentalists, local 
government, a whole array of businesses, that we need to put 
more resources in the transportation trust fund. Would you be 
able to work with us to get a team to help us flesh out how the 
administration would work with us on solving that problem?
    Mr. Orszag. There is really only one answer to that 
question, right? Yes.
    Mr. Blumenauer. Super.
    I would like to conclude on the area of Medicare reform, 
because I deeply appreciated what you put on the graph, that 
there are lots of opportunities in this proposed budget for 
reform that aren't Draconian, that just take a little bit away 
from coal mines that have already been cleaned up, for Heaven's 
sake, and go to parts of the country where they aren't, or 
reducing burdens on some.
    I want to focus on Medicare for a second because you have 
identified, it is a huge opportunity for savings, and your past 
research, I think, has been terrific. I have actually got some 
legislation introduced modeled on some of your prior research 
in this area. You soft-pedaled one point that it looks like, in 
some cases, there are actually negative results correlated to 
all of these tests. With that as the context, is it possible, 
as we are looking at Medicare Advantage, that we could consider 
one reform alternative that had people competing for what is 
the national average right now or for the national average for 
Medicare, and use that to allow people to compete with 
standards and performance-based measures so you don't penalize 
States like Wisconsin or Oregon, and you help encourage people 
to change their practices? Could we consider that as an 
alternative?
    Mr. Orszag. I would never want to be accused of soft 
pedaling anything, so let me first say that, in many cases, the 
more intensive approaches are not only more costly but actually 
harmful to health.
    With regard to Medicare Advantage, we think the proposal we 
have, which is competitive bidding with the benchmarks being 
set based on bids in the local area, is a preferable way. But 
we can talk to you.
    Mr. Blumenauer. But doesn't that wire in these 
extraordinarily high-cost areas? Why couldn't, if it is 
Medicare Advantage, which was supposed to provide lower cost, 
why can't we move towards more of a national?
    Mr. Orszag. Actually, we believe that the competitive 
bidding process will lead to the largest cost reductions in 
Medicare Advantage, precisely in those high-cost areas, like 
Florida.
    Mr. Blumenauer. Can't we superimpose the two?
    Mr. Orszag. There are lots of ways of doing this. We have 
put forward a proposal that we think works well.
    Chairman Spratt. Mr. Diaz-Balart.
    Mr. Diaz-Balart. Thank you, Mr. Chairman.
    Thank you. Good to see you, sir.
    This is the largest budget ever submitted and the largest 
share as a share of the economy since World War II. I would 
like to know how you developed this. The President has been 
talking about transparency and openness, and so I am going to 
ask you a series of questions, and I may have to ask some more 
in writing.
    Mr. Orszag. Let me preface this by saying that, obviously, 
the discussions we had with the President, I am going to not 
fully answer just to protect our internal discussions. But go 
ahead.
    Mr. Diaz-Balart. Well, I just wanted to know if you 
personally met with people outside the government to develop 
proposals that are reflected in this budget, and who those 
individuals would be?
    Mr. Orszag. To my knowledge, I did not personally meet with 
outside representatives while this budget was being discussed. 
But we can get a fuller answer to make sure----
    Mr. Diaz-Balart. E-mails, correspondence, phone calls?
    Mr. Orszag. I don't live entirely inside a bubble, so 
inevitably people contact me through e-mail and other means as 
budget proposals are being developed.
    Mr. Diaz-Balart. I ask this because, in the budget itself, 
the President states, quote, that it is no coincidence that the 
policy failures of the past 8 years have been accompanied by 
unprecedented government secrecy and unprecedented access by 
lobbyists and the well-connected. The New York Times recently 
reminded us that now, according to them, quote, liberal groups 
are flexing new muscle in lobbying wars. So there is no secret 
that, on the right and left, there are interest groups that 
want to have input.
    The President himself in this budget said that was 
horrible, and he has talked about transparency and openness. 
That is why I am asking these questions. I think it is 
important that we follow the President's own words, and that is 
why I am asking these questions, because he is the one who has 
been talking about transparency and openness.
    Yes, I would like to know, e-mails, faxes, any other 
contacts you have had from interest groups; will you provide 
those for us?
    Mr. Orszag. As you know, there is a long history of 
discussion between the Congress and the White House as to a 
balance between transparency and also not revealing--we would 
not want the internal discussions with, especially the 
President, to be undermined in terms of their frankness from--
well, period.
    Mr. Diaz-Balart. You are starting to sound a lot like the 
previous administration, I just I would mention that, which is 
not necessarily a bad thing.
    Mr. Orszag. I didn't intend to, and I hope that is not the 
case.
    Mr. Diaz-Balart. Well, you clearly are.
    Mr. Orszag. Let me just say, in terms of transparency, we 
are taking several steps to improve transparency. And I will 
give you one example. When I was CBO director, folks did like 
the fact that I had a blog to be able to talk about what we 
were doing. I have started a blog at OMB, and you will see a 
lot of output on that blog so we can provide more transparency 
about what we are doing.
    Mr. Diaz-Balart. I understand your concern about contacts 
between staff and the President. How about, did the President 
meet or call or e-mail anyone outside regarding this budget 
proposal?
    Mr. Orszag. Again, I understand the road you are trying to 
take me down here. I am going to just, if you want to submit 
questions in writing, we will get the appropriate White House 
Counsel and other ethics officers to provide the answers.
    Mr. Diaz-Balart. Well, again, and I am not trying to put 
you on the spot, but the reason is that I am actually reading 
from the President's own words in this budget that was 
submitted where he talks about that.
    Mr. Orszag. I think this administration is happy to be held 
to a historic level of transparency and accountability. And 
again, given the questions you are asking, I don't want to make 
a mistake with regard to the law or existing procedures. So I 
will defer to answering in writing.
    Mr. Diaz-Balart. And I understand that, and that is right. 
But, again, since the President has talked about a historic 
level of transparency, let me ask, did those White House 
staffers consult with or receive input from any outside 
interest groups before giving you instructions regarding this 
budget?
    Mr. Orszag. I guess we are going to play this game for a 
couple of more minutes.
    Chairman Spratt. Would the gentleman suspend? I think the 
witness has stated his position and stated it correctly, and 
stands thereon. I think you are just harassing the witness by 
continuing to pursue this line of inquiry.
    Mr. Diaz-Balart. Thank you, Mr. Chairman.
    Let me just clarify something. I am not trying to do that. 
The witness right now just said that they are trying to have 
unprecedented transparency. I just want to see what that means. 
What does unprecedented transparency mean? Does it mean the 
same standards that the previous administration used, or 
different standards? What I am hearing right now, Mr. Chairman, 
and I understand what he is saying, it is basically the same 
standards that the previous administration used, and I just 
wanted to see if there is any difference.
    I have not heard any difference, Mr. Chairman.
    Mr. Orszag. I think you will see a difference. But again, I 
will defer to the appropriate officials to get back to you in 
writing.
    Chairman Spratt. The gentleman yields back.
    Mr. Boyd.
    Mr. Boyd. Thank you, Mr. Chairman.
    I appreciate you ending that line of questioning. My dear 
friend from Florida, and I agree with so many things that have 
been said here in complimenting Director Orszag about the 
budget, particularly in the fact that, for the first time in 
many, many years, the first time maybe in 8 years, we have been 
presented an honest budget, and Mr. Ryan and others have 
acknowledged that and shown their gratitude to the director.
    Mr. Ryan. Only in a few places.
    Mr. Boyd. And what do I mean by that?
    Simply, I mean that the administration has brought us a 
budget which accounts for all of the spending that the 
government is going to be doing, including the war costs, 
including the AMT, including the Medicare doc fix, those things 
which we traditionally over the last 8 years around here said, 
no, that is not really going to happen; we will deal with it 
later. And I am quite confident that Mr. Ryan and his 
colleagues are very happy they don't have to defend that system 
any more. So I want to join them in complimenting you, Mr. 
Orszag, for what you have done.
    It is difficult for me to believe that we sit here today 
looking back where we were 8 years ago. Eight years ago, we 
asked the President to do three things. Remember where we were 
8 years ago. Surpluses as far as the eye could see. Number one, 
pay down debt; number two, reform broken entitlement programs; 
and number three, reduce taxes in a way that would as much as 
possible ensure the economic prosperity and continued growth of 
the middle class of this Nation.
    Number one, we didn't pay down any debt; we doubled the 
debt. Number two, we didn't reform broken entitlement programs. 
We have expanded entitlement programs in a way that makes them 
more broken. And number three, even though we reduced taxes, we 
didn't do it in a way that would expand economic prosperity and 
actually narrowed the middle class rather than expand it. So 
the policies we have been dealing with over the last 8 years 
have gotten it all wrong, and this team is trying to fix it.
    Now I want to ask you a very simple question, one that we 
have actually had some discussion about before, and I am sorry 
that Mr. Blumenauer went right before me and banged about 
agriculture.
    Mr. Orszag, how do you answer those that say a health care 
reform initiative should save money in the long run and not be 
an additional cost to the Treasury?
    Number two is, are you aware that taking on too many issues 
in this budget reform, in this economic recovery plan, might 
sink the whole ship?
    Softballs, Mr. Orszag.
    Mr. Orszag. Let me deal with the second question first. It 
is unfortunately the case that too many problems have been 
left. We have not addressed the problems in our education 
system. We have not addressed the need to move to clean energy. 
We have not addressed the huge inefficiencies in our health 
care system which drive up costs for American workers and for 
the Federal Government and for State governments.
    So, would I like it if we didn't have so many things that 
need to be done? Sure. But that is not the situation that we 
face. Given what we do face, what is the alternative rather 
than trying to address these key problems?
    Now, with regard to health care, the proposals that you see 
both in the recovery act and in the budget will reduce health 
care costs over the long term. And not only that, but we are 
committed to a self-financing health care reform so it doesn't 
add to the budget deficit even over the next 5 or 10 years 
while those investments are bearing fruit and the curve is 
being bent.
    But I think we need to remember, the rate at which health 
care costs grow, the power of compound interest is so strong 
that that becomes a dominant force. Just as an example, health 
care costs have grown a little bit more than 2 percentage 
points per year faster than income per capita over the last 
four decades. If that were reduced to 1 percentage point 
faster, still a significant amount, but from 2 percent to 1 
percent a year, go out 50 years, health care expenses are 20 
percent lower as a share of GDP, 20 percent of GDP lower than 
at the 2 percent growth rate. That is the whole ball game. That 
is the entire size of the Federal Government today just in 
reduced health care expenditures out after 50 years. That is 
what we have to keep our eye on because, again, and I know I 
keep repeating myself, but that is the key to our fiscal 
future.
    Mr. Boyd. Okay, I like that answer, 50 years at 2 percent a 
year, that, pretty soon you take the whole gross domestic 
product for health care.
    But the thing I wanted to say to you is that, in the end, 
this is a political process here in the House of 
Representatives and the Senate. And you need to be careful 
about taking on too many issues because we really do want to 
pass a budget, and we want to pass a good budget, and we think 
you have the basis for a good one, but it probably needs some 
tweaks.
    Thank you. I yield back.
    Chairman Spratt. The gentleman's time has expired.
    Mr. McGovern.
    Mr. McGovern. Thank you, Mr. Chairman.
    And, Director Orszag, congratulations. You have inherited a 
mess: The worst economy in my life time and the biggest debt in 
the history of the United States of America, so you have a 
tough job ahead of you.
    I want to say, for the record, I have confidence in you and 
the new President and the team he has put together to help dig 
us out of this ditch that the previous administration got us 
into. I think the budget you presented here today reflects the 
priorities that I think most people of the United States want 
the Federal Government to advocate. I wish you success, and I 
do have confidence in this administration.
    I want to talk about an issue that doesn't get talked about 
a lot, and that is the issue of hunger, which is getting worse 
in this country and around the world. Currently, in the United 
States, one in every eight Americans struggle with some form of 
hunger or food insecurity, as the Bush administration relabeled 
it. That is 12.2 percent of our people. This big figures 
include close to 700,000 children. I should add that this 
hunger issue adds significantly to our health care costs. And 
if we want to get health care costs under control, we need to 
deal with the issue of food and nutrition for all of our 
people.
    Globally, nearly 1 billion people suffer from hunger and 
malnutrition. And of these, over 400 million are children. I 
was glad and proud to see President Obama has made room for 
hunger on his plate of priorities. He has stated that he will 
eliminate child hunger in America by 2015, and he will work 
with the international community and provide the necessary 
resources to cut global hunger in half by 2015.
    Like the President, I believe this is doable. I also 
believe it requires a White House led government-wide 
comprehensive strategy on hunger and food security to make 
achieving these goals a reality. Most of our domestic hunger 
programs, especially those focused on children, fall under the 
USDA and Health and Human Services. Addressing global hunger 
and food security is not a simple matter either. Here programs 
are spread throughout a number of agencies and jurisdictions, 
including the Departments of Agriculture, State, Treasury, 
Energy and Labor and agencies, such as USAID, the Millennium 
Challenge Corporation, the Peace Corps and USTR.
    I think this is one of the moral challenges of our time, 
and I will be honest with you that, as a United States 
Congressman, I am ashamed that there are so many people in our 
country, 35 million plus, who don't get enough to eat, and we 
are the richest, most prosperous country in the world. We need 
to do something about this.
    Can you please tell me and the committee more specifically 
how the President's fiscal year 2010 budget and his 5- and 10-
year projected budgets will achieve these goals?
    Mr. Orszag. Yes, and I think you have identified a very 
important issue. First, let's start with what has already 
happened. The recovery act, for example, includes a significant 
increase in food stamp benefits or SNAP, the program has been 
renamed, but to help reduce the cost of purchasing food for 
moderate- and low-income households.
    In addition to that, the budget includes $1 billion 
annually for the Women, Infant and Children Program so that 
program can serve 9.8 million women and infants and provide 
needed nutrition to them and also to support the child 
nutrition programs that are part of this budget, including the 
school lunch program and other initiatives.
    One of the things that I know we are very interested in 
doing is moving towards not just providing adequate funding but 
also healthier options as part of those programs so that we are 
addressing, as you mentioned, not only the need for calories 
but the need for nutrition, which was the underlying rationale 
for those programs in the first place.
    Mr. McGovern. As I mentioned, the programs that actually 
respond to the issue of hunger and food insecurity fall under 
the jurisdiction of many different committees. What I am 
concerned about is there is a lack of coordination. I would 
urge very strongly that somebody in the White House be 
appointed or be charged with coordinating the different 
agencies to respond more effectively to domestic hunger and 
also to global hunger. I think this is a national security 
issue, one that I think we can play a very positive role in.
    But it is not just about funding this program and that 
program, but it is about coordinating all of the different 
agencies and departments. I really think there needs to be a 
point person in the administration to do this.
    Mr. Orszag. I would just add, in addition to the nutrition 
side, better integration of our food safety efforts would also 
be warranted and is something that the administration is 
looking into with the split responsibility between FDA and the 
Department of Agriculture for food safety.
