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



 
                            STATUTORY PAYGO

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


                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

             HEARING HELD IN WASHINGTON, DC, JUNE 25, 2009

                               __________

                           Serial No. 111-13

                               __________

           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                  ROBERT E. LATTA, Ohio
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, June 25, 2009....................     1

Statement of:
    Hon. John M. Spratt, Jr., Chairman, House Committee on the 
      Budget.....................................................     1
        Prepared statement of....................................     2
    Hon. Paul Ryan, ranking minority member, House Committee on 
      the Budget.................................................     3
    Peter R. Orszag, Director, Office of Management and Budget...     4
        Prepared statement of....................................     6
        Bill proposal: ``Statutory Pay-As-You-Go Act of 2009''...    37
    Alice M. Rivlin, the Brookings Institution and Georgetown 
      University, prepared statement of..........................    48
    Douglas Holtz-Eakin, former Director, Congressional Budget 
      Office.....................................................    51
        Prepared statement of....................................    52
    Robert Greenstein, executive director, Center on Budget and 
      Policy Priorities..........................................    55
        Prepared statement of....................................    57


                            STATUTORY PAYGO

                              ----------                              


                        THURSDAY, JUNE 25, 2009

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:01 a.m. in room 
210, Cannon House Office Building, Hon. John Spratt [chairman 
of the committee] presiding.
    Present: Representatives Spratt, Schwartz, Becerra, 
Doggett, Berry, Boyd, McCollum, Melancon, DeLauro, Edwards, 
Scott, Langevin, Larsen, Bishop, Schrader, Ryan, Hensarling, 
Garrett, Diaz-Balart, Lummis, and Latta.
    Chairman Spratt. I think more of the committee will be 
joining us later in the morning. But in the interest of time, I 
think we should also get this hearing started.
    The purpose of this hearing is to review statutory Pay-As-
You-Go, PAYGO, and examine the President's proposal to renew 
it. Initially, we had planned this hearing for last Thursday; 
and I would like to thank both of our witnesses and our ranking 
member, Mr. Ryan, for their cooperation in helping us 
reschedule it for today.
    At the outset of the 1990s, Congress passed the Budget 
Enforcement Act to ensure that the Budget Summit Agreement was 
carried out. Among its provisions was a rule that we 
colloquially called Pay-As-You-Go, PAYGO for short. Our critics 
disdained our resort to budget process. They accused us of 
dodging the hard choices we had to make if we were going to 
wipe out the deficit. But by the end of the 1990s, the budget 
was in surplus for the first time in 30 years; and it was clear 
that process rules like PAYGO played a big part in our success.
    Republicans were in the majority in 2002 when the BEA 
expired. They chose not to reinstate PAYGO, knowing it would 
impede passage of their tax cut agenda. Without the process 
rules, the budget plunged from a surplus of $236 billion in the 
year 2000 to a deficit of $413 billion in the year 2004.
    When Democrats took back the House, the reinstatement of 
PAYGO was on the top of our agenda. We made PAYGO the rule of 
the House the first day we convened the 110th Congress.
    Two weeks ago, the President proposed a bill to make PAYGO 
statutory; and last week that bill was introduced, with over 
150 cosponsors, as a starting point toward making statutory 
PAYGO part of our budget process.
    The Obama administration and the current Congress have 
inherited a colossal deficit, swollen this year to accommodate 
needed recovery measures. As these measures help pull us out of 
the slump, we need to refocus our attention on the longer-term 
fiscal fate of this country and this government.
    Earlier this month, Chairman Bernanke told our committee 
that the long-run fiscal path is simply not sustainable; and 
witness after witness comes to us bearing the same message. 
Statutory PAYGO works because it reins in new entitlement 
spending and new tax cuts. Both tend to be long lasting. They 
are easy to pass and hard to repeal. By insisting on offsets 
and deficit neutrality, PAYGO buffers the bottom line. Its 
terms are complex, but at its core is a common-sense rule that 
everyone can understand: When you are in a hole, stop digging.
    We share the administration's commitment to fiscal 
discipline and believe that statutory PAYGO will put greater 
rigor into the budgetary process.
    To help us understand the proposed legislation, our first 
witness will be no stranger to this committee. He is a former 
CBO Director, now the OMB Director, Peter Orszag.
    Then, on our second panel, we have lined up additional 
experts who are old friends of the Budget Committee as well: 
Robert Greenstein from the Center on Budget and Policy 
Priorities; Doug Holtz-Eakin, who is also a previous Director 
of CBO.
    We originally planned for Alice Rivlin to testify. She was 
not able to be here due to the schedule change. If there is no 
objection, we will make her statement part of the record.
    Before turning to Director Orszag for his testimony, let me 
turn to Mr. Ryan for any opening statement that he may wish to 
make. Mr. Ryan.
    [The statement of Mr. Spratt follows:]

Prepared Statement of John M. Spratt, Jr., Chairman, House Committee on 
                               the Budget

    The purpose of today's hearing is to review statutory Pay-As-You-Go 
(PAYGO) and examine the President's proposal to renew it. We initially 
had planned this hearing for last Thursday and I would like to thank 
both our witnesses and our Ranking Member, Mr. Ryan, for their 
cooperation in helping us reschedule it for today.
    At the outset of the 1990s, Congress passed the Budget Enforcement 
Act to ensure that the Budget Summit Agreement was carried out. Among 
its provisions was a rule called `pay-as-you-go' or PAYGO for short. 
Critics disdained our resort to budget process. They accused us of 
dodging the hard choices we had to make if we were going to wipe out 
the deficit. But by the end of the 1990s, the budget was in surplus for 
the first time in 30 years; and it was clear that process rules like 
PAYGO played a big part in our success.
    Republicans were in the majority in 2002 when the Budget 
Enforcement Act expired, and they chose not to reinstate PAYGO, knowing 
that it would impede passage of their tax cutting agenda. Without the 
process rules, the budget plunged from a surplus of $236 billion in the 
year 2000 to a deficit of $413 billion in the year 2004.
    When Democrats took back the House, the reinstatement of PAYGO was 
at the top of our agenda. We made PAYGO a rule of the House the first 
day we convened the 110th Congress.
    Two weeks ago, the President proposed a bill to make PAYGO 
statutory, and last week that bill was introduced--with over 150 co-
sponsors--as a starting point toward making statutory PAYGO part of our 
budget process.
    The Obama Administration and the current Congress have inherited a 
colossal deficit, swollen this year to accommodate needed recovery 
measures. As these measures pull us out of the slump, we must focus 
attention on our longer-term fiscal fate. Earlier this month, Chairman 
Bernanke told our Budget Committee that the long-run fiscal path is 
simply not sustainable.
    Statutory PAYGO works because it reins in new entitlement spending 
and new tax cuts. Both tend to be long lasting--easy to pass, hard to 
repeal. By insisting on offsets and deficit neutrality, PAYGO buffers 
the bottom-line. Its terms are complex, but at its core, it is a 
common-sense rule that everyone can understand: when you are in a hole, 
stop digging.
    We share the Administration's commitment to fiscal discipline, and 
believe that statutory PAYGO will put greater rigor into the budget 
process. To help us better understand the proposed legislation, our 
first witness will be no stranger to this Committee, former CBO 
Director and now OMB Director Peter Orszag. Then, on a second panel, we 
have lined up additional distinguished experts who are also old friends 
of the Budget Committee:
     Robert Greenstein is the founder and Executive Director of 
the Center on Budget and Policy Priorities and provides expertise on a 
wide range of budget policies.
     Douglas Holtz-Eakin, served as the sixth director of CBO 
and also worked with George H. W. Bush and George W. Bush on economic 
policy.
     We had originally planned for Alice Rivlin to testify, as 
well, but with the schedule change for the hearing, she cannot be with 
us in person today, but, without objection, her written testimony will 
be included as part of the record. As you know, she is senior fellow at 
the Brookings Institution and formerly served as director of OMB during 
the Clinton Administration and also as director of CBO from 1975 
through 1983, at the onset of our current budget process.
    Before turning to Director Orszag for his testimony, however, let 
me turn to Mr. Ryan for any opening statement he may wish to make.