    Mr. McGovern. The President's goal of ending childhood 
hunger by 2015 is a laudable goal, and is a good benchmark. I 
want to make sure that we reach that goal. I think it is going 
to require that the budget responds to try to move us in that 
direction, but I think there needs to be a coordinated effort 
and a comprehensive plan. I don't know what the plan is. I 
expect it will be developed. You have only been in office for a 
few weeks, but I think this is the moral challenge of our time, 
and I appreciate all of your work.
    Chairman Spratt. Ms. Tsongas.
    Ms. Tsongas. Thank you, Mr. Chairman.
    Thank you, Dr. Orszag.
    I have to say that I applaud our new President for 
presenting us with a budget that does focus on the challenges 
of health care, education, and energy independence, and global 
warming. As I go about my district, there is a commonsense 
understanding that these are the great failures of the past 
decade in not looking at these and beginning to put in place 
forward-looking approaches to them.
    But I would like to ask you about individual savings. I 
think it is great what you have included in the budget really 
beginning to look at ways to encourage people to save in 
retirement. But as we know, retirement savings are only one 
piece of the pie. And especially for those who have been 
dependent upon home equity to borrow against the value of their 
homes in the case of a personal emergency, that no longer is a 
resource. I am wondering if the administration is looking at 
ways to encourage individual savings aside from retirement?
    Mr. Orszag. I think there are a variety of discussions 
going on, some focused on financial education, which is one 
mechanism that people have put forward to encourage saving. We 
have already discussed retirement saving. So the short answer 
is, yes, I think a lot of that activity is focused in the 
Treasury Department because at least part of the answer 
involves the Tax Code. Part of the effort is surrounding the 
Department of Education and financial education efforts. And I 
know this is something that the Vice President feels strongly 
about, and it has already come up frankly in our first task 
force meeting of the Middle Class Task Force. It was one of the 
topics that was discussed.
    Ms. Tsongas. It is an issue of low- to middle-income 
families. I represent three cities where the average income is 
well below the norm and where much of the subprime lending 
crisis originated. We see what happens when we don't put in 
place incentives to encourage savings so that people can begin 
to get a head start.
    Mr. Orszag. Let me raise another topic which is included in 
the budget, which is one of the things that doesn't make a lot 
of sense to my mind. We encourage saving on the one hand, and 
for people who do save, if a crisis like we are currently 
facing comes along and they need assistance under food stamps 
or other means-tested benefit programs, we have very outdated 
asset tests that apply. We basically are saying, please, go 
save, and then we hit you over the head if you do, should you 
ever need assistance in the future in ways that even 
conservative economists have identified as being a very high, 
implicit tax on savings.
    The budget includes a set of proposals to start modernizing 
those asset tests so we are achieving a better balance between 
targeting the benefits on those who most need them but not 
discouraging people so much from saving in the first place.
    Ms. Tsongas. I welcome hearing that, and I look forward to 
reading the particulars. Thank you very much.
    Chairman Spratt. Ms. McCollum.
    Ms. McCollum. Thank you, Mr. Chairman.
    I am going to quote President Obama here: Government has 
failed to fully confront the deep systematic problems that year 
after year have only become a larger and larger drag on our 
economy. From the rising cost of health care to the state of 
our schools, to the need to revolutionize how we power our 
economy, to our crumbling infrastructure, policymakers in 
Washington have chosen temporary fixes over lasting solutions.
    It goes on to say that the time has come to usher in a new 
era, and I will conclude with this: To lay a new foundation of 
growth upon which we can renew the promise of America.
    So we have heard some discussions about the recent past and 
our failures to really build a strong economy. Look at where we 
are today. So we don't want Congress and this administration to 
repeat the mistakes in the future. Can you maybe contrast three 
or four major choices or decisions that took place in putting 
this budget together that, when you looked at the past 8 years, 
that contributed to the financial nightmare we find ourselves 
in? What are some of the lessons learned in the Obama 
administration in putting this budget together that you would 
like to share with Congress so we don't repeat the mistakes in 
the future but instead take $1 and invest it wisely to benefit 
a child, a community, or our country to make it stronger, 
healthier and more prosperous?
    Mr. Orszag. Let me highlight three. The first is, previous 
budgets would present a picture of the future that was 
unrealistic because they excluded lots of things that everyone 
in this room knew were going to happen. I have ticked through 
the list, but again, excluded the alternative minimum tax, let 
it take over the Tax Code when everyone know that wouldn't 
happen; assumed that Medicare physician payments would be 
reduced by 20 percent when, year after year, Congress would act 
to prevent that from occurring.
    So one choice that was made was, we are not going to do 
that, even if the reported number is higher, the deficit is 
higher, and I could make the deficit look a lot smaller by 
playing those games. The President decided and I fully support 
this, let's be grown-ups here and be real about the situation 
that we face and start working our way out of it. So that was 
the first choice.
    The second choice was to take a variety of inefficient 
subsidies and eliminate them. Subsidies to Medicare Advantage 
plans that are overpaid by 14 percent relative to traditional 
Medicare, according to estimates from CBO and GAO and MedPAC 
and others; subsidies to middlemen on education loans that add 
$50 billion in cost without helping students at all; and you 
can keep going down the list. So I think there are a series of 
changes that were targeted at eliminating inefficient 
subsidies.
    Finally, I would again focus on health care. Previous 
budgets did not put on the table a significant down payment and 
a focus on health care like the President has done that will 
help bend the curve on health care costs over the long term and 
thereby make working families better off because their take-
home pay will go up. Right now, it is burdened by the weight of 
health care costs, and also address the key to our fiscal 
future. I think that is the single most important thing we can 
do to put the Nation on a sounder long-term fiscal path and 
also help working families and State governments.
    Ms. McCollum. Could you point out how, by investing a 
dollar in education or investing a dollar in IT technology, how 
we are going to see fruits of that?
    Mr. Orszag. Sure. Let me give a few examples across a 
variety of areas. Let's take the government's own operations. 
There is credible evidence that shows investing a dollar in 
combatting health care fraud, that is making sure that, under 
Medicare, money only goes to the providers that should receive 
it, saves $1.60 in health care costs. We have underinvested in 
program integrity. This budget corrects course and saves $50 
billion in erroneous payments that would otherwise have 
occurred.
    Actually, I think that might be, perhaps, the most 
compelling example. But you can keep going down the list. In 
early education, the evidence is very clear that high-quality 
early education programs help to produce better life outcomes 
for individuals who go through those programs but also helps to 
reduce crime and other things that as a society have costs.
    In health information technology, we have already 
discussed, that is one of the key--necessary but not 
sufficient. By itself, it won't solve the problem, but it is a 
key step on the road to a more efficient health care system.
    The analogy people have drawn is it is like plugging the 
toaster into the wall. By itself, the toast doesn't come out 
just because you plug the toaster in; you also have to put the 
bread in and press the button down and what have you. But if 
you don't plug the toaster in, you are not going to get any 
toast out of the toaster.
    Chairman Spratt. Mr. Edwards of Texas?
    Mr. Edwards. Thank you, Mr. Chairman.
    Dr. Orszag, if I could borrow on the words of my colleague, 
Mr. Hensarling, I think what the administration has inherited 
is a trifecta: a trifecta that is the result of 8 years of 
Republican, trickle-down, deregulation ideology that led to, 
first, the largest deficits in American history; the second-to-
the-worst job loss since World War II; and, thirdly, to 
potentially the largest, longest, deepest recession we have had 
since the 1930s.
    I salute you and President Obama for putting together a 
budget that is honest in its assumptions and, once again, tries 
to show real respect to American middle-class working families 
that have lost, I believe, between $1,000 and $2,000 a year in 
real income over the last 8 years under the policies of our 
Republican colleagues.
    I would ask American citizens who watch these debates to 
just take into account that some of the loudest, most 
vociferous critics to the Obama proposals were the architects 
of the disastrous economic trifecta that has hurt millions and 
millions and millions of American working families, senior 
citizens who have lost their savings, families wondering how 
they will make their next mortgage payment because they have 
just lost their jobs.
    I also want, as chairman of the appropriations committee 
that funds veterans, I want to salute President Obama for 
something that the press has paid very little attention to. In 
this budget, President Obama proposes the largest increase in 
veterans' health care and benefits funding ever proposed by any 
President--the largest ever.
    For far too long, we have had administrations who have paid 
respects, genuine respects, to our veterans on Veterans' Day 
and Memorial Day, but yet did not fully respect them with their 
budget proposals. I salute President Obama for keeping his 
promise to those who have kept their promise to serve our 
Nation.
    And because of the $25 billion increase over the baseline 
over the next 5 years proposed by the President, more veterans 
will receive VA care, including a lot of middle-income veterans 
and lower-income veterans who have been locked out of our VA 
hospitals because of the previous administration's arbitrary 
cap on income eligibility for VA care. The 5.5 million veterans 
receiving care every year are going to get better care, better 
quality care, with shorter waiting times for physicians 
appointments.
    And I could go on and on, but the bottom line is this 
budget shows a historic level of respect to America's past 
service men and women. And I think that deserves the attention 
of the American people. I know there are 25 million veterans 
and there are millions of dependents who will greatly respect 
the President's initiative in this area.
    The one question I would like to ask is this. I was very 
critical of Republican budgets over the last decade because 
they assumed constant economic growth with no potential 
recession over a 10-year timeline, and then they followed 
policies based on those unrealistic assumptions.
    What is the policy of the President if either Congress 
refuses to bring about the savings proposed by the President or 
economic growth doesn't meet the projected growth, I think 2.6 
percent for the last 4 or 5 years in the decade proposed? Will 
you adjust spending downward, or will the spending be committed 
and we will just increase the deficit in that case?
    Mr. Orszag. Well, again, I think in those out-year 
projections, the assumptions are actually lower than the Blue 
Chip economic growth forecast. So the whole point of putting 
together--addressing the long-term challenges that we face is 
to generate that economic growth. And that is the whole point 
of the budget.
    Mr. Edwards. If those numbers turn out for 2010, 2011, or 
2012 even in the short run, turn out to be a little optimistic, 
because nobody can predict the future with absolute certainly--
the Republicans certainly didn't. They projected balanced 
budgets for the next decade.
    Mr. Orszag. Right. We could wind up being too high, we 
could wind up being too low. There is significant uncertainty. 
Of course we will revisit things as the world evolves. And, you 
know, we will have a budget next year and we will have one 
thereafter. And part of the policymaking process is to readjust 
to reality as it occurs, and that is what we will do.
    Mr. Edwards. Great. Thank you.
    Chairman Spratt. Now Mr. Etheridge, then comes Mr. Scott, 
and after that Mr. Langevin if he is here, Mr. Larson if he 
returns, Ms. DeLauro of Connecticut, and Mr. Melancon.
    Now Mr. Etheridge.
    Mr. Etheridge. Thank you, Mr. Chairman.
    And thank you, Dr. Orszag, for being here to discuss the 
2010 budget. And I appreciate your efforts and your staff and 
the administration to really put out, I think, a clear view of 
our current economy and not try to hide the costs of those 
policies and have them omitted from the budget. I think it is 
critical to have that, because to budget is to govern, and we 
certainly have to do that.
    Let me ask a question, though. Having served as a former 
State superintendent of schools, there is an issue in here I 
have a question about, because I do believe education is a key 
in the foundation for the future growth. And I am pleased that 
this budget really invests in that high priority of education.
    But I am concerned about the proposal to end the Federal 
Family Education Loan Program and to have all those loans 
originate through the Federal Direct Loan Program. And for the 
past 4 years, the College Education Foundation of North 
Carolina has assisted over a half-million North Carolina 
students and families with college loans.
    Could you comment on the eliminated savings the budget has 
associated with these through that program? And is the 
Department of Education ready to scale up to deal with these 
programs?
    And the budget assumes a $4 billion to $6 billion savings--
which, directed costs might be expected to increase the deficit 
by, my numbers say, $100 billion. How are these savings 
calculated? And is OMB assuming these savings on the basis of 
current low interest, and might this change in the future?
    Mr. Orszag. Well, let me first say all of the estimates 
from OMB, from the Congressional Budget Office, from elsewhere 
suggest that the direct lending program is a more efficient 
system than providing subsidies, basically, to middlemen in the 
education loan process. Now, let me also say----
    Mr. Etheridge. But North Carolina is a nonprofit run by----
    Mr. Orszag. I understand that, and there are obviously some 
more efficient and less efficient intermediaries. But as part 
of this expanded direct lending program, there would be 
substantial opportunities for both private-sector entities and 
others to service the loans, which is part of our proposal.
    So this is an area where the current system contains an 
inefficiency. We are trying to move towards a more efficient 
system, and there would still be activity for servicers to 
service the direct loans.
    You had also asked about the ability of the Federal 
Government to ramp up, and that is something that we had 
considered and evaluated. And the short answer is I am 
confident that the Federal Government could ramp up the direct 
lending program in a timely and effective manner under this 
proposal.
    Mr. Etheridge. I look forward to talking to you more on 
that, because I know how ours works, and that would be moving 
those jobs to North Carolina and Washington, and I am not so 
sure that is efficient.
    Mr. Orszag. No, we won't be doing that. No, no, right.
    Mr. Etheridge. Okay. But I would like to talk with you 
about it.
    Let me move to another one, if I may, because I am excited 
about the investment that this budget has in health care, 
because I think that is a critical area that everyone is 
affected by. And the President needs to seriously think about 
making some real reform in this critical sector of our economy. 
And I appreciate his bold call for curing cancer and other 
serious diseases that the administration is emphasizing and the 
money that is being placed in as investment in health research 
at NIH and through the SIRB and other initiatives as part of 
keeping America globally connected and competitive.
    Can you discuss the mixture, though, of public and private 
scientific investments in the President's budget and how such 
research will create jobs, public and private sector, and puts 
the Nation on a sounder foot financially? Because I think this 
is a critical piece as we move forward.
    Mr. Orszag. And now we are outside of health care, we are 
talking about science writ large?
    Mr. Etheridge. Absolutely. Which will reflect on health 
care at some point.
    Mr. Orszag. Absolutely.
    The Recovery Act included historic investments in science. 
The budget builds on that with significant investment in with 
the National Science Foundation, in other parts of our 
scientific community, because we need to remain at the 
forefront of scientific knowledge if we are going to have a 
high-performance economy.
    So the evidence strongly suggests that, by having the 
Federal Government focus not just on basic research but some 
aspects of applied research, there are very significant 
spillover effects that help boost economic performance. So, 
even when the research is done or funded through the National 
Science Foundation and done at a university, the impact and the 
benefits spill over into the economy. And, for example, you do 
have significant growth clusters that arise around research 
universities, which is one manifestation, but the effects, the 
evidence suggests, are even broader than that. And 
technological progress is one of the keys to our long-term 
economic performance, which is why we are investing in science, 
not only in the Recovery Act but in the budget.