    Mr. Ryan. Thank you, Chairman. And Budget Director Orszag, 
welcome back. Nice to have you here.
    First, I want to note that I appreciate any real effort by 
the administration and Congress to get a grip on our Nation's 
mounting fiscal crisis. But when I look at the broader 
budgetary context that has developed in the first 6 months of 
this administration, I am afraid that this PAYGO debate is 
little more than a distraction. The President's budget will 
produce record deficits as far as the eye can see. Deficits 
never fall below $600 billion and hit $1.2 trillion by the end 
of the budget window; and, under this budget, the national debt 
will nearly triple over the next decade.
    Second, after signing a bloated 2009 omnibus spending bill, 
a stimulus bill that will cost more than $1 trillion with 
interest costs and proposing an 11 percent increase in 
nondefense discretionary spending for this year alone, the 
administration is now demanding that Congress rush through a 
huge new entitlement program under the slogan of health care 
reform. Just this week, Treasury had to issue a record $104 
billion in new debt to support all of this spending.
    Not surprisingly, polls have started to show the public's 
concern about this deluge in spending and debt that Washington 
is racking up. So we get a Cabinet meeting to highlight $100 
million in savings, followed by, a few weeks later, by a day-
long media blitz to trumpet this PAYGO bill.
    Clearly, both of these efforts were intended to give the 
impression that the administration is finally putting its foot 
down on out-of-control spending. But if you read the papers 
after either of these announcements, you will know that I am 
not the only one with skepticism. Even the Washington Post said 
that the President doesn't deserve much credit for his PAYGO 
proposal because of, quote, his failure to adjust his spending 
plans to budgetary reality, end quote.
    But, notwithstanding all of that, there are some aspects of 
this bill that are real improvements to the House majority's 
existing rule. Most notably, the administration's proposal 
would modify PAYGO so that simply preventing one unintended tax 
hike, such as the expansion of the AMT or expiration of the 
2001 and 2003 tax laws, don't result in yet another unintended 
tax hike.
    The administration's proposal would also direct CBO and OMB 
to ignore the all-too-often-employed timing shift gimmick, the 
practice of shifting spending or revenue from one year to the 
next in order to claim it as a savings.
    Regrettably, these positive aspects will likely be 
overwhelmed by the basic but significant shortcomings of this 
bill.
    First, there are no caps on annual appropriations, which 
make up 40 percent of the total spending. PAYGO in the past has 
always been accompanied by discretionary spending caps, and 
that has been the critical element of spending control. But the 
administration didn't do that.
    Second, emergency spending is also exempt.
    Third, PAYGO can easily be circumvented through gimmicks 
such as artificial reductions in spending that we saw recently 
in the SCHIP bill that met PAYGO by assuming that funding will 
be cut by 65 percent in 2014.
    But, most important, PAYGO does nothing to address our 
greatest challenge to our long-term budgetary and fiscal 
health, the entitlement crisis that is already speeding towards 
us.
    So while I certainly appreciate any genuine effort to 
fiscal discipline, I don't think it is wise to pretend that we 
can substitute a PAYGO slogan for the real, immediate action 
needed to get spending deficits and debt under control. I hope 
we can move this legislation toward the budget reforms that 
actually tackle the real fiscal problems we face; and I will 
assure both the chairman and the director that, when they are 
ready, I will be the first in line to help bring about that 
result.
    Thank you, Chairman.
    Chairman Spratt. Thank you, Mr. Ryan.
    Let me ask unanimous consent that all members be allowed to 
submit an opening statement in the record at this point.
    Without objection, so ordered.
    And let me say once again, welcome to our witness. We 
appreciate your coming and your endeavors to put this bill 
together and we will make your written testimony part of the 
record so that you can summarize it.
    The floor is yours, Dr. Orszag. Thank you for coming.

    STATEMENT OF PETER R. ORSZAG, DIRECTOR OF THE OFFICE OF 
                     MANAGEMENT AND BUDGET

    Mr. Orszag. Mr. Chairman, Mr. Ryan, members of the 
committee, thank you for the opportunity to testify this 
morning on the Statutory Pay As You Go Act of 2009.
    Largely because of rising health care costs, the Nation is 
on an unsustainable fiscal course. Given the large structural 
deficits that the Nation faces, we should follow the 
Hippocratic Oath that reminds doctors to first do no harm.
    With respect to taxes and entitlement, the PAYGO Act is the 
statutory embodiment of that time-tested principle. It tells 
Congress and the administration that their minimum duty is not 
to make the existing multiyear structural deficit any worse 
than it already is.
    The PAYGO act would hold us to a simple but important rule: 
We should pay for new tax or entitlement legislation. Creating 
a new tax cut or entitlement expansion would require offsetting 
revenue increases or spending reductions.
    In the 1990s, statutory PAYGO encouraged the tough choices 
to help move the Nation from large deficits to surpluses; and I 
believe it can play a similarly constructive role today. The 
statutory PAYGO legislation would complement existing 
congressional rules. Both houses of Congress have already taken 
an important step by adopting rules incorporating the PAYGO 
principle, but we can strengthen enforcement and redouble our 
commitment by enacting the PAYGO Act into law, which would 
allow us to adopt a belt-and-suspenders approach to fiscal 
discipline with the statutory PAYGO Act working alongside the 
existing rules.
    How would it work? Under the PAYGO Act, OMB would maintain 
a PAYGO ledger recording the average 10-year budget effects of 
any legislation enacted through 2013 that affects government 
receipts or mandatory outlays relative to the baseline. We 
would sum the average cost of savings--costs or savings of all 
PAYGO legislation having effects in a given year and would 
record a net cost for that year if the cost exceeded the 
savings, which would then violate the PAYGO Act's budget 
constraint.
    The PAYGO Act would enforce that budget constraint through 
the threat of sequestration. If policymakers don't make the 
hard choices necessary to pay for any new mandatory spending or 
tax reductions, the law would trigger sequestration, automatic 
cuts in nonexempt mandatory programs. Sequestration would 
strongly encourage all of us never to violate that PAYGO 
constraint because--and, therefore, in practice it would be a 
threat and not a reality. And the reason is that the across-
the-board reductions for the programs that are covered would be 
so painful that, in the 1990s, that threat was significant 
enough to avoid its ever having to be triggered.
    Now, as I have said, the proposed legislation would require 
that new mandatory or tax policy be paid for. That is the 
embodiment of the do-no-harm principle. A keyword here, 
however, is ``new''.
    We have put forward a statutory PAYGO Act that reflects the 
thrust of current policy in three main areas: the sustainable 
growth rate formula for how doctors are reimbursed under 
Medicare, the 2001 and 2003 tax legislation, and the 
alternative minimum tax. In all three areas, we have adopted a 
current policy as opposed to a current law approach; and I 
would be happy to discuss that further during the question and 
answer period.
    But the motivation in doing so was to avoid waiving the 
rules when current policy was extended in a way that there are 
no plausible offsets to pay for. And so we thought it was 
better to have a set of rules that could actually be enforced 
and that would not be waived, rather than having something that 
looked better on paper but then would immediately be waived in 
practice in major pieces of legislation.
    Let me just conclude by noting that the current debate over 
health care reform illustrates the importance of the PAYGO 
principle. Some advocates may support health reform even if it 
expands the deficit. The administration does not share that 
perspective. Some may say that all we need to do is make the 
system more efficient in the long run and this will pay for 
health care reform. We agree that bending the health care cost 
curve over the long run is essential, but it is not enough. 
That is why we have put forward $950 billion in hard scoreable 
offsets to make sure that the legislation is deficit neutral 
not only over 10 years but also in the tenth year alone.
    So just to reinforce the point, what we are saying is that 
health care reform must be deficit neutral using CBO scored, 
hard scoreable offsets over 10 years and in the tenth year.
    And then, in addition to that--because if that is all we 
did, we would be expanding coverage in a fiscally responsible 
way but perpetuating a health care system that did not embody 
best practices across the entire country and that did not 
capture the opportunity to move towards a higher-quality, 
lower-cost system.
    So in addition to expanding coverage in a fiscally 
responsible way and making sure the package as a whole is 
deficit neutral using CBO scoring over the next decade, we also 
firmly believe there are a series of changes that must be made 
involving health information technology, expanded patient 
center health research, changes in financial incentives towards 
quality, and changes in the process through which Medicare 
policy itself is set that will help us move towards a rapid-
learning, higher-quality, lower-cost system over time.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Peter Orszag follows:]

 Prepared Statement of 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 Statutory Pay-
As-You-Go (``PAYGO'') Act of 2009.
    The PAYGO Act would hold us to a simple but important principle: we 
should pay for new tax or entitlement legislation. Creating a new non-
emergency tax cut or entitlement expansion would require offsetting 
revenue increases or spending reductions. In the 1990s, statutory PAYGO 
encouraged the tough choices that helped move the Government from large 
deficits to surpluses, and I believe it can do the same today. Both 
houses of Congress have already taken an important step toward righting 
our fiscal course by adopting congressional rules incorporating the 
PAYGO principle. But we can strengthen enforcement and redouble our 
commitment by enacting the PAYGO Act into law.
    Both the President's Budget and the Budget Resolution approved by 
the Congress would cut the deficit in half by the end of the 
Administration's first term, while laying a new foundation for 
sustained and widely shared economic growth through key investments in 
health, education, and clean energy. Even though more will ultimately 
be needed to restore fiscal responsibility, enacting statutory PAYGO 
would complement the efforts already initiated and represent an 
important step toward strengthening our budget process.
                          the paygo principle
    The Hippocratic Oath famously reminds doctors to, first, do no 
harm. Similarly, but more colloquially, Charlie Stenholm, the long-time 
Texas congressman and a founder of the Blue Dogs, often repeated what 
he called the ``rule of holes'': If you find yourself in a hole, stop 
digging. With respect to taxes and entitlements, the PAYGO Act is the 
statutory embodiment of these time-tested principles. It tells Congress 
and the Administration that their minimum duty is not to make the 
existing multiyear structural deficit any worse than it already is.
    This may seem like a relatively easy rule to follow, but history 
suggests it is not. One way to see this is by looking at three 
relatively recent pieces of legislation that violated the PAYGO 
principle: the 2001 and 2003 income tax reductions, or EGTRRA and 
JGTRRA, and the Medicare Modernization Act of 2003, which created the 
Medicare Part D prescription drug benefit. None of these three pieces 
of tax and entitlement legislation was paid for in PAYGO terms. Each 
was permanent or intended to be permanent. And those three bills 
together increased the 75-year fiscal gap--the difference between 
sustainable and unsustainable budgets--by roughly 3 percent of GDP.\1\ 
Since estimates of the long-term fiscal gap prepared by GAO, CBO, and 
other independent analysts place it at around 7 percent of GDP, those 
three violations of the PAYGO principle by themselves nearly doubled 
the long-term fiscal gap. The difference, then, between adhering to and 
violating PAYGO is not a question of few billion dollars around the 
edges--but rather can go to the heart of the nation's fiscal path.
---------------------------------------------------------------------------
    \1\ The estimate that the 2001 and 2003 tax cuts increased the 
fiscal gap by 2% of GDP includes as part of its cost the degree to 
which those tax cuts expanded the size of AMT relief, but does not 
include cost of AMT relief that would be part of current policy even if 
those two tax cuts had not been enacted.
---------------------------------------------------------------------------
                            how paygo works
PAYGO Ledger
    Under the PAYGO Act, the Office of Management and Budget (OMB) 
would maintain a PAYGO ledger recording the average ten-year budgetary 
effects of all legislation enacted through 2013 that affects 
governmental receipts or mandatory outlays relative to the baseline 
(``PAYGO legislation''). After recording the average ten-year budgetary 
effect for each piece of PAYGO legislation enacted in a given year, OMB 
would then sum the budgetary effect of all PAYGO legislation having 
effects in that year (including the effects of legislation enacted in 
prior years but after the enactment of this proposal) and would record 
a net cost (or debit) for that year if the sum is negative.
    Spelling out a few of these features in greater detail:
     Sunset. The PAYGO Act would expire after five years, on 
December 31, 2013.
     PAYGO window. The PAYGO Act would measure the cost or 
savings of PAYGO legislation in the current year and over the next ten 
years.
     Averaging. For the budget year and any remaining years on 
the PAYGO ledger, the PAYGO Act would require OMB to enter the average 
ten-year budgetary effect--rather than the budgetary effect in each 
individual year--associated with any piece of PAYGO legislation. This 
means that the PAYGO ledger is designed to require budget neutrality 
across a time period rather than year-by-year.
     Scorecard neutrality. The PAYGO Act would not require that 
each piece of enacted PAYGO legislation be budget neutral by itself, 
but rather only that the averaged budgetary effects in a given year of 
all PAYGO legislation enacted since the proposal becomes effective be 
budget neutral.
     Look back. To take into account any budgetary effects of 
PAYGO legislation in the current year (i.e., the year that PAYGO 
legislation is enacted), the PAYGO Act includes a ``look back'' rule, 
which provides that any budgetary effects in the current year (i.e., 
the year of enactment) would be treated on the PAYGO ledger as if they 
were budgetary effects in the budget year (which is the year subsequent 
to the current year).
     Timing shifts. The PAYGO Act would not give any credit for 
savings created or costs avoided through a shift between year 10, which 
is inside the PAYGO window, and year 11, which is outside the window. 
This restriction would prevent any gaming of the PAYGO Act that would 
occur by hiding the budgetary costs of PAYGO legislation just outside 
the PAYGO window.
     Basis of estimates. The PAYGO Act stipulates that OMB 
would estimate the average ten-year budgetary effects of all PAYGO 
legislation on the basis of the economic and technical assumptions 
underlying the latest President's Budget and in conformance with the 
scorekeeping guidelines determined by OMB after consultation with the 
House and Senate Budget Committees and CBO.
Sequestration
    The PAYGO Act enforces its budget constraint through the threat of 
sequestration. PAYGO forces policymakers to make the hard decisions 
necessary to pay for any new mandatory spending or tax reductions by 
triggering sequestration--automatic cuts in non-exempt mandatory 
programs--if they do not.
    Specifically, if there is a net cost on the PAYGO ledger for the 
upcoming year when Congress adjourns at the end of a session, the 
President is required to issue an order temporarily sequestering 
resources--sufficient to fully pay off the PAYGO debit--from non-exempt 
mandatory programs in the budget year. With the exceptions of Medicare 
and three additional, small health care accounts,\2\ non-exempt 
mandatory programs would be cut by a uniform percent; Medicare could be 
cut by at most 4 percent. If a cut larger than 4 percent is needed to 
offset the debit on the PAYGO ledger, the uniform percentage cut to the 
other non-exempt mandatory programs would be increased so that the 
sequester of Medicare and the other non-exempt programs would together 
produce sufficient savings to offset the budget-year debit.
---------------------------------------------------------------------------
    \2\ The three additional health care accounts excepted from a 
uniform percentage cut are community health centers, Indian health 
facilities, and Indian health services; each is capped at a maximum 2 
percent cut.