    Mr. Etheridge. I couldn't agree more. And you can look at 
spots in North Carolina and around the country where that is 
absolutely true.
    Thank you, Mr. Chairman. I yield back.
    Chairman Spratt. Thank you, Mr. Etheridge.
    Mr. Scott of Virginia?
    Mr. Scott. Thank you, Mr. Chairman.
    Dr. Orszag, thank you for coming.
    And you have been faced with the, kind of, national debate 
with two competing theories, economic theories, one of which 
was put into effect in 1993 and one in 2001. And the debate 
sounds like you ought to receive these with equal credibility, 
when, in fact, the 1993 plan created record numbers of jobs, 
median income up substantially, Dow Jones Industrial Average 
more than tripled. If we had kept going at the rate we were 
going, we would have paid off the entire debt held by the 
public by last year.
    On the other hand, the 2001 budget went into effect, the 
worst job performance since the Great Depression, median income 
went down when adjusted for inflation while health care costs, 
college tuition, and housing costs actually went up. The Dow 
Jones Industrial average was worse than it started. And we 
overspent the budget by eliminating $5 trillion of surplus and 
overspending it by another $3 trillion or $4 trillion, 
overspending the budget by $9 trillion.
    Now, the Republicans want some credit for this, because 
they took over the House and Senate in 1995. But you will 
remember that their contribution to the economic theory was 
producing budgets that President Clinton vetoed and refused to 
sign. In fact, the government closed down because he kept he 
kept vetoing their budgets.
    Now, you are faced with this. Now, do you think that the 
1993 theory--what is in this budget that is closer to the 1993 
budget than the 2001 budget?
    Mr. Orszag. Oh, this budget is clearly more spiritually 
aligned with the 1993 budget than anything resembling the 2001 
budget. But I would also say that it goes beyond what was done 
in the 1990s in many key areas.
    But I think what you are really getting at is a very 
important point, which is there are two theories of the case 
here. A theory of the case, that the only thing that drives 
economic performance is the top marginal tax rate or the top 
two marginal tax rates that affect a very small share of people 
and that the way we are going to get markets to work well is 
funneling lots of subsidies to corporations, has been tested. 
It does not work.
    Mr. Scott. Thank you.
    Now, you also mentioned honesty in budgeting. When the 2001 
and 2003 tax cuts passed, the AMT was not mentioned, when 
everybody knew that we would adjust it every year. Is it true 
that about two-thirds of the total cost of those tax cuts was 
in the annual fixing of the AMT?
    Mr. Orszag. It is an important interaction, so it is a very 
large share. Exactly what the share is depends on how you do 
the calculation, but a very significant share.
    And, in a sense, to be more precise about that, the cost of 
the 2001 and 2003 tax legislation was artificially reduced, or 
made to look low, by assuming that the AMT gradually took back 
a growing share of those tax cuts. That is not what is done in 
this budget, and that is a very significant change.
    Mr. Scott. Now, you have a placeholder for over $600 
billion in health care. What can we expect with that?
    Mr. Orszag. What you can expect from that is not only 
efficiency improvements on the provider side but also funding 
to get overall health care reform done this year, which is what 
we want to do.
    Mr. Scott. Now, interest on the national debt--had we paid 
off the national debt, we would have, by 2013, in fact not only 
paid off the debt held by the public but also restored the 
money to the trust funds. How much money are we going to spend 
every year in interest on the national debt going out, which 
would have been zero?
    Mr. Orszag. You know, you always ask me that question, 
which is why I frantically--yes, it would have been zero. With 
the policy path that we are on, without the budget 
interventions, total net interest is almost $5 trillion over 
the next 10 years.
    Mr. Scott. And for about one-tenth of that, you are going 
to make profound changes in health care.
    Mr. Orszag. We believe that the health care system could be 
made much more efficient and that we need to do that this year, 
yes.
    Mr. Scott. Now, we have heard complaints about earmarks. 
Compared to earmarks when the Republicans had total control 2 
years ago, isn't it true that the number of earmarks in this 
bill and the bill we just passed, the omnibus appropriations, 
the number is substantially lower than anything that passed 
when the Republicans had total control of Congress and the 
White House?
    Mr. Orszag. Yes. In particular, the number has been reduced 
from something like 15,000 to something like 8,000 or 9,000--
still higher than the President would like, but a significant 
reduction.
    Mr. Scott. Thank you, Mr. Chairman.
    Chairman Spratt. Thank you, Mr. Scott.
    Mr. Schrader?
    Mr. Schrader. Thank you, Mr. Chairman.
    A series of, hopefully, quick questions.
    The Blue Chip forecast that was alluded to earlier, did it 
take into account the beneficial effects of the Recovery and 
Reinvestment Act, do you know?
    Mr. Orszag. The long-term one, no. The short-term one, to 
varying degrees. But, again, I think the folks who pay the most 
attention to lining up with our fiscal year projections and 
what have you is the Congressional Budget Office. And on that 
basis, at the time the forecasts were locked in, we are right 
in line with them once the Recovery Act is included in the 
analysis.
    Mr. Schrader. A lot has been made over this is the largest 
peacetime budget, maybe, in recent American history or for 
quite a while. How many other administrations have had the 
vision to take on health care independence, if you will, energy 
independence, and education for the 21st century besides 
President Obama?
    Mr. Orszag. I think it is clear that this is a bold and new 
direction for the country.
    Mr. Schrader. And I assume that the administration feels 
this is the direction the people want to go.
    Mr. Orszag. The direction people want to go and the 
direction we need to go if we are going to have the future that 
all of us desire.
    Mr. Schrader. A lot has been made over tax increases or 
revenue increases in this budget. Isn't it true that, if you 
balance out of the tax breaks, the efficiencies, that we are 
actually getting to almost a $2 trillion reduction in revenues 
on the American taxpayer?
    Mr. Orszag. There is a tax reduction for 95 percent of 
working families in this budget.
    Mr. Schrader. And the AMT and numerous others, I believe.
    Mr. Orszag. And we make sure that the AMT does not take 
over the Tax Code. And we continue the middle-class tax 
provisions that were provided as part of the 2001 and 2003 
legislation.
    Mr. Schrader. I am surprised at some of my Republican 
colleagues' dismissal of some of the business-friendly aspects 
of this budget, particularly in the small-business arena. Could 
you elaborate on what is in this budget and what was in the 
Recovery Act that is going to really free up--you alluded to it 
a little bit before, the credit markets and small businesses 
recovery?
    Mr. Orszag. Yeah, let me--again, most small businesses now 
are struggling because of a collapse in demand for their 
products and because they are having trouble getting credit 
from their banks. The key thing that we can do over the next 6 
months, a year, to get small business back on its feet is to 
get the economy back on its feet and to get credit flowing to 
those small businesses. The budget includes $28 billion in loan 
guarantees, the majority of which is provided through a well-
known and effective program to get credit to small businesses.
    The Recovery Act was intended to get the economy back on 
its feet. So, in addition to that, there are a variety of other 
targeted provisions--for example, a zero capital gains rate on 
stocks that are held in qualified small businesses for more 
than 5 years, zero percent capital gains rate.
    But I think, rather than getting focused on the wrong 
thing, the right thing to focus on with regard to small 
business is getting economic growth back on track and getting 
credit flowing.
    Mr. Schrader. Last but not least, not a lot has been made 
of the performance outcome reporting that has been suggested in 
this budget, and a chief performance officer. I think that is 
huge.
    Has there been discussion about getting away from counting 
inputs and outputs and reports and all that stuff that gets in 
the way of good use of some of the taxpayer dollars at our 
local State and private enterprise level and maybe going to a 
more performance-based criteria?
    I guess I would urge the administration to go down that 
road vigorously, work with States that are already doing this 
and, frankly, some of the congressional delegation that might 
be interested in pursuing that. That really is exciting.
    Mr. Orszag. Absolutely. And I, again, just want to 
emphasize, the way that the Federal Government has measured 
performance has been focused on, as you put it, inputs, 
processes. To take the tax gap, $350 billion, the performance 
metric system that we have, the PART system, focuses on the 
audit rate, if you will, on how many audits are done. Well, 
that is great, but that is an input. What we really care about 
it getting the tax gap down.
    So, rather than saying our target is to get the tax gap 
down to some dollar value or some percentage of GDP or 
something like that--and there are many mechanisms for doing 
that--we focus just on input. That needs to change, and we will 
be adopting a new system. It is going to take some time to 
develop the new system, but we are going to adopt a new system 
that will be based not only on consultation with you but with 
the agencies, and it will be more outcome-focused.
    Mr. Schrader. Thank you very much. I yield my time.
    Chairman Spratt. I thank the gentleman.
    Ms. DeLauro of Connecticut?
    Ms. DeLauro. Thank you very much, Mr. Chairman.
    Thank you, Dr. Orszag. I am looking around, and it is Mr. 
Schrader and myself, so my apologies for popping in and out.
    But let me just say thank you to you for your honesty, for 
your clarity, and for your candor in this budget. And I think 
it is a remarkable document which demonstrates a clear 
commitment to priorities, but it also demonstrates a clear 
commitment to values and to what are the issues that are most 
pressing on the people of this Nation and how we try to address 
them.
    I will make just a very quick thank-you to the President 
and to yourself with regard to the child tax credit, not only 
part of the recovery program and changing the income level from 
$12,000 to $3,000, but now a permanent part of this budget. I 
think that will go a long way, as a refundable tax credit can 
do, to really assist families.
    I am going to move to an area that you have heard me talk 
about for a long time, and that is infrastructure. The budget 
proposes to expand, enhance existing Federal infrastructure 
investments through a national infrastructure bank that will 
deliver financial resources to priority infrastructure 
projects, those that are of significant national or regional 
economic benefit.
    What you propose is $5 billion in each of the next 5 years, 
as I understand it, for a total of $25 billion for the bank and 
another $25.2 billion over the following 5 years through fiscal 
year 2019.
    I am going to be introducing legislation very shortly which 
would create an infrastructure bank very, very much like the 
European investment banks. It has a similar amount of money, 
authorized annually for appropriation. The bank would function 
like a development bank: make loans, loan guarantees, issue 
bonds, purchase, pool, and sell infrastructure securities on 
the global market, leverage investment and so on.
    Now, when the President was then Senator Obama, he 
supported an effort which was a bit different which created an 
entity that would similarly depoliticize the process and focus 
on projects of national interest, but not necessarily have all 
of these functions. Just the authority to prioritize funding 
for projects and to issue bonds, that was the limit.
    At this juncture, can you provide any further detail as to 
how you envision the structure of this entity and, critically, 
what financial and other functions it will have?
    What we are going to try to do in the legislation that I am 
going to propose is fund transportation, environment, energy, 
telecommunications projects. And so, a further question is how 
you define ``infrastructure'' in your vision of the bank.
    Mr. Orszag. Well, let me first say one of the motivations 
for an infrastructure bank reflects a concern about the way we 
select infrastructure projects currently and whether they are 
based on efficiency and, sort of, what will most benefit the 
economy. I think we need to be moving more towards that type of 
selection process, which a bank will help do.
    As I said before, there is going to be a lot more details 
coming from us in April in the full budget. I know that you 
have been very focused on this topic; I know Senator Dodd, your 
colleague from Connecticut, has been. There is a lot of 
congressional interest. So I would, at this point, just say we 
look forward to working with you to flesh out the details as we 
move into the full budget in April and as you move forward with 
the legislative process.
    Ms. DeLauro. I thank you for that, and I will look forward 
to working with you and fleshing out the details.
    Given at least the success that I understand that has come 
through the European development banks, is that I would hope 
that that is the kind of a model that we are looking at, which 
we would absolutely be creating a bank in which we can do that, 
which gets you to both processes, which is to depoliticize the 
way in which the projects are determined and what the common 
good is or the public interest is, as well as allowing for 
there to be really a critical public-private partnership.
    Mr. Orszag. I remember one weekend spending the weekend 
reading a binder on the European investment bank because of 
your references to it, so thank you for that.
    Ms. DeLauro. Thank you.
    I have a quick 16 seconds. Early childhood education, we 
did $142 billion in the reinvestment and the recovery package. 
Just tell me, with the current budget, what kind of commitment 
are we going to be able to keep in serving all eligible 
children in this regard and to look to those kids and their 
providers or those programs and providers to meet the 
standards, the standards that were laid out in the recovery 
package.
    Mr. Orszag. In early education?
    Ms. DeLauro. In early education, yes.
    Mr. Orszag. Yeah, again, the President's budget includes 
very significant increases, puts us on a--doubles Early Head 
Start. There are significant investments in early education 
because the evidence suggests it works.
    Ms. DeLauro. Thanks very much. Thank you, Dr. Orszag.
    Thank you, Mr. Chairman.
    Chairman Spratt. Mr. Langevin?
    Mr. Langevin. Thank you, Mr. Chairman.
    Director, thank you for being here. I know you have a tough 
job on your hands, and we appreciate the job you are doing and 
also the credentials that you bring to the new post.
    I am particularly pleased, first of all, by the way that 
President Obama has made health care reform such a priority. 
And he is going to tackle it now looking forward to the future. 
And, really, it is one of the key components of how we are 
going to truly balance the budget and fix the economy for the 
long term, helping us to be competitive.
    Let me just say this, Dr. Orszag. The President's budget 
obviously sets forth a very ambitious policy agenda while 
simultaneously adhering to an honest and sobering accounting 
standard that realizes incredible fiscal challenges. And it has 
become clear that, in order to rebuild our economy, we are 
going to have to make significant investments and keep 
priorities like energy, education, and health care while 
sacrificing in some other areas.
    One of the priorities that he highlighted in the budget 
outline is a reserve fund of more than $630 billion over 10 
years to finance health care reform, which I mentioned. 
Certainly, as a strong advocate for health care reform, I am 
very interested in hearing more about this initiative, in 
particular.
    And so my question is, it is stated that the reserve fund 
will be financed in part by new revenue and in part by savings 
proposals that promote efficiency and accountability. So, on 
this point, can you please elaborate on that for me, and what 
specific budgetary and policy changes need to be made to fully 
fund this reserve?
    Mr. Orszag. Okay, first, let's just again point out we want 
to get health care reform done this year. And the reason we 
want to that is, not only to put the Nation on a sounder fiscal 
path, since health care costs are the key driver of our long-
term fiscal gap, but also to help working families, because 
their take-home pay is being reduced by excessively large 
health care costs and State governments that are facing 
problems financing their health programs and are having to 
starve other parts of their budget in order to finance health 
care.
    The budget puts down $634 billion as a significant 
downpayment on getting health care reform done this year. It is 
split roughly half and half, half additional revenue and half 
savings in Medicare and Medicaid that are focused on making 
those programs more efficient.
    So, as one example, $177 billion in moving to a competitive 
bidding program for the private insurance firms that offer 
Medicare coverage. Currently, they are paid $1,000 more per 
beneficiary than covering the same beneficiary under 
traditional Medicare because of artificial rules that were 
written to provide them those excessive payments. What we are 
saying is, bid for the business, and that is what you will get 
paid; it saves $177 billion.
    Similarly, there are changes in--almost 20 percent, I think 
it is 18 percent of patients are readmitted to a hospital 
within 30 days after being discharged. We are trying to provide 
incentives to reduce that. MedPAC and other experts have 
suggested significant efficiency improvements could come from 
better management of patients after they are discharged from a 
hospital to avoid those readmissions.
    And, by the way, it is not only a cost thing, but who wants 
to, you know, get admitted to a hospital, go through all of 
that, get discharged, and then have to wind up back in the 
hospital? If you can avoid that, it is not only a cost-saver, 
but it also makes people's lives better off. So we are trying 
to provide stronger incentives to hospitals to do a better job 
of avoiding the need for readmission.
    So we can continue this conversation, but, basically, I 
have given you some flavor for the types of things that are 
already in that significant downpayment. And we want to work 
with the Congress to provide the full health reform package and 
get it done this year.
    Mr. Langevin. And so, the new account that you are setting 
up, that is going to be a set-aside in the sense as a 
downpayment that we could draw on to achieve a form of 
universal health care just as a starting point?
    Mr. Orszag. Yes. Correct.
    Mr. Langevin. Okay. And can you tell me, at this point, is 
it the President's vision that the health care reform that we 
hope to achieve would be mandatory-type universal health care, 
where we would include everybody, as opposed to doing this 
piecemeal?
    You know, I want to be on record as saying that I believe 
the only way to truly achieve universal health care is to have 
it mandatory, that everyone has to be in the system. It is not 
necessarily a one-size-fits-all, but everyone has to be in the 
system.
    So can you give me, kind of, a glimpse into where you are 
going?
    Mr. Orszag. Well, I think the goal is to move toward 
universal coverage. And I don't want to--there are lots of ways 
of doing that. You are going to see more details on Thursday at 
the health summit, and you are going to see more forthcoming 
thereafter. But I think we are all clear that the goal is to 
move towards universal coverage.
    Mr. Langevin. Okay. One of the things that I have also 
looked at and--two things I would hope you look at. First, one 
of the things that I have tried to do to achieve universal 
health care and move the debate forward is introduce a bill 
that achieves universal health care by using the Federal 
Employees Health Benefit Program as a template. Again, it is 
not a big government-run program, but it is government-
negotiated. And what it does is it has the Federal Government 
negotiating this variety of different health care plans for the 
almost 9 million Federal employees, dependents, and retirees. I 
think it is an outstanding model for getting us closer to 
universal health care.
    The other thing that I would hope you would look at as we 
move in this direction is looking at places like the New 
America Foundation that have estimated that we already spend 
about $80 billion to $120 billion each year--each year--on 
uncompensated care. Obviously, that is a big gap between 
whether it is $80 billion or $120 billion, but it a significant 
pool of money that we are, again, already spending on the 
uninsured; we are just spending it in the most inefficient way 
possible. And we can get closer to universal health care and 
achieve better outcomes and lower costs by spending that money 
up front and more wisely.
    I don't know if you had any comment on that, on 
uncompensated care and how we are spending it right now.
    Mr. Orszag. Clearly, one of the issues involved in the 
existing health care system is that there is a lot of cost-
shifting that occurs from--like a game of hot potato, and 
uncompensated care is one manifestation of that phenomenon. 
Moving to a more efficient health care system will mitigate 
that. And that is one of the benefits of getting health reform 
done.
    Mr. Langevin. Is that my time?
    Chairman Spratt. Go ahead if you have one more question, 
please.
    Mr. Langevin. President Obama's reserve fund, obviously it 
represents, as you talked about, the beginning of a long-term 
path to reform. And I guess what I would like to do is, I would 
appreciate it if you could highlight some of the other maybe 
immediate funding investments made in the President's budget to 
address health care for 2010. Specifically, I want to talk 
about community health centers and the role that they play over 
the short term, providing health care access to the uninsured 
and underinsured. And also, how will their role in funding 
change as we move toward a system of universal health care?
    And, by the way, I am a big supporter of primary care, 
particularly primary care physicians. And I hope, as you look 
at overall health care reform, in addition to health centers, 
that we also put more money into incentivizing doctors or 
people going through medical school to go into primary care. 
The statistics are very clear that, in those regions that have 
predominantly primary care versus specialty care, you get 
better outcomes and lower costs. And the reverse is true if you 
have a high percentage of specialty care versus primary care 
docs.
    So health centers and then primary care, if you could 
comment on those.
    Mr. Orszag. Again, I agree with your reading of the 
literature on primary care physicians. And that map that I put 
up with significant variation in health care costs is highly 
correlated with the ratio of specialists and primary care 
physicians, with a higher ratio, generating higher costs 
without, apparently, better outcomes.
    With regard to community health centers, as you know, there 
was a very substantial investment made as part of the Recovery 
Act in community health centers. The evidence suggests they do 
provide quality care, especially to populations that have 
trouble getting access to other parts of the health care 
system.
    And that raises a broader concern. We have heard a lot of 
about income inequality in the United States. There is also a 
degree of inequality in health outcomes that is growing over 
time. So, for example, if you look at life expectancy, the gap 
between better-educated and less-educated families or people in 
life expectancy has been growing very rapidly. Part of that has 
to do with health behavior; part of it has to do with access to 
health care.
    Mr. Langevin. Very good. Well, thank you for that. And, you 
know, I think the health centers have been a real godsend in 
the sense of meeting a demand for health care that is out there 
that we are not getting anywhere else.
    And, anyway, thank you for your answers, and I look forward 
to working with you on all these issues.
    Mr. Orszag. Absolutely.
    Mr. Langevin. Thank you, Mr. Chairman.
    Chairman Spratt. Mrs. Moore?
    Ms. Moore. Thank you so much, Dr. Orszag.
    I am very impressed with the President's effort to cut the 
budget deficit in half within 5 years. But I am concerned about 
that, because balancing the budget as a primary budget outcome 
can somehow ignore other sorts of things that we need to do.
    I am reminded of FDR's pledge to balance the budget when he 
was running against Herbert Hoover, and then, of course, when 
he got into office, he had to initiate the New Deal. And even 
though the budget deficit was 100 percent of GDP at the end of 
1945, after a war, after the depression, our economy was 
stronger, because we, in fact, had made the investments, used 
deficit spending as an investment. So I am concerned.
    I say all that to say, number one, I am concerned about the 
complete absence of any discussion of there being a safety net 
outside of health care benefits and this temporary increase in 
food stamps. And I am also concerned that you didn't mention at 
all how we are going to deal with the trade deficit. As long as 
we have a trade deficit, isn't it inevitable that we are going 
to have a budget deficit?
    Mr. Orszag. Well, let me deal with those in turn.
    This budget includes very important investments, not only 
in health care, not only in education, but in a safety net, 
including--we discussed earlier some of the nutrition programs, 
for example, the WIC Program, which is a very important program 
for moderate- and low-income mothers and infants to provide 
with them nutritious food and other related materials and 
healthy nutrition--I am just repeating myself. Sorry. It is 
already becoming a long hearing.
    Secondly, the budget perpetuates or continues very 
important changes that were made as part of the Recovery Act 
that will provide significant assistance to low- and moderate-
income working families. For example, the child tax credit that 
Representative DeLauro mentioned----
    Ms. Moore. I just want to interrupt, because I don't have 
much time. That is the whole point: You have to be working in 
order for this to benefit you. You know, those women, for 
example, who used to receive AFDC, I mean, if you are 
unemployed, if you are one of the people who doesn't qualify 
for unemployment compensation, those are the people that I am 
worried about.
    Mr. Orszag. Okay, and, again, even on unemployment 
insurance, one of the important things that occurred in the 
Recovery Act and that we proposed as part of the budget is to 
expand eligibility for unemployment insurance. The rules were 
written on unemployment insurance 70 or 80 years ago in a 
different era. And, as a result of outdated rules, lots of 
workers are excluded from being eligible for unemployment 
insurance when they should be eligible. So, as a result, fewer 
than half of unemployed workers receive unemployment insurance.
    We are trying to rectify part of those problems. And the 
Recovery Act started us on that road; the budget will follow up 
on that.
    Ms. Moore. Okay. And then the other part: How do we get to 
cutting the budget deficit in half without dealing with the 
trade deficit?
    Mr. Orszag. Well, one of the reasons that we have to get 
the budget deficit down over time is precisely because, if we 
don't, we will continue to borrow from foreigners to a degree 
that is not sustainable.
    So one of the effects of moving towards a reduced budget 
deficit and then also increasing household saving, like through 
the automatic IRA, is that gradually the trade deficit will 
improve.
    Ms. Moore. Okay. Well, thank you.
    I yield back 29 seconds.
    Chairman Spratt. Mr. Director, well done. You not only get 
an A for presentation but for endurance and forbearance, as 
well. Well done, indeed, and we look forward to working with 
you in the weeks ahead.
    Mr. Orszag. Thank you very much, Mr. Chairman.
    Chairman Spratt. Thank you.
    One final housekeeping detail: I would ask unanimous 
consent that all members who were unable to present questions 
today be allowed 7 days in which to file questions for the 
record. So ordered.
    [Questions submitted and their responses follow:]

     Director Orszag's Responses to Questions for the Record From 
                       Representative Blumenauer

                      1. energy and climate change
    Dr. Orszag, I was pleased to see the FY 2010 budget assume revenues 
from comprehensive climate change legislation. Your summary document 
reads that the program will be implemented through a cap and trade 
system which will include 100% auction to ``ensure that the biggest 
polluters do not enjoy windfall profits,'' and that a majority of the 
auction revenues will be spent on ``investments in a clean energy 
future'' and ``returned to the people.'' Can you elaborate on why the 
administration favors a cap and trade approach and do you have any more 
details on how the administration envisions spending the revenues?
    (a) Would you agree that transportation, which accounts for \1/3\ 
of our nation's greenhouse gas emissions, should be a part of this 
legislation and a focus of some this investment? (b) There has been 
some concern expressed about fluctuation of allowance prices in a cap 
and trade program. Has the administration thought about mechanisms to 
provide price certainty to the economy? (c) Can you provide more 
detailed information which shows the projected revenues on a year by 
year basis?
                                response
    (a) The Administration believes a market-based approach such as cap 
and trade will promote energy security and mitigate climate change 
while spurring competitiveness. The Environmental Protection Agency's 
acid rain program provides strong evidence that the market can serve as 
an effective mechanism to achieve impressive environmental protection 
at lower costs than initially anticipated. While a climate policy will 
present additional challenges and opportunities, the Administration 
believes these same principles will hold true. Revenues from the cap 
and trade program will be devoted to the Making Work Pay tax credit as 
well as essential clean energy investments. Our best estimates for 
these commitments are detailed in the Budget, and any additional 
revenues will be returned to the American people to help with the 
transition to a clean energy future. For example, $15 billion per year 
over ten years will be targeted to help transition to a clean energy 
economy, including investments to develop technologies such as wind 
power and solar power, advanced biofuels, low carbon emission coal 
technologies, and more fuel-efficient cars and trucks built in America. 
We look forward to working in a collaborative spirit to identify an 
appropriate resource allotment to achieve the desired goals.
    Reducing our reliance on oil and achieving energy security will 
require American industry to develop more fuel efficient cars and 
trucks and increased use of public transportation. The Administration 
plans to incorporate the transportation sector into its comprehensive 
strategy for America's clean energy future, including increasing fuel 
efficiency standards to 35 mpg by 2020, consistent with the Energy 
Independence and Security Act of 2007. As part of a comprehensive clean 
energy policy, we will also invest in a full suite of technologies to 
advance automotive energy efficiency, develop technologies to support 
plug-in hybrids, and develop the next generation of biofuels. 
Furthermore, most cap and trade proposals have included transportation 
under the cap by requiring allowances to distribute fuels that produce 
greenhouse gas emissions.
    (b) We are evaluating several cost-containment mechanisms including 
price ceilings and floors, greenhouse gas offset provisions, and 
banking and borrowing of carbon credits. All of these issues must be 
carefully considered when drafting legislation and upon implementation 
may require periodic review to make sure the program is working as 
intended. A properly designed system can provide more certainty than we 
have today.
    (c) Tables S-2 and S-6 of the budget show the estimated year-by-
year climate revenues dedicated to Making Work Pay and an investment in 
clean energy technologies, totaling about $79 billion in the first 
year. These estimates are placeholders until legislation is more fully 
developed, but they are conservative projections of the amount of 
revenue likely to be available. We developed these estimates by 
considering various analyses of climate bills proposed in the 110th 
Congress and updates to underlying assumptions in these models. As the 
details of the cap and trade legislation take shape, we will work to 
further update the models and revenue projections.
                 2. medicare geographic cost variation
    As a representative from Oregon, a low-spending Medicare state that 
has high quality health outcomes, I am acutely aware that in order to 
fully address our health care crisis and reign in our unsustainable 
national health costs, we need to address the wild geographic 
variations in health care spending. These ``culture of care'' 
differences lead to over-treatment of patients in certain regions 
through longer hospital stays, greater numbers of procedures, and more 
doctors visits. Yet this increased spending fails to achieve higher 
quality outcomes or longer lives. If fact, according to researchers at 
the Dartmouth Atlas for Health Care lower spending regions often 
produce better quality care and better patient outcomes. In your time 
at the CBO, you studied these geographic cost variations and became 
exceedingly well versed in these problems. I think we can agree that we 
need all communities to practice medicine like we do in Portland and 
Minneapolis--how do you propose that we bend the curve in this 
direction? How will both your Medicare Advantage competitive bidding 
proposal and your traditional Medicare payment proposals address these 
geographic variations in spending and create incentives to promote 
quality of care as opposed to quantity of care?
                                response
    The first step toward addressing geographic variations in spending 
is to encourage the efficient delivery of care and to better align 
payments with the costs of efficient providers. For example, Medicare 
Advantage (MA) plans are currently paid, on average, about 114 percent 
of the amount a beneficiary would cost in traditional fee-for-service 
(FFS), which allows plans to be less cost efficient than they would be 
if they were paid closer to Medicare FFS levels. Some Medicare 
Advantage plan types have shown they can deliver care below the cost of 
traditional fee-for-service. MedPAC estimates that in plan year 2009, 
HMO bids averaged 98 percent of FFS spending. The Budget's Medicare 
Advantage competitive bidding proposal would allow local market 
competition to set the rate for MA plan payment. This will reward 
efficient plans and allow them to offer enhanced benefits to attract 
enrollees. Inefficient plans will have incentives to become more 
efficient through better care coordination, appropriate utilization 
management, and adherence to evidence-based care guidelines. As plans 
increase their efficiency and quality, they may encourage improved and 
more consistent patterns of practice among a broad range of providers, 
which may also help to drive a reduction in geographic variations in 
costs over time.