---------------------------------------------------------------------------
    Following in the footsteps of statutory PAYGO from the 1990s, the 
proposed legislation would exempt most mandatory programs from 
sequester--programs such as Social Security, veterans' disability and 
related benefits, and major low-income entitlements such as 
Supplemental Security Income and Medicaid. The remaining sequestration 
base totals approximately $540 billion in fiscal year 2010 and includes 
programs such as Medicare, farm price supports, and a number of grants 
to states.
    Set up in this way, sequestration strongly encourages policymakers 
never to violate the PAYGO budget constraint and trigger 
sequestration--in other words, sequestration is in practice a threat, 
not a remedy. The sequestration base is broad enough to produce 
significant savings in the event sequestration were triggered, but it 
is narrow enough that any such cuts would be painful to important 
constituencies. In the 1990s, this careful balance resulted in Congress 
never triggering sequestration and, instead, making the hard choices 
that PAYGO requires.
    It's also important to recognize that being exempt from 
sequestration does not mean a program is exempt from the PAYGO budget 
constraint. The only mandatory or tax legislation that is outside the 
scope of the PAYGO Act is legislation dealing with the two programs 
that are off-budget by law: Social Security and the Postal Service 
Fund. Otherwise, new mandatory spending or tax reductions--irrespective 
of whether they relate to programs that are exempt from sequester--
would have to be paid for in order to avoid triggering painful 
automatic cuts to the programs in the sequestration base.
                      adjusting for current policy
    As I have said, the proposed legislation would require that new 
mandatory or tax policy be paid for--essentially enforcing a ``do no 
harm'' fiscal principle. A key word here is ``new.''
    To focus the PAYGO Act on applying a strict budget constraint only 
to new policy, the proposed legislation includes adjustments in four 
policy areas where current policy deviates substantially from current 
law: the Medicare sustainable growth rate formula (SGR), the estate 
tax, the Alternative Minimum Tax (AMT), and the 2001 and 2003 income 
tax reductions. In each of these areas, the policies currently in place 
are set to expire or substantially change in coming years in ways that 
unrealistically reduce costs or increase revenues--for instance, 
payments to doctors under Medicare are scheduled to be cut by about 21 
percent next year under the SGR, and virtually all of the 2001 and the 
2003 tax cuts are scheduled to expire at the end of 2010. For these 
four areas, where the law on the books does not reflect the realities 
of current policy, the PAYGO Act would not require a continuation of 
those policies to be paid for.
    Some have criticized the Administration for designing the PAYGO Act 
to reflect current policy rather than current law in these areas. These 
critics, however, have provided no indication of how they would offset 
the costs of continuing current policy in these areas, and I have seen 
no credible proposals for such offsets. The most plausible result of 
applying the PAYGO Act to a continuation of these current policies 
would therefore be waivers of the statute in these cases. Such waivers 
would establish a harmful precedent that could undermine the statutory 
PAYGO regime and lead to waivers for new policy, allowing policymakers 
to avoid the PAYGO budget constraint.\3\ The Administration therefore 
believes it is better to design statutory PAYGO in a credible way to 
minimize the potential for waivers, and that is what our proposal does.
---------------------------------------------------------------------------
    \3\ Note also that the PAYGO Act would not alter the existing 
congressional PAYGO rules. The Senate PAYGO rule would still apply to 
legislation that extended current policies; the House PAYGO rule, as 
provided in the Budget Resolution, would recognize limited exceptions 
for the continuation of current policy if statutory PAYGO were enacted.
---------------------------------------------------------------------------
    The PAYGO Act would give a time-limited window for continuing 
current policy without paying for it. At the end of 2010, the 
adjustment for current policy would expire, unless the President 
determines that legislation sufficiently consistent with current policy 
has not been enacted in any one or more of the relevant four areas--in 
which case the President can choose to continue the adjustment for one 
more year, until the end of 2011. Once the adjustment is no longer 
allowed, continuing current policy would have to be paid-for, like any 
other tax or mandatory policy.
            complement to existing congressional paygo rules
    Both the House and Senate adopted PAYGO rules in 2007. Congress 
should be commended for having done so, and this was a substantial 
improvement over the immediately prior years when no such rules 
existed. Nonetheless, the House and Senate rules lack the sequestration 
mechanism that would give teeth to the PAYGO Act. As a result, the 
Administration believes that, while the congressional rules are an 
important bulwark for fiscal discipline, putting PAYGO back into law 
will complement and strengthen the rules and help to bring us back to a 
more sustainable budget. In other words, to borrow an old cliche, we 
believe in a ``belt-and-suspenders'' approach to PAYGO budgeting, with 
the PAYGO Act and the House and Senate rules working alongside one 
another to achieve fiscal discipline in a mutually reinforcing way.
    Moreover, the joint presence of PAYGO rules and a PAYGO law would 
essentially replicate the situation in the 1990s, when a Senate PAYGO 
rule coexisted with statutory PAYGO. Notably, during this period from 
1990 to 1999, Congress did not just meet the PAYGO requirement of 
budget neutrality, but managed to exceed it with the enactment of tax 
and entitlement legislation that in fact reduced deficits. (Congress 
accomplished this feat even before counting the effects of the deficit-
reduction packages enacted in 1990, 1993, and 1997, which were 
deliberately excluded from the PAYGO scorecard.) It is quite possible 
that Congress was able to reach this result of net budgetary savings 
during the 1990s because it had to meet the requirement of both 
congressional rules and statutory PAYGO.
                               conclusion
    The current debate over health care reform illustrates the 
importance of enacting the PAYGO Act and abiding by the ``do no harm'' 
fiscal principle, even as we seek to invest in areas that have too long 
been ignored.
    Some advocates may support health reform even if it expands the 
deficit; the Administration does not share that perspective. Instead, 
the President is insistent that health reform be deficit neutral 
through scoreable offsets, and has put forward roughly $950 billion in 
Medicare and Medicaid savings and additional revenue for that purpose. 
Beyond the need to make deficits no worse in the medium term, it is 
also crucial that we enact game-changing proposals that will move the 
health system toward one in which best practices are more universal 
across the nation, rather than isolated in certain areas and hospitals 
within the United States. These game changers may not score 
immediately, but they hold the key to containing health care cost 
growth in the long term and should be included in the legislation for 
this purpose.
    We should not waiver from the fiscal principle of ``do no harm''--
in health care reform or elsewhere in the budget. Enacting statutory 
PAYGO is another important step in holding us to this goal.

    Chairman Spratt. Thank you very much, Dr. Orszag.
    Just a few basic questions to start with.
    In the past, the Budget Enforcement Act, for example, was 
enacted for 5 years because it matched the 5 years of the 
Budget Summit Agreement. Is there some particular reason you 
chose 5 years here? Would 10 years be applicable and acceptable 
to the Administration or even no term limits at all?
    Mr. Orszag. We chose 5 years for the duration of the 
statutory PAYGO Act just to mimic what was done in 1990 and 
then, frankly, done subsequently during the 1990s. But we don't 
have any firm principle. And maybe I should have said at the 
beginning, wherever possible, we were trying to recreate what 
existed in 1990. Since that was initially created for 5 years, 
we just said, okay, let us do this for 5 years, also. We would 
have no objection to a longer time period.
    Chairman Spratt. In addition, you averaged the entries on 
the scorecard ledger, a little odd when you first read the 
proposal. Would you explain why you proposed to average it 
instead of actually making the entries when they occur?
    Mr. Orszag. Yeah. The motivation there was that we had 
heard some concern from congressional staff that your existing 
rules in both the House and Senate look at it in a long-time 
period. They look at a 6-year time period and an 11-year time 
period and that if we had a statutory PAYGO rule that was year 
by year you would be creating inconsistencies between the 
congressional rule and the statutory act.
    So we thought it was better to just simply reflect the same 
principle that you already have in your PAYGO rule in the 
House, which is look over, for example, a 10 or 11 year period. 
And if the thing is balanced over that window, then it meets 
PAYGO. The same principle would apply under statutory PAYGO.
    Chairman Spratt. There is another anomaly; and that is, to 
implement the new PAYGO, we first have to declare it won't be 
applicable to four rather substantial tax provisions that will 
be expiring for the most part on December 31, 2010. Why did you 
give this exoneration to the current policy baseline for these 
particular programs?
    Mr. Orszag. Again, I think there is--and they are not just 
tax provisions. It is also applying to the sustainable growth 
rate formula.
    But with regard to the exceptions that we put forward, I 
think there is widespread agreement that there will be some 
extension. We are not going to allow physician payments to fall 
by 20 percent. We are not going to allow the alternative 
minimum tax to take over the Tax Code. And I don't think anyone 
is proposing or embracing that none of the 2001 and 2003 tax 
legislation is extended. Perhaps some Members of Congress are. 
But in terms of the bulk of Members of Congress and senators, 
it is very likely that some significant part of the 2001 and 
2003 tax legislation will be extended. No one has put forward 
credible offsets in those categories.
    For example, on the sustainable growth rate formula--or let 
us take the alternative minimum tax. There have been 1-year 
patches that have generally either not been offset at all or 
been offset with 10-year offsets. No one has put forward a 10-
year fix with 10-year offsets.
    In that situation where there are no credible offsets that 
have been put forward, the most likely outcome if you wrote the 
legislation based on current law is that the rules would just 
be waived when those extensions came up. We thought it would be 
better to write the legislation in a way that didn't 
immediately trigger waivers, because we think waivers--once you 
get in the--I guess the theory of the case is once you get in 
the habit of giving waivers, you could get too used to giving 
waivers; and it would be better to write the rules in a way 
that recognized reality and then not have waivers.
    Chairman Spratt. To make it clear, you are not sanctifying 
these tax cuts at these levels necessarily or calling for their 
reenactment or reinstatement on December 31st?
    Mr. Orszag. No, it is not a policy statement at all. It is 
just that if the Congress decides to extend, for example, part 
of the tax legislation, how that should be treated under 
statutory PAYGO.
    Chairman Spratt. And there is a time limit on acting to 
take advantage of the exclusion here?
    Mr. Orszag. That is right.
    Again, if we step back and realize why we are in this 
situation, the reason we are in this situation is that--
especially with regard to the 2001 and 2003 tax legislation, 
which is the biggest single component, there was an artificial 
sunset put into the law at the end of 2010, which creates this 
awkwardness between the current law and current policy 
baseline. That not a good way of making policy.
    Chairman Spratt. One more question. The sequestration base. 
Did you say a word about how the legislation that could be 
subject to sequestration was chosen and what methods you took 
to choose it? Are you simply carrying forward what was last in 
law or have you made some modifications to it?
    Mr. Orszag. We were generally--we were carrying forward the 
spirit of what was last in law, which exempted low-income, 
veterans, retirement programs, and a few others. 
Unfortunately--well, not unfortunately. There were some new 
programs created that needed to be put into one bucket or the 
other, and we tried to follow the same guidelines that had been 
embodied in the previous legislation. So the vast majority of 
the exemptions to sequestration are exactly the same as under 
the 1990 law. We just had to update it for programs that were 
created since then.
    Chairman Spratt. One final question. What you are proposing 
is statutory PAYGO. The House has a PAYGO rule, which is the 
rule of the House. The Senate has a PAYGO rule. Is it your 
anticipation that the House and Senate rules will stay in 
effect as well?
    Mr. Orszag. Yes. That is, I guess, the belt part of the 
belt-and-suspenders approach to PAYGO.
    Chairman Spratt. I won't ask which ones are the suspenders 
and which ones are----
    Mr. Orszag. Yeah. Well, I will let you choose.
    Chairman Spratt. Mr. Ryan.
    Mr. Ryan. Thanks, Chairman.
    Peter, in the past, PAYGO was accompanied with 
discretionary spending caps; and I think a lot of observers of 
your budget would say that your discretionary spending path is 
unrealistic. I would like to see it materialize as you lay it 
out after the first year. The first year you go up 11 percent, 
and then you average less than 3 percent over the rest of the 
10-year window. Would you be willing--would the administration 
be willing to lock in those numbers with statutory caps?
    Mr. Orszag. We would be willing--let me first say--I am 
just going to correct a few things. The discretionary spending 
increase is artificially affected by things like the Bureau of 
the Census.
    Mr. Ryan. I will concede the first year is 11 percent, but 
it averages less than 3 percent over the next 10 years.
    Mr. Orszag. Focusing on the outyears, I think the most 
important single thing we could do is enact statutory PAYGO for 
mandatory and revenue. Remember, over the past 8 years, we 
doubled the size of the long-term fiscal gap in this Nation by 
enacting tax legislation that was not offset and a prescription 
drug benefit that was not offset and present value that is 3 
percent of GDP; and that doubled the size of the fiscal gap.
    Now, discretionary spending can matter, also. We have put 
forward a path we support. If one were to pursue discretionary 
caps, we would want them to be at the level that we have put 
forward. That is a discussion we could have. But I think first 
things first. Let us focus on where most of the money is, which 
is on the mandatory side and the tax side of the budget.
    Mr. Ryan. Forty percent of the money is not peanuts. So 
since you have a path you subscribe to, you believe in, it is 
40 percent of the spending. In the past, it was accompanied 
with statutory caps on discretionary. Why not support 