    Research indicates that geographic variations in spending are 
driven in large part by differences in professional norms and by the 
supply of certain providers and services. High-cost areas tend to have 
greater use of specialty providers and more intensive services, even 
though it may not result in better quality of care on average. Examples 
of other Budget proposals that should help reduce geographic variations 
in spending include bundled payments for acute hospital and post-acute 
care settings, as well as addressing financial conflicts of interest in 
physician-owned specialty hospitals. Bundled payments would help 
encourage hospitals to follow cost-effective practice patterns and 
provide care in the most clinically appropriate setting. The proposal 
on physician-owned hospitals would help prevent supply-driven 
utilization of services (for instance, MedPAC found that physician-
owned hospitals increase the rate of cardiac surgeries) by prohibiting 
new physician-owned hospitals from seeking reimbursement for services 
furnished to Medicare patients that had been referred to the hospital 
by a physician owner.
                3. medicare advantage quality standards
    I'd like to highlight your proposal to encourage hospitals serving 
Medicare beneficiaries to reduce readmission rates, underscoring the 
importance of proper discharge protocols and care coordination after a 
hospital admission.
    Health plans in Oregon, including our Medicare Advantage plans, 
have been focused on this effort for years and it is one of the reasons 
why Oregon has a more efficient health care system that spends less 
money, yet provides high quality care.
    While MA plans in Oregon have created programs to better manage 
diseases and coordinate care, I know that not all MA plans nationwide 
have made this a priority. If done correctly, Medicare Advantage plans 
can provide the framework and financial incentives for better quality 
and delivery of health care services, while containing costs. What role 
do you see for the Medicare Advantage program in raising quality 
standards and how can we do a better job of holding plans accountable? 
(list of quality standards attached)
    Examples of Quality Initiatives Adopted by Oregon Medicare 
Advantage Plans:
    1) Reduce unnecessary congestive heart failure admissions. MA plans 
should be required to have a disease management program for congestive 
heart failure with measured outcomes. This is the chronic condition 
which has been consistently measured to be able to be impacted with a 
disease management program. (PHP)
    2) Reduce acute coronary syndrome and stroke admissions to acute 
care facilities. MA plans should track and have in place a system to 
improve HEDIS measurements in cholesterol measurement after 
cardiovascular event. The system can be a disease management program, 
physician outcome transparency, pay for performance, and or a center of 
excellence in addition to educational materials. (PHP)
    3) Reduce admissions to acute care facilities due to diabetes. MA 
plans should track and have in place a system to improve HEDIS 
measurements for cholesterol and hemoglobin A1C measurements in 
diabetes. The system can be a disease management program, physician 
outcome transparency, pay for performance, and or a center of 
excellence in addition to educational materials. (PHP)
    4) Reduce barriers to medication adherence. Monthly cost of drugs 
is a barrier to adherence. Generic drugs are 10% of the cost of brand 
drugs. MA plans should create systems of care to cause generic 
percentage of drugs to be above 75%. (PHP)
    5) Reduce later-stage colon and breast cancer. MA plans should be 
required to do HEDIS measurements for screening for colorectal cancer 
and breast cancer. MA plans will have systems in place to improve these 
measurements. The system can be an outreach program, physician outcome 
transparency, or pay for performance in addition to educational 
materials. (PHP)
    6) Improved quality in ambulatory surgery. MA plans should be 
required to measure and improve quality in cataract surgery and 
colonoscopy procedures. MA plans will create systems of care to measure 
for example visual acuity and functional status prior to cataract 
surgery and give feedback to physicians and similarly measure 
colonoscopy procedures that meet gastroenterology society criteria for 
indication. MA plans will further have systems to improve outcomes with 
transparency, pay for performance or other quality measures. These two 
procedures are the major drivers of cost in the ambulatory surgery 
area. (PHP)
    7) Reduce the percentage of smokers. MA plans should have in place 
systems of care to reduce smoking prevalence. This can include 
outreach, pay for performance, medication availability, stop smoking 
class availability in addition to educational materials. (PHP)
    8) Reduce admissions for pneumonia. MA plans should have systems in 
place to reduce admissions for pneumonia. Strategies can include 
increasing influenza and pneumococcal vaccine utilization. Also, HEDIS 
measurement of spirometry in members with chronic obstructive pulmonary 
disease and correct medication for asthma should be measured. MA plans 
will create systems to improve these measured outcomes. They can 
include disease management, physician outcome transparency, or pay for 
performance in addition to educational materials. (PHP)
                                response
    CMS continues to explore ways to hold all providers accountable for 
quality, including MA plans. The Budget includes several proposals to 
advance Medicare's transformation from quantity-based to quality-based 
payments. This includes payment incentives for hospitals to improve the 
quality of care and for physicians to coordinate care and provide 
services that help prevent illnesses. These proposals will encourage 
hospitals and physicians to provide high quality care by linking 
Medicare payments to providers' adherence to evidence-based processes 
of care and patient outcomes.
    The Budget's MA competitive bidding proposal should help to improve 
quality in the MA program by incentivizing plans to offer efficient and 
high-quality care. Plans that can reduce their bids compared to other 
plans will be able to offer additional benefits to attract 
beneficiaries. Plans that effectively implement high-quality care 
programs like care coordination and disease management should be able 
to reduce their bids and attract more beneficiaries. In addition, CMS 
is implementing the Medicare Improvements for Patients and Providers 
Act provisions that require PFFS and MSA plans to have quality 
improvement plans and to report on quality data (as is already required 
for other types of MA plans).
     4. defense energy efficiency and environmental responsibility
    The Department of Defense is both the largest manager of 
infrastructure in the world and likely the largest energy user in the 
world. The legacy of this dominance is millions of acres of US lands 
that lay contaminated with unexploded ordnance and munitions 
constituents, and, according to a recent Defense Science Board report, 
a Department lacking a comprehensive strategy for energy, to the 
detriment of the military's short and long-term mission to protect. 
Would you agree that a greater emphasis on the full cost of energy 
requirements and environmental use should be a priority for the 
Administration? What changes will we see in this Defense budget to 
ensure that energy efficiency and environmental responsibility are both 
adequately invested in and properly valued?
                                response
    The Department of Defense (DoD) is in the process of developing its 
2010 budget, so details on funding are not available at this time. 
However, energy efficiency and environmental responsibility are key 
Administration priorities and will guide resource allocation.
    Regarding environmental contamination due to unexploded ordnance, 
the Department has implemented the Military Munitions Response Program. 
To date, the Department has identified over 3,500 munitions response 
sites across the United States and currently estimates that the cost to 
complete munitions response at all sites is about $19 billion. The 
Department plans to complete inspections of all these sites by the end 
of FY 2010.
    The Department has made significant strides in identifying and 
funding opportunities for increasing energy efficiency. It has 
increased investment in energy initiatives from $440 million in fiscal 
year 2006 to approximately $1 billion in fiscal year 2009. The 
Department is developing and procuring technologies that make good 
business sense both financially and operationally. It has also expanded 
programs such as the Energy Conservation Investment Program, which 
competitively awards funds for energy-saving construction projects.
    Finally, the Department has made recognizing the full cost of 
energy a central part of its strategic energy plan.
                    5. millennium development goals
    President Obama has expressed great interest in returning to the 
Millennium Development Goals and doubling U.S. foreign assistance. His 
Budget includes a 9.5% increase over FY09 levels for the State 
Department and International programs and lists funding for key 
programs that advance U.S. foreign policy goals, including helping the 
world's weakest states to ``reduce poverty, combat global health 
threats, develop markets, govern peacefully, and expand democracy 
worldwide.'' Securing clean water and sanitation is a key cross-cutting 
requirement to achieving each of these objectives; each dollar invested 
yields up to $34 in return. It is also a MDG commitment; in 2005 the US 
agreed to halve by 2015 the proportion of people without access to 
clean water and sanitation. How will the administration include an 
international investment in clean water, through the Water for the Poor 
Act or otherwise, in a full Budget, and to what extent will the 
Administration's budget reflect our commitment to the MDGs?
                                response
    The President has embraced the Millennium Development Goals to, 
among other things, cut global poverty in half by 2015. The 
Administration is committed to elevating development in U.S. foreign 
policy, and the FY 2010 International Affairs budget request of $51.7 
billion puts the United States squarely on a path to doubling foreign 
assistance. I urge Congress to fully fund the President's Budget, which 
will support the U.S. commitment to achieving the Millennium 
Development Goals. Clean water and sanitation programs, another key 
element of the MDGs, are an important component of the U.S. development 
toolbox. The details of the FY 2010 Budget are being developed and we 
look forward to providing additional information, including planned 
investments in clean water and foreign assistance, when the full FY 
2010 Budget is transmitted.

     Director Orszag's Responses to Questions for the Record From 
                        Representative Etheridge

                    savings from elimination of ffel
    As the former Superintendant of Schools in North Carolina, I 
believe that education is the key to success and the foundation for our 
future. I am pleased that this budget makes education a high priority, 
because I truly believe that the best investment we can make in our 
future is to give more children access to a better education. I am 
pleased to see that the administration's budget expands access to 
higher learning, invests in early childhood education, and increases 
spending for child nutrition and school meals initiatives.
    However, I am concerned about the President's proposal to end the 
Federal Family Education Loan Program and to have all loans originate 
through the Federal Direct Loan Program. For the past 40 years, the 
College Foundation of North Carolina has assisted over 550,000 NC 
students and families with college loans with one of the nation's 
lowest default rates. Dr. Orszag, could you comment on estimated 
savings in the budget associated with the elimination of the Federal 
Family Education Loan program? Is the Department of Education ready to 
scale up the Direct Loan program to cover all post-secondary student 
loans? The budget assumes a $4 to $6 billion savings while directs 
costs might be expected to increase the deficit by $100 billion. How 
are these savings calculated? Is OMB assuming these savings on the 
basis of the current low interest rates that might change in the 
future?
                                response
    In developing Federal Family Education Loan (FFEL) savings 
estimates, the Administration accounted for the program's sensitivity 
to changes in interest rates, as well as the probability that interest 
rates could fluctuate in future years. The approach we took is similar 
to the approach taken by the Congressional Budget Office in its FFEL 
estimates. Our savings estimates, therefore, are robust to almost any 
realistic set of interest rate assumptions; even if Treasury rates and 
Commercial Paper rates return to their historical average, eliminating 
FFEL subsidies and ramping up the DL Direct Loan (DL) program will 
continue to generate savings for taxpayers.
    The Department of Education has been enhancing its servicing 
capabilities, both in response to the Budget policy and to support the 
FFEL loan purchase programs established last summer. The Budget 
proposal will maintain competition because the Department of Education 
will begin using multiple contractors to service DL loans. This will 
maintain competition between servicers, which will help students and 
families benefit from improved customer service and technological 
advances in loan servicing.

     Director Orszag's Responses to Questions for the Record From 
                        Representative Langevin

                       savings from health reform
    Dr. Orszag, the President's budget sets forth a very ambitious 
policy agenda, while simultaneously adhering to an honest and sobering 
accounting standard that realizes incredible fiscal challenges. It has 
become clear that in order to rebuild our economy, we are going to have 
to make significant investments in key priorities like energy, 
education and health care while sacrificing in some others. One of the 
priorities highlighted in the budget outline is a reserve fund of more 
than $630 billion over 10 years to finance health care reform. As a 
strong advocate for health care reform, I am very interested in hearing 
more about this initiative.
    Many policy experts agree that investing in the health of our 
citizenry now will yield tremendous savings later. In other words, by 
increasing quality and efficiency in our health system today through 
innovations in health information technology and early access to 
preventative care, we can ultimately reduce health expenditures over 
the long term, but it is often difficult to account for these savings 
under the House ``pay as you go'' rules: 1. To what degree are savings 
from these investments currently incorporated into the budgetary 
outlook?
    2. If they are not incorporated, why not?
    3. Can we expect unrealized budgetary savings not incorporated into 
current health care modeling?
                                response
    The Administration understands that reforming health care is 
critical to our nation's fiscal future. As a first step toward reform, 
the President signed into law the American Recovery and Reinvestment 
Act (ARRA). The ARRA will help curb health care spending by investing 
in computerized health care records, accelerating comparative 
effectiveness research, and scaling up prevention and wellness 
programs.
    The President's Budget builds on the ARRA and commits $634 billion 
over ten years in a budget-neutral health reform reserve fund as a down 
payment on comprehensive health care reform. First, the Budget proposes 
changing the tax code by reducing itemized deduction rate for families 
with incomes over $250,000, which is expected to save $318 billion over 
ten years. Second, the Budget estimates $316 billion in savings over 
ten years in the Medicare and Medicaid programs. These savings result 
from promoting efficiency and accountability, aligning incentives 
toward quality, and encouraging shared responsibility.
    The Medicare and Medicaid savings are included in the Budget 
projections and represent the Administration's best current estimate of 
the costs and savings of the Budget proposals. The independent 
actuaries at the Department of Health and Human Services have made 
projections, based on their in-depth program and industry knowledge, 
sound evidence and research, and up-to-date program data. These 
proposals include the following:
     Reducing Medicare Overpayments to Private Insurers through 
Competitive Payments. Under current law, Medicare overpays Medicare 
Advantage plans by 14 percent more on average than what Medicare spends 
for beneficiaries enrolled in the traditional fee-for- service program. 
The Administration believes it's time to stop this waste and will 
replace the current mechanism to establish payments with a competitive 
system in which payments would be based upon an average of plans' bids 
submitted to Medicare. This would allow the market, not Medicare, to 
set the reimbursement limits, and save taxpayers more than $175 billion 
over ten years, as well as reduce Part B premiums.
     Reducing Drug Prices. Prescription drug costs are high and 
rising, causing too many Americans to skip doses, split pills, or not 
take needed medication altogether. The Administration will accelerate 
access to make affordable generic biologic drugs available through the 
establishment of a workable regulatory, scientific, and legal pathway 
for generic versions of biologic drugs. To retain incentives for 
research and development for the innovation of breakthrough products, a 
period of exclusivity would be guaranteed for the original innovator 
product, which is generally consistent with the principles in the 
Hatch-Waxman law for traditional products. Additionally, brand biologic 
manufacturers would be prohibited from reformulating existing products 
into new products to restart the exclusivity process, a process known 
as ``ever-greening.'' The Administration will prevent drug companies 
from blocking generic drugs from consumers by prohibiting 
anticompetitive agreements and collusion between brand name and generic 
drug manufacturers intended to keep generic drugs off the market. 
Finally, the Budget will bring down the drug costs of Medicaid by 
increasing the Medicaid drug rebate for brand-name drugs from 15.1 
percent to 22.1 percent of the Average Manufacturer Price, apply the 
additional rebate to new drug formulations, and allow States to collect 
rebates on drugs provided through Medicaid managed care organizations. 
All the savings would be devoted to the health care reserve fund.
     Improving Medicare and Medicaid Payment Accuracy. The 
Government Accountability Office has labeled Medicare as ``high risk'' 
due to billions of dollars lost to overpayments and fraud each year. 