discretionary caps at your levels?
    Mr. Orszag. It is an idea that we would be willing to 
pursue with you and discuss with you. But we thought it was 
most important--especially given the past history of where the 
most deterioration occurred--focus on where the problem is.
    Mr. Ryan. Let us go on to that, then. We are on the verge 
of creating a brand new entitlement, a brand new entitlement 
that will provide eligibility numbers that rank up there with 
the size of Medicare. And, therefore, its liabilities could, 
could rank up there with the size of Medicare.
    I want to applaud you and thank you for standing by CBO and 
rejecting some of the entreaties to have OMB scoring for the 
health care bill and to stick with CBO. By the way, I am glad 
the administration is sticking with assuring that we have CBO 
scoring on the health care legislation and that--I assume you 
are sticking with the 10-year pay-for. You are going to pay for 
it within the 10-year window, correct?
    Mr. Orszag. Health reform must be paid for over 10 years 
and in the tenth year.
    Mr. Ryan. Right. That is great.
    What about the years after that? What about the long-term 
fiscal gap? What about the long-term effects of this? Will the 
administration give us long-term scoring as to what kind of 
debt we are going to be passing on to the next generation in 
addition as a result of this program? Will the administration 
be able to show us that the revenues, the pay-fors will 
actually match the expenditures in the outyears? Or, in fact, 
are we creating yet another liability for the next generation 
on top of the $62 trillion we have right now, according to the 
GAO?
    Mr. Orszag. Three comments. First, contrast how different 
this is from the process that was used for the prescription 
drug benefit where there was no offset at all. We expanded the 
long-term fiscal gap by a percent of GDP by doing so with no 
offsets.
    Second, the reason that we have said that we want deficit 
neutrality in the tenth year is that is the best proxy for what 
will happen in the second decade. By that time, the program 
should be fully phased in. And if you have deficit neutrality 
in your 8th, 9th and 10th year, for example, you are not 
falling off a cliff towards the back end of the decade----
    Mr. Ryan. Great point. So does your deficit.
    Mr. Orszag. And there is a third point. And then the third 
is, remember, that is not counting any of the transformation 
that we believe is crucial. And what I would say on that is 
there may be some debate over exactly how much you will get out 
in 2050 from these ideas. But everyone must agree they are 
necessary. Some people may not believe they are sufficient, but 
they are necessary for transforming the health care system.
    Under your consumer-driven health approach, for example, 
you need health IT and more research into what works and what 
doesn't so that consumers have better, more informed choices. 
We are doing hard things there precisely because we firmly 
believe that if we don't, nothing else is going to matter.
    Mr. Ryan. Does your deficit neutrality apply to the 
outyears? Does it apply to the long term?
    Mr. Orszag. As you know, CBO only does 10-year----
    Mr. Ryan. I know.
    Let me go to an episode we had in Ways and Means where the 
Republicans made a mistake. You know who Rick Foster is? He is 
the chief actuary at CMS. I have some House Ways and Means 
colleagues that are here with me. Lloyd was here then.
    When the prescription drug bill was done, the CMS actuary 
put out some long-term estimates. Those estimates were not 
provided to Congress, and that was a mistake. We used CBO--I 
see Doug Holtz-Eakin shaking his head there. That was a 
mistake. And the minority at the time was right to point out 
that the administration should not have sat on those estimates 
that would have better informed Congress as to the fiscal 
decisions they were making.
    It turned out those estimates were way off. It turned out 
CBO was way off. It turned out this benefit came in 40 percent 
below projections.
    But my question is, will you allow the CMS actuary to give 
us these kinds of scores and make them available to Congress? 
Because that was a mistake the last administration made. I hope 
you don't repeat that mistake. And will you allow the CMS 
actuary to do the long-term scoring, 10-year and long-term 
scoring on this new entitlement benefit so we can get a better 
picture of what we might be passing in 3 or 4 weeks here?
    Mr. Orszag. Three comments. First, I am firmly in favor of 
disclosure of information to the Congress.
    Second, the CMS actuaries, as you know, are responsible for 
Medicare and Medicaid. Their ability to model systemwide health 
changes like we are talking about----
    Mr. Ryan. Probably better than anybody else's ability.
    Mr. Orszag. Although that is not what they are paid to do. 
I just want to note that. So there is an awkwardness. The 
prescription drug benefit was within their four corners. This 
is not.
    And then, finally, as you pointed out, I think sometimes 
there is a thought that, even if you are deficit neutral, 
somehow the projections are always biased too low and therefore 
we are going to wind up in a bad situation. And, as you noted, 
the prescription drug numbers have actually come in lower than 
projected, making the point that, in general--CBO, for example, 
does its best job. Sometimes they are too high. Sometimes they 
are too low. They are not biased in one direction.
    Mr. Ryan. I would argue it is sort of the nature of the 
program that brought those numbers where they are.
    But let me ask you this. Don't you think we ought to have a 
handle on what we are creating over the long-term with this new 
entitlement, this new health care entitlement? You of all 
people have been so articulate in coming to Congress, 
especially in your old job, of saying what a fiasco we have got 
financially, the indebtedness of this Nation, the long-term 
unfunded liabilities. Shouldn't we get a handle on what kind of 
long-term unfunded liability we might be creating before we 
vote to create this new entitlement program?
    Mr. Orszag. And I would again say by far the best 
protection you have against that--a belt-and-suspenders 
approach there, too, where you not only have deficit neutrality 
over the first decade but in the 10th year alone, using hard 
scoreable offsets. And then we have an aggressive set of game 
changers which are not even included in those calculations but 
that are the most auspicious approach to bending the curve over 
the long term.
    And just remember, health care is so dominant and the costs 
are growing so quickly that even small reductions in the growth 
rate dominate everything else. Reducing the growth rate of 
health care costs by 15 basis points, point 15 percentage 
points per year has a larger impact on the Nation's long-term 
fiscal gap than eliminating the actuarial deficit and Social 
Security deficit.
    Mr. Ryan. So why can't we get those numbers? Don't you 
think we ought to have that before we----
    Mr. Orszag. Sure. But the only thing--you are looking to 
the CMS actuaries, and what I am saying is that is not their 
job.
    And the second thing is it is very difficult to quantify 
many of these game changers precisely because we have never 
moved to a high-performing, higher-quality, lower-cost system.
    Mr. Ryan. I guess what we are getting is we are going to 
vote on a new entitlement program without knowing its long-term 
fiscal effects.
    Mr. Orszag. No. Again--look, the 10th year constraint is 
very similar to the constraint that is often imposed on Social 
Security at the end of the 75-year window. If you are not 
falling off a cliff at the end of your projection window, that 
is your best assurance that the long-term trajectory is also 
stable.
    Mr. Ryan. Thank you.
    Chairman Spratt. Thank you, Mr. Ryan.
    Mr. Doggett.
    Mr. Doggett. Thank you, Mr. Chairman.
    Dr. Orszag, I actually share a number of the concerns that 
Mr. Ryan has just raised, if not necessarily all of the 
conclusions. I was one of the many sponsors along with our--
under leadership of our colleague, Congressman Hill, last 
session. His measure for statutory PAYGO included the 
discretionary spending caps that Mr. Ryan was just asking you 
about. It did not include all of the exceptions that you have.
    I voted against some measures on the House floor that I 
support, such as correcting the alternative minimum tax because 
they were not paid for. And it seems to me that, to the extent 
that you have all these exceptions, that we are basically 
prejudicing our policy in favor of continuing Bush tax cuts, 
doing some of the other things that you have here and against 
other necessary measures.
    Let me ask you, though, in order for this process to work, 
you have to have honest scores. Who will be the scorekeeper for 
statutory PAYGO under your proposal?
    Mr. Orszag. Because of constitutional constraints, the 
scorecard has to be maintained by the Office of Management and 
Budget. So another difference between the congressional rule 
and statutory PAYGO, one is sequestration, but the other is--
your rule is based on CBO scoring; statutory PAYGO must be 
based on OMB scoring.
    Mr. Doggett. Citing the example Mr. Ryan just used, which 
was an infamous example, not put in place I think to deceive 
Democrats but to deceive Republicans on the true cost of the 
prescription drug program as it was originally estimated, how 
do you think score keeping would have worked the last 8 years 
in the Office of Management and Budget?
    Mr. Orszag. Well, again, I think perhaps sometimes the 
implication is that the administration biases scores down. 
There is an example where it was actually higher than CBO. I 
will very firmly defend the staff at OMB who are highly 
professional and outstanding analysts. I don't believe that 
there is a bias either in CBO scoring or in OMB scoring in 
terms of new programs one way or the other.
    There are technical differences. Creating a new 
prescription drug benefit had--was--you were creating a whole 
new program, and analysts can reasonably differ--the CMS 
actuaries versus the Congressional Budget Office can reasonably 
differ on such things. But if an undercurrent here is that 
somehow the administration is always biased in one way or the 
other, I am going to defend my staff here and say I don't 
agree.
    Mr. Doggett. Well, I think it is the decisions that were 
made with those numbers that were a problem under the last 
administration.
    Mr. Orszag. Oh, I agree with that. Withholding information 
is a problem. That is a different question.
    Mr. Doggett. What is the nature of the constitutional 
problem that would prevent anyone other than OMB being the 
scorekeeper?
    Mr. Orszag. The issue really is that sequestration happens 
automatically. And to have that happen automatically based on a 
legislative body's judgment is the constitutional issue that 
has arisen.
    Mr. Doggett. Isn't there a way to write this legislation to 
give the Congressional Budget Office a bigger role in score 
keeping?
    Mr. Orszag. I don't believe so. But if you would like to 
have follow-up discussions with the staff, I would be happy to 
entertain that. I believe that we have--I think it is very 
difficult to do anything other than the way we have designed 
it.
    Mr. Doggett. While our perspective is not entirely the 
same, I do agree that for those of us who are concerned about 
education deficits, about health care deficits, about law 
enforcement deficits, we won't be able to address those 
deficits if interest payments are such a substantial share of 
our national budget; and it is essential that we work together, 
as you are trying to do today, to address the need for more 
responsible pay-as-you-go government.
    Thank you very much.
    Chairman Spratt. Thank you, Mr. Doggett.
    Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Welcome, Dr. Orszag. I found your comments on PAYGO to be 
helpful and instructive, although there is still much of what 
you say with which I disagree.
    As I listened to the PAYGO debate--although I find your own 
voice helpful, I find other voices somewhat unhelpful. And as I 
listen to the debate, I am struck between the difference 
between what I might view as a bumper sticker slogan and a real 
program for spending discipline. So I think it is important 
that the American people have the facts.
    So I want to make sure that we are clear on this point. 
Number one, under the administration's PAYGO spending plan, 
increases in discretionary spending are exempt, correct?
    Mr. Orszag. PAYGO applies to the mandatory part of the 
budget and to revenue; and, therefore, discretionary spending 
could be handled either through the normal congressional 
process, the 302(a) and (b) process, or----
    Mr. Hensarling. So is the answer yes?
    Mr. Orszag. The answer to that would be PAYGO does not 
apply to the discretionary----
    Mr. Hensarling. Thank you. Thank you.
    So if Congress as is in the current budget planning on 
increasing discretionary spending--nondefense discretionary 
spending 9.3 percent, they can do that without decreasing 
spending elsewhere or raising taxes to pay for it, correct?
    Mr. Orszag. Under your House PAYGO rule and under this 
statutory PAYGO rule, that is correct.
    Mr. Hensarling. And isn't it also true that, under PAYGO, 
spending increases in current entitlement programs, they are 
not subject to PAYGO either; isn't that correct?
    Mr. Orszag. Spending increases that happen naturally 
because of demographics----
    Mr. Hensarling. Your current entitlement programs.
    Mr. Orszag. They are built into the baseline. That is 
correct.
    Mr. Hensarling. I believe in the CBO baseline, Social 
Security is due to grow 4.78 percent. Medicare is due to grow 
4.3 percent. Those are spending increases.
    Mr. Orszag. PAYGO is intended to make sure we don't dig the 
hole deeper.
    Mr. Hensarling. But those are spending increases whereby 
Congresses doesn't have to decrease spending elsewhere or raise 
taxes to pay for it. Is that not correct?
    Mr. Orszag. That is correct. Again, statutory PAYGO is 
intended to make sure that we are not adopting new programs to 
make things work.
    Mr. Hensarling. I understand. I understand. My time is 
limited, Dr. Orszag. So if one asserts that under PAYGO 
Congress can only spend a dollar if it saves a dollar 
elsewhere, that is not literally true, is it?
    Mr. Orszag. Well, it is true outside of discretionary 
again, because it depends on what you mean by spend.
    Mr. Hensarling. So out of discretionary, 40 percent of the 
budget, and outside of current entitlement programs, which as 
of today, by definition, represents the rest of the budget.
    Mr. Orszag. I would say spend a new dollar on automatic 
programs----
    Mr. Hensarling. If one says Congress can only spend a 
dollar if it saves a dollar elsewhere, is that literally true?
    Mr. Orszag. That may be shorthand for what I just said.
    Mr. Hensarling. It may be shorthand.
    Mr. Orszag. Yeah. I don't know who----
    Mr. Hensarling. Might you concede it is misleading?
    Mr. Orszag. It would be a form of shorthand.
    Mr. Hensarling. It would be a form of shorthand. So when 
the President spoke those very words on June 9th, you would say 
he was speaking to the American people in shorthand?
    Mr. Orszag. Undoubtedly. He was giving a speech, and in a 
speech there aren't as many footnotes about sequestration.
    Mr. Hensarling. Well, that is part of the problem here. I 
sense the administration is trying to get credit for something 
that, frankly, doesn't quite live up to its billing. My fear 
is, if the administration was a private firm selling a product 
called PAYGO and made those claims about it, they would be sued 
by the FTC for false advertising.
    Can we pull up charts--chart number 3, please?
    