The Centers for Medicare and Medicaid Services (CMS) will address 
vulnerabilities presented by Medicare and Medicaid, including Medicare 
Advantage and the prescription drug benefit (Part D). CMS will be able 
to respond more rapidly to emerging program integrity vulnerabilities 
across these programs through an increased capacity to identify 
excessive payments and new processes for identifying and correcting 
problems.
     Improving Care after Hospitalizations and Reduce Hospital 
Readmission Rates. Nearly 18 percent of hospitalization of Medicare 
beneficiaries resulted in the readmission of patients who had been 
discharged in the hospital within the last 30 days. Sometimes the 
readmission could not have been prevented, but many of these 
readmissions are avoidable. To improve this situation, hospitals will 
receive bundled payments that cover not just the hospitalization, but 
care from certain post-acute providers the 30 days after the 
hospitalization, and hospitals with high rates of readmission will be 
paid less if patients are re-admitted to the hospital within the same 
30-day period. This combination of incentives and penalties should lead 
to better care after a hospital stay and result in fewer readmissions--
saving roughly $26 billion of wasted money over ten years.
     Expanding the Hospital Quality Improvement Program. The 
health care system tends to pay for quantity of services not quality. 
Experts have recommended that hospitals and doctors be paid based on 
delivering high quality care, or what is called ``pay for 
performance.'' The President's Budget will link a portion of Medicare 
payments for acute in-patient hospital services to hospitals' 
performance on specific quality measures. This program will improve the 
quality of care delivered to Medicare beneficiaries, saving more than 
$12 billion over ten years.
     Reforming the Physician Payment System to Improve Quality 
and Efficiency. The Administration believes that the current physician 
payment system, while it has served to limit spending to a degree, 
should be reformed to give physicians incentives to improve quality and 
efficiency. Thus, while the baseline reflects our best estimate of what 
the Congress has done in recent years, we are not suggesting that 
should be the future policy. As part of health care reform, the 
Administration would support comprehensive, fiscally responsible 
reforms to the payment formula. The Administration believes Medicare 
and the country need to move toward a system in which doctors face 
better incentives for high-quality care rather than simply more care.
    Estimating future budget expenditures is a highly uncertain 
undertaking. It is very difficult to pinpoint specific out-year 
savings, since so little research has been done quantifying cost 
savings from such efforts. Some policy changes may only begin to 
produce significant savings outside the ten-year budget window. 
Therefore, when considering the merits of various policy proposals, 
Congress may also want to consider not only mid-term (ten-year) effects 
but also the potential for long-term savings.
    The Administration believes that health care reform should be 
deficit-neutral over the short- and medium-term, and should ``bend the 
curve'' on health care costs over the long term. I believe we are doing 
the things considered to be the most promising for bending the curve on 
health care costs over the long term--such as investing in health IT, 
comparative effectiveness research, changes in incentives, and 
prevention and wellness efforts. We must continue and build on this 
effort.

     Director Orszag's Responses to Questions for the Record From 
                         Representative Lummis

                  1. cap and trade--price assumptions
    President Barack Obama's Fiscal Year 2009 budget blueprint 
estimates $646 billion in ``climate revenues'' under his proposed cap 
and trade system. What price per metric ton of carbon emissions 
underlies these revenue projections? How do these prices compare with 
current prices in the European Union's carbon trading system?
                                response
    The estimates in the Budget are placeholders that provide 
conservative projections of the amount of revenue that would be 
available under a cap and trade program based on a 100 percent auction 
of allowances. We developed these estimates by considering various 
analyses of climate bills proposed in the 110th Congress and updates to 
underlying assumptions in these models. As the details of the cap and 
trade program take shape, we will work to update the models and revenue 
projections and make firm cost-per-ton estimates. By applying relevant 
budget scoring assumptions, we estimated that the cap and trade 
revenues would at a minimum offset the Making Work Pay tax credit as 
well as provide $15 billion per year investment in clean energy 
technologies.
    In designing this program, we have learned from the European Union 
Emissions Trading Scheme (EU-ETS). As the Government Accountability 
Office reported, the EU over-allocated carbon credits to the point 
where supply exceeded the cap and led to a collapse of carbon permit 
prices (GAO-09-151). The GAO report also indicates the EU-ETS lacked 
reliable emissions data at the start of the program, creating 
uncertainty in the reductions achieved. By creating a robust emissions 
inventory and avoiding over-allocation of credits to particular 
industries, we can learn from the experience of the EU and create a 
strong carbon trading market.
                 2. cap and trade--effect on industries
    Will these revenues be collected from all industrial emitters? What 
evidence is there that the affected industries, other than electricity 
generators, can either absorb or recover these additional costs?
                                response
    A viable program to reduce greenhouse gas emissions must cover a 
sufficient percent of large emitters, including some industrial sectors 
for which measurable, verifiable reductions can be accurately recorded. 
While it is not practical to cover all industrial emission sources, we 
strive to reach the right balance to lead the world with a strong 
program as well as consider practical limitations. We have already 
begun to consult stakeholders on this issue through EPA's rulemaking 
process for the development of the mandatory greenhouse gas reporting 
rule.
    While there will be some additional costs to industrial sectors, a 
cap and trade system enables entities that lead their competition in 
effective emissions reduction to gain market share. Furthermore, the 
policy should provide targeted measures to address impacts on energy-
intensive industries. We look forward to working with Congress as these 
issues are considered in the legislation.
          3. cap and trade--protection of domestic industries
    How does the Administration plan to protect domestic businesses 
that will be forced to purchase carbon allowances--particularly smaller 
businesses in need of these allowances--from their foreign competitors 
who will not have to shoulder the financial burden of the carbon 
mandates in the President's cap and trade plan?
                                response
    Ensuring that domestic industries remain competitive is an 
essential component of the policy. First, only entities emitting above 
a particular emissions threshold will be included in the program; we 
intend to incorporate the largest emitters while excluding small 
businesses whenever possible. Second, the cap and trade system would 
offer flexibility to domestic businesses to meet their obligations by 
purchasing auctioned credits, trading in the domestic carbon market, or 
perhaps offsetting emissions through investment in verifiable emission-
reduction projects. The policy would not require domestic businesses to 
purchase allowances from their foreign competitors. Furthermore, the 
United States will aggressively engage our major trading partners to 
insure they commit to significant, measurable and verifiable 
contributions to combat climate change.

     Director Orszag's Responses to Questions for the Record From 
                         Representative McHenry

                  1. transparency of federal spending
    During the Presidential campaign President Obama routinely stated 
that he would restore fiscal discipline to Washington and you yourself 
said, ``you would work with Congress to provide greater transparency 
and accountability''. Within the stimulus bill and the omnibus there 
were 11,297 earmarks at a cost of 25.6 billion to the American 
taxpayer. Do you believe during an era of new responsibility, as the 
President's budget and his address to the nation has outlined, that 
this type of spending that so open to waste and abuse can continue? And 
in order to create greater transparency in federal spending, as you and 
the President have promised to the American people, do you think it is 
important to create a specific website/office outside of the prevue of 
Congress and the White House but maintained by the Federal Government, 
to allow the American public to track every federal dollar spent, with 
the exception of classified projects?
                                response
    The Federal Funding Accountability and Transparency Act of 2006 
required the Executive Branch to establish a website to track awards 
made by Federal agencies. As a result of this law, OMB developed the 
USASpending.gov website, which makes available information on Federal 
spending in a searchable format. Visitors to the site may search the 
spending database by State, awardee, Congressional district and other 
criteria.
    In addition, the Administration is currently working with the 
Oversight Board established by the American Recovery and Reinvestment 
Act to develop the capability to report at the subaward level for all 
Recovery Act funding. Once this capability is established for Recovery 
Act funding, we intend to expand it to cover all Federal funding.
    These efforts, once completed, will significantly expand the 
information available to all citizens on how Federal funds are spent.
                       2. funding for 2010 census
    As you know, the Census Bureau has required additional funding to 
stay on-schedule for execution of the 2010 Decennial Census. The recent 
stimulus bill contained an additional $1 billion for Bureau 
communications, and the House-passed version of the FY 09 Omnibus 
Appropriations bill contained $3.1 billion more for the census. What 
sort of funding can we expect to see for the Census Bureau in the 2010 
Budget, and to what operations do you see the majority of funding 
allocated? Do you see this as being enough to meet the Bureau's goals 
of producing a full and accurate count?
                                response
    The decennial census is the largest peacetime mobilization the 
Federal Government undertakes and is a priority of this Administration. 
The 2010 Budget provides approximately $7 billion for the Census 
Bureau, an increase of $4 billion from the level provided in the 2009 
Omnibus Appropriations Act. Including Recovery Act funds, nearly $8 
billion will be available in 2010. We are particularly aware of the 
challenges of counting harder-to-reach groups, and the 2010 Budget 
provides all the resources necessary for a successful and accurate 
Census count in 2010.
    Funding is provided to open hundreds of local census offices, mail 
out millions of forms, hire half a million temporary workers to visit 
non-responding households, and implement a nationwide advertising 
campaign. Significant funds are also provided for partnership and 
outreach activities, which will be focused on increasing the response 
rate of historically undercounted communities and groups.
           3. impact of cap and trade on jobs and households
    The President has outlined in his initiative to implement a Cap and 
Tax system beginning in 2012 on American families and businesses. You, 
yourself have provided testimony before this committee that a 15-
percent reduction in emissions would result in a $680 to 2,180 
reductions in household income. Do you know the affect this new policy 
will have on Americans who are on fixed incomes when it comes time to 
pay their heating and electric bills? And has the administration taken 
into affect the number of jobs that will be lost once this policy is 
implemented and do you have an estimate of the number of job losses?
                                response
    We will not allow struggling Americans to become overburdened with 
their electric and heating bills. We believe a market-based approach 
will spur American ingenuity and entrepreneurship to find the least 
expensive means to bring clean energy sources online. The program will 
invest $15 billion per year for ten years to develop clean energy 
technologies and to increase efficient use of energy; revenues will 
also finance the Making Work Pay tax credit. Any additional revenues 
will be returned to the public--especially to vulnerable families, 
communities, and business--to help them transition to a clean energy 
future. Furthermore, through the Recovery Act we are already making a 
significant down payment to weatherize homes that will help keep energy 
bills affordable for low- and fixed-income families.
    A strategy to promote energy security and tackle global warming is 
critical to create new jobs and bolster the long-term viability of the 
economy. It is a major step to promote a stable, diverse and resilient 
energy supply while also taking crucial steps to avoid the most 
devastating effects of climate change. To help create the next 
generation of workers in the emerging fields of clean energy 
technology, a cap and trade policy should promote the creation of new 
jobs, and new and expanded job training programs.
    As climate change legislation evolves, the Environmental Protection 
Agency, the Department of Energy, and others will analyze the projected 
impact on GDP, consumption, and net jobs. We will be working with 
Congress to mitigate any adverse impacts.
         4. health care reform--prevention and early detection
    Can you share with us the type of prevention and early-detection 
strategies the Administration would like to see as part of 
comprehensive healthcare reform?
                                response
    The Administration supports evidence-based prevention and early-
detection strategies that will lead to a more efficient health care 
system, expanded coverage, improved quality, and reduced costs. The 
Recovery Act provides $1 billion for an historic effort to improve 
prevention and wellness by dramatically expanding community-based 
interventions proven to reduce chronic diseases. Prevention and early-
detection strategies could support effective workplace and community 
physical activity programs targeted to high-risk populations. We look 
forward to working with Congress to determine the specific types of 
prevention and early-detection strategies that should be part of 
comprehensive healthcare reform.
                 5. health care reform--chronic disease
    I was wondering if you could share with the Committee the 
Administration's vision for addressing the rising prevalence of chronic 
disease--as spending on chronic conditions now accounts for 75% of U.S. 
health care spending.
                                response
    The Administration's vision for addressing the rising prevalence of 
chronic disease is to invest in public health measures proven to reduce 
cost drivers in our system--such as obesity, sedentary lifestyles, and 
smoking--as well as guarantee access to proven preventive treatments. 
The Recovery Act provides $1 billion for an historic effort to improve 
prevention and wellness by dramatically expanding community-based 
interventions proven to reduce chronic diseases. As we work with 
Congress on health reform over the coming year, the prevention of 
chronic disease will certainly be part of the discussion.
             6. health care reform--limit on patient costs
    What are your thoughts about how to ensure that more insurance 
plans include a total annual limit on patient costs, and to help lower 
income patients in particular?
                                response
    The Administration looks forward to developing a health reform 
approach through an open and inclusive process that explores all 
serious ideas that achieve the common goals of constraining costs, 
expanding coverage, and improving quality. Limiting costs Americans 
face for health care is a priority of this Administration.
        7. health care reform--incentives for patient compliance
    Given the prevalence of chronic conditions among Medicare 
beneficiaries, and the benefits of engaging patients more actively in 
their own care, what are your thoughts about how to measure and reward 
health plans and providers for efforts to improve patient adherence to 
the treatments their doctors' recommend?
                                response
    We need to improve care coordination and patient adherence to 
treatments. More than two-thirds of Medicare spending is for 
beneficiaries with five or more chronic conditions. Medicare patients 
with chronic diseases such as diabetes, congestive heart failure, renal 
failure may receive uncoordinated care from multiple physicians and 
providers at the same time. Encouraging providers to better coordinate 
care and help patients manage their conditions and follow treatment 
plans is needed to both improve the quality of care and reduce growth 
in health care spending.
    The Budget includes proposals to incentivize physicians and 
providers to better coordinate care and to invest in patient adherence 
efforts. For example, the Budget includes a proposal that would 
strengthen incentives for Medicare providers, such as physicians, to 
form voluntary groups who would work together to better manage and 
coordinate care for Medicare beneficiaries. These provider groups could 
receive bonus payments if they improve the quality of care for patients 
and produce savings for the Medicare program.
    Additional payment system reform will also improve care 
coordination. We need to better integrate the current fragmented fee-
for-service system to create quality and efficiency incentives for a 
broad array of services and providers. As a starting point, the Budget 
includes proposals to reduce payments to hospitals in certain cases 
when patients are readmitted within 30 days and to link a portion of 
payments to performance on quality measures. Hospitals that have high-
quality care; better communication with patients and post-acute care 
providers; and better discharge planning, coordination, and follow up 
(which would include ensuring patient compliance with treatment plans) 
will have lower readmission rates and higher scores on quality 
measures. Under these proposals, higher payments would go to hospitals 
with lower readmission rates and higher-quality care, which will save 
Medicare billions of dollars over ten years.
    There are many other approaches that may reward efforts to improve 
patient compliance with doctors' treatment plans, including medical 
homes, disease management organizations, and community networks or 
teams to coordinate care. The Department of Health and Human Services 
is beginning to test these concepts and will make recommendations in 
developing future options for modernizing Medicare's payment systems. I 
look forward to continuing to work with you, other members of Congress, 
and other policymakers to consider all options in this area.
                  8. satisfaction with medicare part d
    According to opinion polls, some 85% to 90% of those enrolled in 
Medicare Part D are quite happy with it. Is this your understanding as 
well? Sir, what do you think is driving this high rate of satisfaction?
                                response
    Opinion polls from groups such as AARP, Medicare Today, the 
Medicare Rx Education Network and the Wall Street Journal online 
indicate that beneficiaries generally are satisfied with Medicare Part 
D. For example, the December 2007 Wall Street Journal Poll showed that 
overall 87 percent of beneficiaries were satisfied with their Medicare 
prescription drug coverage.
    In each of the polls cited above, the results suggest particularly 
high satisfaction rates with certain aspects of the program. For 
example, the October 2007 Medicare Today survey showed that 94 percent 
of beneficiaries consider their plans convenient to use. The Medicare 
Today poll also found that 91 percent of those surveyed reported they 
were enrolled in plans with good customer service. The November 2007 
Medicare Rx Education Network, in turn, found that 87 percent of those 
surveyed were satisfied with the number of drugs covered by their plan. 
The poll also showed that 95 percent were satisfied in their ability to 
have their prescriptions filled.
    To keep satisfaction rates high, the Administration continues to 
look for ways to improve the Part D program for beneficiaries. For 
example, we are evaluating methods to make information on the different 
types of plans available more understandable to beneficiaries. These 
changes will help beneficiaries to choose the most cost-effective plans 
that provide access to the medications they need.
                   9. increasing medicaid drug rebate
    Do you believe that increasing Medicaid rebates is likely to 
further increase cost-shifting and prescription drug costs for private 
payers? If so, do you still think it's a good idea to increase Medicaid 
rebates?
                                response
    The Budget includes a proposal to increase the basic drug rebate 
for brand-name drugs from 15.1 percent to 22.1 percent of the Average 
Manufacturer Price, which may help reduce the effects of existing price 
control-like mechanisms in the prescription drug market. Because the 
rebate amount is based in part off of the lowest price of a drug 
offered to any private purchaser, non-profit or government entity with 
certain statutory exceptions--a provision known as ``best price''--drug 
manufacturers do not currently have an incentive to offer lower drug 
pricing in the private market because it increases their rebate 
obligation. Increasing the flat rebate percentage to 22 percent could 
mitigate the impact of best price by triggering that part of the rebate 
formula less often. This may actually encourage drug manufacturers to 
offer lower drug prices.
       10. comparative effectiveness research and access to care
    There's been a lot of discussion about comparative effectiveness 
research in recent weeks. I believe this type of research holds real 
value for patients, and real dangers as well. In particular, I'm very 
concerned that this could lead to centralized value judgments about who 
should and shouldn't get access to medically beneficial care. We've 
seen this happen in other countries like the U.K., where patients with 
breast cancer, kidney cancer, Alzheimer's and many other serious 
diseases are denied access to beneficial treatment options that are 
widely available in this country. Do you share these concerns? What 
steps can we take to ensure this research achieves the goal articulated 
by President Obama--improving patient and provider decision-making--
while avoiding these types of blunt, centralized access restrictions?
                                response
    I agree that this research holds real value for patients, and 
understand your concerns about its use. Current efforts at the Federal 
level--including the $1.1 billion included in the Recovery Act--are 
focused on increasing the quantity of comparative effectiveness 
research produced, in order to enhance medical decision-making by 
patients and physicians. As research and medicine progress and more 
studies become available showing what works best for people with 
different genetic markers, patients should be better able to obtain 
individually-tailored treatments that maximize the likelihood of 
positive health outcomes. For example, pharmacogenomics is a field of 
research that studies how different people respond to the same drug 
based on their genetic makeup. Such research recognizes that what works 
best for one group of people may not be what works best for another 
group. More research comparing the effectiveness of different 
treatments for different groups of people should eventually lead to 
higher-quality health care.
    There are a variety of ways that private insurers can use 
comparative effectiveness research findings in coverage or 
reimbursement decisions. These approaches include mechanisms that are 
more refined than a simple on-off switch--for example, health insurers 
might reimburse providers at enhanced rates for treatments that are 
found to be more effective than others, but still provide reimbursement 
for other less-effective options. Insurers may also pay bonuses to 
providers who consistently deliver care that adheres to recognized 
clinical guidelines. In the future, if Congress were to decide to 
incorporate comparative effectiveness research into coverage or 
reimbursement decisions in public health insurance programs, there are 
a variety of ways this could be done to avoid blunt restrictions that 
block access.

     Director Orszag's Responses to Questions for the Record From 
                          Representative Ryan

                       1. discretionary outyears
    The previous Administration did not provide account level detail 
for discretionary accounts beyond the budget year. Some Members of 
Congress and the Washington Post viewed this as hiding key details 
about the President's budget. In the interest of transparency and long-
term budgeting, please provide account level detail through 2019.
                                response
    The FY 2010 Budget transmitted to the Congress on February 26 was 
an overview. The full details of the Budget are under development, and 
information on the discretionary outyears will be provided as part of 
that transmittal.
                      2. federal employment levels
    Please provide the federal employment levels for FY 2008, 2009, and 
2010. These are traditionally part of the budget submission.
                                response
    The FY 2010 Budget transmitted to the Congress on February 26 was 
an overview. The full details of the Budget are under development, and 
information on federal employment will be provided as part of that 
transmittal.
               3. employment and unemployment assumptions
    What are your employment and unemployment assumptions used in the 
budget? Please provide your estimate of the impact that the stimulus 
bill had upon these assumptions.
                                response
    As described in Table S-8 of the FY 2010 Budget, the Administration 
assumes that the unemployment rate will average 8.1 percent in 2009 and 
decline from there as the economy recovers. Over the next four years, 
it declines steadily and levels off at 5.0 percent in 2014. The Chair 
of the Council of Economic Advisers has estimated that the American 
Recovery and Reinvestment Act will add approximately three and half 
million jobs to the U.S. workforce by the end of 2010. This estimate is 
reflected in the Administration's forecast.
                     4. concurrent receipt proposal
    Please explain your concurrent receipt proposal for DoD and VA. 
Does your proposal do away with the phase-in of concurrent receipt?
                                response
    No. This proposal expands concurrent receipt to a previously 
ineligible population--veterans who are medically retired from DoD with 
fewer than 20 years of service. The proposal phases in concurrent 
receipt of VA disability and DoD retirement benefits for this group of 
veterans over a five-year period.
                5. financing for surface transportation
    In your budget, how much surface transportation funding comes from 
the dedicated user taxes that have funded this program since its 
inception in 1956? How much comes from appropriations of general 
revenue? How much comes from non-traditional financing mechanisms?
                                response
    The FY 2010 Budget presents baseline funding levels for surface 
transportation programs and does not include information about funding 
sources. The Administration recognizes that current law receipts are 
not sufficient to fund current law spending and looks forward to 
working with Congress to developing a sustainable surface 
transportation funding system--one that responds to our nation's 
changing needs.
              6. budgetary treatment of imf quota increase
    Your budget contains a proposal to increase the United States' 
quota subscription to the International Monetary Fund, but in a 
reversal of long-standing budgeting practices, you do not include any 
budget authority associated with this increase. Why did you not show 
budget authority from the increase in the quota to the IMF? Does the 
increase and the use of this authority impact the debt held by the 
public? If so, what is that impact?
                                response
    The proposal to increase the United States' quota subscription to 
the International Monetary Fund represents an exchange of financial 
assets. This is consistent with the budgetary treatment recommended by 
the Presidential Commission on Budgetary Concepts in 1967, and with the 
guidance contained in section 20(h) of Circular A-11. We note that 
quota subscriptions have never resulted in any outlays. We believe the 
prior practice of scoring IMF quota increases as budget authority is 
incorrect.
                          7. earmark tracking
    Two years ago, OMB established a database to track congressional 
earmarks. The President's budget discusses earmarks and calls for 
greater transparency in earmarks and the President stated his pride in 
the fact that the stimulus bill was earmark-free.
    Will you retain OMB's current definition of an earmark? If not, how 
do you define an earmark? When will you update the earmarks.omb.gov 
website? What changes do you plan to implement? Will you update the 
database to include earmarks in the FY2009 appropriations bills? If 
not, how many earmarks were in the FY 2009 enacted bills and the House-
passed omnibus bill and what was the cost of these earmarks?
                                response
    The President's FY 2010 Budget states that the Administration will 
continue to maintain a searchable website of earmarks and sponsors. OMB 
is currently reviewing www.earmarks.omb.gov to determine how to proceed 
with tracking and posting earmarks in ways that improve transparency. 
OMB will post earmarks from FY 2009 appropriations bills on the website 
upon completion of this review.
                      8. earmarks executive order
    Last year, President Bush signed Executive Order 13457, which 
directs that ``the head of each agency shall take all necessary steps 
to ensure that * * * agency decisions to commit, obligate, or expend 
funds for any earmark are based on the text of laws, and in particular, 
are not based on language in any report of a committee of Congress, 
joint explanatory statement of a committee of conference of the 
Congress, statement of managers concerning a bill in the Congress, or 
any other non-statutory statement or indication of views of the 
Congress, or a House, committee, Member, officer, or staff thereof;''
    Is this executive order still in effect?
    Do you plan to modify it or repeal it? If so, how will it be 
modified and how will the Administration determine the level of 
earmarks and their cost in legislation?
                                response
    Until the President rescinds or modifies the Executive Order, it is 
still in effect. The Administration will work with Congress to increase 
the efficiency and transparency of earmarks. We are currently reviewing 
all the Executive Orders issued by the previous Administration and have 
not yet made a decision as to Executive Order 13457.
                        9. administrative paygo
    Is this Administration still abiding by previous OMB Director 
Bolten's memorandum requiring agency administrative actions that affect 
mandatory spending to comply with pay-go? Has the Administration made 
any changes to the baseline for the purposes of Administrative pay-go? 
If so, what are those changes and what is the budgetary impact of those 
changes? Please provide an account of all administrative actions 
affecting levels of mandatory spending that have been implemented since 
January 20, 2009, or which are assumed in your budget.
                                response
    The Administration supports requiring agency administrative actions 
that affect mandatory spending to comply with Administrative PAYGO. The 
Administration plans to implement Administrative PAYGO relative to the 
President's 2010 Budget. Administrative changes relative to the 2010 
Budget would generally, therefore, require budget neutrality (except in 
cases where it is appropriate to waive Administrative PAYGO in 
accordance with established procedures).
    The details of the FY 2010 Budget are being developed and when the 
full Budget is transmitted to Congress, the Current Services Estimates 
chapter of Analytical Perspectives will provide information on the 
budgetary impact of regulations and other important baseline 
assumptions.
            10. proposed program reductions and terminations
    Please provide a list of proposed program terminations and 
reductions included in the President's budget and the savings relative 
to the FY 2009 estimated level.
                                response
    The FY 2010 Budget transmitted to the Congress on February 26 was 
an overview. While the full details of the Budget are under 
development, the Administration has identified cuts and savings that 
include: eliminating the Resource Conservation and Development program 
in the Department of Agriculture; reforming the Market Access program 
in the Department of Agriculture by reducing program funding for 
overseas brand promotion and minimizing the benefits that large for-
profit entities may indirectly gain as members of trade associations; 
reducing Direct Payments to Farmers with sales revenue of more than 
$500,000 annually; increasing collection of delinquent taxes from 
Federal Contractors by streamlining administrative processes; 
eliminating small, ineffective Housing and Urban Development programs 
like the American Dream Downpayment Initiative and the Community 
Development Loan Guarantee program and reforming others like the Rural 
Housing and Economic Development program so that it is not duplicative 
of similar Department of Agriculture programs; and eliminating 
education programs with records of low performance.
            11. proposed program increases and new programs
    Please provide a list of new programs and program increases 
included in the President's budget and the increase in BA and outlays 
relative to the FY 2009 estimate level.
                                response
    The FY 2010 Budget transmitted to the Congress on February 26 was 
an overview. While the full details of the Budget are under 
development, the Administration has identified several program 
increases and new programs that include: a doubling of funding for 
cancer research at the National Institutes of Health and basic research 
at the National Science Foundation; climate change research and 
development to invest in clean energy, end our addiction to oil, 
address the global climate crisis, and create new American jobs that 
cannot be outsourced; a National Infrastructure Bank that expands and 
enhances existing Federal infrastructure investments and is designed to 
deliver financial resources to priority infrastructure projects of 
significant national or regional economic benefit; a nursing home 
visitation program to support first-time mothers; creation of the 
College Access and Completion Fund to support State efforts to help 
low-income students complete their college education; and a change to 
the extended unemployment insurance benefits trigger to make benefits 
available more quickly to long-term unemployed workers.
   12. proposed discretionary changes in mandatory programs (chimps)
    Does the budget assume any changes in mandatory proposals (MSAVERS 
or CHIMPS) as discretionary offsets? If so, please provide a list as 
well as expected BA and outlay savings. Please provide the impact of 
``rebasing'' levels for mandatory savings scored as discretionary 
spending in FY 2009 and a comparison of discretionary BA and outlays 
for FY 2009-2019 with and without rebasing.
                                response
    The FY 2010 Budget transmitted to the Congress on February 26 was 
an overview. The full details of the Budget are under development, and 
information on any proposed discretionary changes to mandatory programs 
will be provided as part of the full FY 2010 Budget.
                  13. proposed advance appropriations
    For programs where a request for advance appropriations will be 
made, please provide a list of the programs and the amount of the 
request.
                                response
    The FY 2010 Budget transmitted to the Congress on February 26 was 
an overview. The full details of the Budget are under development, and 
information on advance appropriations will be provided as part of the 
full Budget submission.
                 14. projections of highway trust fund
    Please provide revenue and spending projections for the Highway 
Trust Fund (both Highway and Mass Transit Accounts).
                                response
    The FY 2010 Budget transmitted to the Congress on February 26 was 
an overview. The full details of the Budget are under development, and 
information on spending projections for the Highway Trust Fund will be 
provided as part of the full Budget transmittal.
                       15. cap and trade proposal
    Will the President be submitting specific legislation on cap and 
trade to Congress? What agency will be responsible for administering 
this program? How much do you estimate will be needed for 
administrative costs? How many federal employees and contractor 
employees will be required? Has the Administration modeled the economic 
impact on GDP and jobs of its cap and trade proposal? If so, what is 
the impact on GDP and jobs? In table S-2, $120 billion of climate 
revenues are devoted to ``climate policy (clean energy technologies).'' 
However, these revenues are also dedicated to deficit reduction in this 
table. Are the revenues double-counted?
                                response
    As we have seen through the various draft bills in the 110th 
Congress, developing energy security and cap and trade legislation is a 
complex undertaking that will produce the strongest result if it is 
informed by a wide group of stakeholders and experts. The 
Administration will work with Congress in developing the legislation to 
make it as effective as possible.
    The level of resources needed to administer the cap and trade 
program will depend on the complexity of the legislation. Until the 
legislation has been drafted, it is difficult to predict the exact 
administrative costs, or the most appropriate agency to administer the 
components of the program. In working with Congress to develop 
legislation, we will weigh the benefits of various measures to design a 
program that is manageable, effective, transparent, and provides 
protections against market manipulation.
    A strategy to promote energy security and tackle global warming is 
critical to create new jobs and bolster the long-term viability of the 
economy. This is a major step to promote a stable, diverse and 
resilient energy supply while also taking crucial steps to avoid the 
most devastating effects of climate change. To help create the next 
generation of workers in the emerging fields of clean energy 
technology, a cap and trade policy should promote the creation of new 
jobs, and new and expanded job training programs. As you are aware, the 
Environmental Protection Agency, the Department of Energy and the 
Congressional Budget Office analyzed several climate policy proposals 
in the 110th Congress and specifically modeled economic impacts such as 
GDP. As the details of the policy take shape through our work with 
Congress, we will use these modeling results and other information to 
inform the most effective and balanced approach.
    The FY 2010 President's Budget proposes that revenues from the 
cap--and-trade permit auction be devoted to the Making Work Pay tax 
credit and to investments to help America transition to a clean energy 
future. The budget tables (S-7) show $15 billion per year in budget 
authority beginning in 2012 devoted to ``Climate Policy (Clean Energy 
Technologies);'' this investment will be paid for by cap and trade 
revenues. Table S-2 captures this discretionary spending under the 
category ``other appropriated programs.'' Thus, the presentation in the 
budget does not double count the revenue because it shows the cap and 
trade revenues and the associated offsetting spending.
               16. impacts of proposal to eliminate ffelp
    This budget projects $47.5 billion in savings over 10 years by 
eliminating the private capital-based Federal Family Education Loan 
Program (FFELP) and using low-interest Treasury borrowing for all 
federal student loans. How much would the Treasury need to issue in 
additional debt for FY 2010-2019 to finance these new direct loans in 
lieu of the guarantee program? What are the risks associated with 
issuing the additional debt and is that accounted for in the scoring? 
If Treasury rates return to their historical average rates by 2011, how 
much less will the savings be from the conversion to direct loans?
                                response
    As our estimate shows, the proposal in the FY 2010 Budget to issue 
all student loans directly from the Department of Education produces 
savings that reduce the deficit in both the short and long term. To the 
extent that bondholders are mostly concerned about the deficit and the 
long-term ability of the U.S. to repay debt, the risks associated with 
additional debt likely generate additional savings rather than costs 
(although those savings have not been scored). Issuing student loans 
directly eliminates the basis risk associated with the Federal Family 
Education Loan (FFEL) program--the risk that the spread of the rate at 
which the Administration compensates lenders over the Treasury's cost 
of borrowing will widen. While eliminating that basis risk is an 
additional benefit of switching to direct loans, we did not score it as 
savings. The Administration was careful in developing FFEL savings 
estimates to account for the program's sensitivity to changes in 
interest rates, as well as the probability that interest rates could 
fluctuate in future years. The approach we took is similar to the 
approach taken by the Congressional Budget Office in its FFEL 
estimates. Our savings estimates therefore are robust to almost any 
realistic set of interest rate assumptions; even if Treasury rates and 
Commercial Paper rates return to their historical average, eliminating 
FFEL subsidies and ramping up the DL program will continue to generate 
savings for taxpayers.
       17. yucca mountain and strategy for nuclear waste storage
    The budget contains a statement that says, ``The Yucca Mountain 
program will be scaled back to those costs necessary to answer 
inquiries from the Nuclear Regulatory Commission, while the 
Administration devises a new strategy toward nuclear waste disposal.'' 
Does the new strategy propose to abandon Yucca Mountain as the primary 
repository of our nation's nuclear waste? Will the Administration's 
Yucca Mountain proposal hinder efforts to build additional civilian 
nuclear plants?
    The courts have ruled that the federal government has a clear and 
binding obligation to accept this waste or to compensate facilities for 
failure to take this waste. How does the Administration plan on 
handling the government's nuclear waste storage liabilities if Yucca 
Mountain is abandoned? Will the government provide alternative storage 
facilities? If so, where? What is the projected cost of failing to meet 
the government's liabilities or to fund alternative storage facility 
arrangements?
    Does the Administration support the construction of new civilian 
nuclear power plants? If so, how many new plants are projected to be 
built during the next 10 years under the Administration's policies?
    If the Nuclear Regulatory Commission grants a license to the 
Department of Energy to build the Yucca Mountain facility, will the 
Administration request the necessary funding to complete the project?
                                response
    The Administration does not believe Yucca Mountain is a workable 
option. The Department is proceeding with the licensing process to 
provide insights to future licensing proceedings regardless of the 
future nuclear waste disposition alternative. All Departmental efforts 
for the Yucca Mountain repository that do not directly support this 
licensing effort, such as further facility design and detailed 
engineering, are being terminated, with DOE's focus solely on the 
licensing process with the Nuclear Regulatory Commission (NRC). The 
Administration understands that nuclear power is an important part of 
our energy mix and intends to devise a policy using the best available 
science to address this issue. The steps to revisit the direction the 
nation should take regarding the long-term disposal of the nation's 
spent nuclear fuel and high-level waste do not impact efforts to build 
additional civilian nuclear plants.
    The government continues to have a binding contractual obligation 
to accept the Nation's commercial spent nuclear fuel and high-level 
waste. This continuing obligation will certainly be among the issues 
raised during efforts to develop a new strategy for nuclear waste, 
which may include new alternative storage facilities or technologies.
               18. social security trust fund projections
    Last year, the actuaries projected Social Security would run a cash 
deficit in 2017. Does the budget assume that Social Security will run a 
cash deficit earlier? Based on the budget's projections, does the date 
Social Security becomes insolvent change? What are Social Security's 
unfunded obligations (75 year and infinite horizon) under the budget's 
assumptions?
                                response
    The Administration relies on the Social Security Administration's 
Office of the Actuary for long-range Social Security solvency 
projections. The intermediate projections in the 2008 Report of the 
Board of Trustees of the Social Security Trust Funds have the Social 
Security cost rate declining slightly in 2008 and then increasing up to 
the 2007 level within the next two years. It would then begin to 
increase rapidly and first exceed the income rate in 2017, producing 
cash flow deficits thereafter. Cash-flow deficits are projected to be 
less than trust fund interest earnings until 2027. Redemption of trust 
fund assets will allow continuation of full benefit payments on a 
timely basis until 2041, when the trust funds will become exhausted. 
The actuarial imbalance over the 75-year valuation period was 1.7 
percent of taxable payroll or 0.6 percent of GDP as of January 1, 2008.
    There is uncertainty around these estimates, and the 2008 Trustees 
Report presents confidence intervals for the point estimates above 
based on a stochastic analysis of key variables. The projected 
actuarial balance under intermediate assumptions over 75 years is -1.7 
percent of taxable payroll, and the 95 percent confidence interval 
based on the stochastic analysis is between -3.52 percent and -0.28 
percent of taxable payroll. The projected date when cash deficits begin 
is 2017, and a 95 percent confidence interval under the stochastic 
analysis is from 2013 to 2021. Similarly, the 95 percent confidence 
interval for the date of trust fund exhaustion (2041 under intermediate 
estimates) is from 2033 to 2070. The 2009 Trustees Report, which is due 
out later in the spring, will reflect updated economic assumptions. The 
new report will project the cash flows and the actuarial balance of the 
Trust Funds over the next 75 years.
                  19. medicare trust fund projections
    How much of a cash deficit does the Hospital Insurance Fund (Part A 
of Medicare) run in 2009? The actuaries projected insolvency by 2019 
for Part A. How do the budget's assumptions affect this insolvency 
date? Does the CMS actuary concur with these insolvency estimates? What 
is Medicare's combined unfunded obligations under the budget's 
assumptions (75 year and infinite horizon)?
                                response
    The official projection of the status of the Hospital Insurance 
(HI) Trust Fund is provided every spring in the Medicare Trustees' 
Report. The Centers for Medicare and Medicaid Services actuaries 
contribute to this report and attest to the actuarial soundness of its 
projections. For the 2008 report, the Trustees projected that the HI 
Trust Fund would be exhausted by 2019 under intermediate assumptions. 
The Trustees projected a 75-year actuarial imbalance of about 1.6 
percent of GDP for the HI Trust Fund. Put another way, payments from 
the Fund would have to be reduced or the income increased in an amount 
equivalent to 3.54 percent of taxable payroll to keep the fund solvent 
over the 75-year projection. The Trustees noted in the Report that, 
because Medicare Parts B and D have automatic general revenue financing 
provisions, there is no actuarial imbalance for these parts of the 
program, although the general revenue financing represents a draw on 
other Federal budget resources.
    Total Medicare expenditures are expected to grow from 3.2 percent 
of GDP in 2007 to 10.8 percent of GDP in 2082 under the Trustees' 
intermediate assumptions. The Trustees will be producing the 2009 
report shortly, which will have updated projections on the 2009 HI 
trust fund cash flows and other information on program financing. The 
proposals in the President's Budget are estimated to extend the 
solvency of the HI Trust Fund by about two years.
                     20. data for major trust funds
    Please provide data for major trust funds traditionally provided by 
the analytical perspectives volume, including the Social Security trust 
funds, Medicare trust funds, highway and transit funds, and airport 
funds (similar to table 22-4).
                                response
    The FY 2010 Budget transmitted to the Congress on February 26 was 
an overview. The full details of the Budget are under development, and 
information on government trust funds (including information similar to 
what was published last year in Analytical Perspectives Table 22-4) 
will be provided with the full President's Budget.
            21. aviation taxes and fees and 25% paygo offset
    The 25% revenue offset rule applies to aviation excise taxes. Does 
it apply to the budget's proposed aviation fees? If not, please provide 
estimates of gross baseline revenues for aviation taxes, net revenues 
(with 25% offset), and the fee collections from the budget's new fee.
                                response
    The FY 2010 Budget transmitted to the Congress on February 26 was 
an overview. The full details of the Budget are under development, and 
information on aviation taxes and fees will be provided as part of the 
full Budget transmittal.
                     22. data on gross obligations
    Please provide data for gross and net outlays to the public that 
are traditionally provided in the analytical perspectives volume.
                                response
    As discussed in the Analytical Perspectives chapter, ``Outlays to 
the Public, Net and Gross,'' accompanying the FY 2009 Budget, the data 
by agency are imprecise estimates of each agency's transactions with 
the public, and the level of imprecision varies by agency. These data 
are not exact because they include payments by each agency to other 
agencies, net of collections of payments received from other agencies. 
These payments and collections between agencies net to zero at the 
total Government level, but not at the individual agency level. We 
would, therefore, caution against using the data, except at the 
government-wide level.
             23. data on current and proposed user charges
    Please provide data on current user charges and fees and proposed 
new or increased user charges that are traditionally provided in the 
analytical perspectives volume.
                                response
    The FY 2010 Budget transmitted to the Congress on February 26 was 
an overview. The full details of the Budget are under development, and 
information on new user charges and increases in existing user charges 
that the Administration is proposing will be provided with that 
transmittal.
         24. funding levels for overseas contingency operations
    Please provide BA and outlay levels for FY 2008-2019 for the BEA 
baseline, current policy baseline, and the budget's proposed levels.
                                response
    The FY 2010 Budget transmitted to the Congress on February 26 was 
an overview. The full details of the Budget are under development, and 
information on funding levels for overseas contingency operations (OCO) 
will be provided as part of that transmittal.
    However, the FY 2010 overview provides information on the detail 
being sought. The outlay levels for 2009 through 2019 for the BEA 
Baseline and the Current Policy Baseline can be found on Table S-5 on 
page 121 on the lines identified as such. The policy outlay level can 
be constructed by adding the delta found on Table S-2 on page 115. The 
policy BA levels are provided through 2019 on Table S-7 on page 131. 
Although only the levels through 2014 are displayed, the footnote 
explains that $50 billion is the placeholder for 2011 and beyond. The 
Current Policy BA level can be calculated by adding the BA delta for 
OCO funding found at the bottom of Table S-2 on page 116.
             25. data on non-emergency outyear ba by agency
    Please provide non-emergency out-year levels (FY 2015-2019) by 
agency.
                                response
    The FY 2010 Budget transmitted to the Congress on February 26 was 
an overview. The full details of the Budget are under development, and 
information on agency totals for 2015 through 2019 will be provided as 
part of that transmittal.
                   26. federal agency energy savings
    The budget shows $16.3 billion in savings for reduced energy 
consumption in federal buildings. How much will the energy efficiency 
investments that will produce these savings cost, and how does the 
Administration plan on verifying the actual savings achieved?
                                response
    The budget item for Function 920 of $16.3 billion includes, but is 
not limited to, reduced energy consumption in federal buildings. The 
Recovery Act contains more than $11 billion for modernizations, new 
construction, and/or repair and restoration of Federal buildings, with 
a focus on high-performance green federal buildings and energy 
efficiency measures, and billions of dollars more for other investments 
in Federal facilities and the purchase of advanced vehicle fleets. We 
expect to agencies to track these investments and their energy savings 
through the mechanisms agencies currently use to track energy 
management investments and performance under Executive Order 13423 and 
Recovery.gov.
    Additional information on Federal energy efficiency investments and 
performance is available on the website of the Department of Energy's 
Federal Energy Management Program: http://www1.eere.energy.gov/femp/
regulations/facility--reports.html.
        27. budget transactions with fannie mae and freddie mac
    The Administration appears to keep Fannie and Freddie off-budget. 
Please provide data showing the transactions between the federal budget 
and Fannie and Freddie for FY 2008-2019 and indicate whether these 
transactions are recorded on a cash basis, a Federal Credit Reform Act 
(FCRA) basis, or a TARP-modified FCRA basis.
                                response
    The operating budgets of Fannie Mae and Freddie Mac are not 
presented in the FY 2010 Budget. However, financial assistance provided 
by Treasury to the GSEs is fully recorded on-budget.
    The FY 2010 Budget includes the ultimate face value (liquidation 
preference) of the Senior Preferred Stock Purchase Agreements with 
Fannie Mae and Freddie Mac, estimated at $173 billion (displayed in 
Table S-9). This includes $2 billion in preferred stock issued in 2008 
when the agreements were signed, plus an estimated $171 billion in 
payments to the GSEs from FY 2009 to FY 2011. This program is recorded 
in the Budget on a cash basis.
    The Budget also incorporates the estimated subsidy cost of Treasury 
purchases of GSE mortgage-backed securities ($1.8 billion in negative 
subsidy receipts through January 2009), and the estimated subsidy cost 
of the GSE liquidity facility in Treasury (there has been no lending 
activity to date). Both of these programs are recorded on a standard 
Federal Credit Reform Act basis.

    [Whereupon, at 1:44 p.m., the committee was adjourned.]

                                  
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