    
    Again, my concern is is that people are trying to get 
credit for something that doesn't actually occur. Chart 3 shows 
the spending increases that were subject to PAYGO in 2009. Yet 
$870 billion in spending increases in 2009, 2 percent, 2 
percent subject to PAYGO.
    Can I get chart number 4, please?
    
    
    2010 spending, we have got $3.5 trillion of spending 
estimated for 2010, of which 3 percent is subject to PAYGO.
    I guess I would ask this question, Dr. Orszag--and I also 
see that there is an op-ed in the Wall Street Journal by the 
Democrat majority leader and Chairman Miller, ``Congress must 
pay for what it spends.'' Well, clearly Congress is not paying 
for what it spends.
    So, on the one hand, we either have false advertising; or 
if PAYGO actually does live up to its billing, that Congress 
must pay for what it spends, given that under CBO projections 
by 2019 we are looking at a deficit of $1.2 trillion, first 
income tax revenues of $2 trillion, we would have to increase 
taxes--income taxes 60 percent to make good on the PAYGO 
promise.
    So which is it? Are we looking at a proposal to increase 
personal income taxes 60 percent over the next 10 years or 
simply is PAYGO false advertising?
    Mr. Orszag. Neither. And remember----
    Mr. Hensarling. I thought that might be your answer.
    Mr. Orszag. Well, look, if we had this system in place over 
the past 8 years, roughly 3 percent of GDP was adopted by the 
Congress and not offset. That is exactly what this PAYGO law is 
intended to address. So that is almost as large as the entire 
nondefense discretionary budget is today.
    To Mr. Ryan's point, 3 percent of GDP from the prescription 
drug benefit and from tax cuts that were not offset, that is 
this year alone almost $450 billion. That would be a very big 
chunk of your pie chart, adopted without being offset. That is 
what this law is intended to address. It is not a panacea.
    Chairman Spratt. Mr. Becerra.
    Mr. Becerra. Thank you, Mr. Chairman.
    Dr. Orszag, nice to see you again.
    Mr. Orszag. Nice to see you.
    Mr. Becerra. Let me ask a few questions about some of the 
provisions that incorporate within the baseline some of the 
programs that exist that are expected to expire like these tax 
cuts. Give me a sense of the 10-year cost of some of those 
provisions that will not be counted on the PAYGO ledger, AMT 
indexing. What is the number on that?
    Mr. Orszag. There is an interaction effect with the 2001, 
2003 legislation, but it is about $500 billion or so.
    Mr. Becerra. And the estate tax?
    Mr. Orszag. The estate tax, I have to get the exact number, 
but it will be a few hundred billion, several hundred billion.
    Mr. Becerra. Okay. And then the some of the other tax cuts 
include the two top rates, capital gains dividends. There is a 
whole category of them.
    Mr. Orszag. Yeah. All in the exemptions are north of $3 
trillion.
    Mr. Becerra. So north of $3 trillion. That would include 
things like the child tax credit as well, the reduction in the 
lower-middle income tax brackets as well?
    Mr. Orszag. That is correct.
    Mr. Becerra. So there is about north to $3 trillion over 
the next 10 years that would not be counted towards the PAYGO 
ledger. And you explained part of the reasons for doing that, 
which there is a lot of logic to it, because we in essence, de 
facto, or ad hoc'ly are doing that already.
    But I am wondering if you can tell me how you--OMB projects 
our budgets in the future, if we continue to have these 
deficits hovering above $500 billion, which would be a 
tremendous accomplishment to get them below the deficit that we 
saw the President inherit this year from the previous 
administration of $1.3 trillion or so----
    So let us say you are able to achieve President Obama's 
goal to reduce the deficits in half in his first 4 years in 
office. We will not be counting in that calculation many of 
these provisions which are costing the government resources, 
because you can't do certain things if you don't have the 
revenues. But we have decided because of the way Congress and 
the administration have operated over the last several years 
that you are, in essence, institutionalizing what de facto 
happens every year ad hoc'ly when we extend these things, patch 
them through, et cetera. Is that more or less what you are 
saying?
    Mr. Orszag. But with a very limited time window and the 
hope that we will stop this process of patching. Because that 
is, again, something I said before. It is not good policy to 
have such large sunsets in the Tax Code or in Medicare policy.
    Mr. Becerra. And I think there is at least a degree of 
honesty in what you are proposing. At least you are saying we 
admit that it would be tough to tell American families we are 
not going to extend a tax credit that we have provided for 
children. So I recognize that.
    Now, let me ask this. If Congress were in the future to 
decide to allow some of these tax provisions to expire, how 
would those be treated? How would the revenue that would now 
come in be treated if we were to not extend some of these tax 
cuts.
    Mr. Orszag. That would go for deficit reduction.
    Mr. Becerra. So all of it would go for deficit reduction?
    Mr. Orszag. If you were not to extend the tax provisions, 
yes.
    Mr. Becerra. So there is a good chance if you don't extend 
some of the Bush tax cuts that you might actually be able to 
see an increased reduction in the deficits over the next 
several years?
    Mr. Orszag. Yeah. And let me just comment on that. The 
deficit this year is elevated $1.8 trillion. $1.3 trillion of 
that is due to the economic downturn and steps necessary to 
address it. That $1.3 trillion will gradually disappear as the 
economy recovers and the extraordinary steps necessary to 
stabilize the economy are no longer necessary.
    Beyond that, to address that underlying structural deficit, 
there are various things that could be done. As you go out 
further over time, we are back into exactly what we were 
discussing before, which is the key driver of our long-term 
deficits is health care. That is exactly why we are putting 
such emphasis on getting health reform done now in a way that 
is fiscally responsible and also puts in place a structure so 
that we could bend the curve over the long term.
    Cost containment in health care is going to be a continual 
effort that we have to keep--it is not--you know that Staples 
thing? It is not like you pass the bill and go ``that was 
easy.'' You have to keep at it over time, and we are putting in 
place a structure that will allow that to happen more 
naturally. That is perhaps the most important single thing we 
can do to put the Nation on a sounder fiscal course.
    Mr. Becerra. Mr. Chairman, I appreciate it. Thank you very 
much.
    Chairman Spratt. Thank you, Mr. Becerra.
    Mr. Garrett.
    Mr. Garrett. Thank you, Mr. Chairman.
    Dr. Orszag, as Jeb just mentioned to me before he left, so 
what you are saying is the appropriate rallying cry for the 
administration and the Democratic majority should be stop us 
before we spend again?
    Mr. Orszag. Was that a question?
    Mr. Garrett. Well, I don't know. I appreciate your 
commentary. I appreciate the administration's new-found 
interest in spending restraint. I wish it had come a little bit 
earlier in their administration.
    Some of us sitting on this side of the aisle had been 
willing to vote against our majority, when our President, when 
we were in power, were asking us to spend more than we thought 
was fiscally prudent, more than you thought so when you came 
before the committee and testified was fiscally prudent; and we 
were willing to stand up to our party.
    I guess maybe you are like I am, sitting on the edge of 
your seat waiting for someone from the other side of the aisle 
to exemplify that same restraint that some of us, maybe a 
minority on our own side, exemplified during that time. So far 
we haven't seen it in the 3 years that they have been in the 
majority.
    I am discouraged that, as Jeb was pointing out, that this 
proposal applies, as he indicated, to increases or reductions 
in tax rates and any new expanded entitlement programs. It does 
nothing to affect the wave of entitlement spending as Paul was 
talking about before that we are going to see come in. It does 
nothing to address the waste, fraud, and abuse of taxpayer 
dollars that we have been seeing through discretionary 
spending. So enacting PAYGO at this point is a little bit like 
closing the barn door after the horse has gone out.
    The chairman mentioned that they implemented PAYGO on the 
first day of the 110th Congress, but haven't they waived it a 
whole bunch of times--can you just answer that yes or no--since 
they came in?
    Mr. Orszag. I am not aware of PAYGO being waived.
    Mr. Garrett. No? How about his----
    Mr. Orszag. Let me----
    Mr. Garrett. Let me just tell you this. In the first 2 
years after reinstalling it----
    Mr. Orszag. Sorry. I thought you said this year.
    Mr. Garrett. He said the 110th Congress.
    Mr. Orszag. Oh, yeah. No, there have been waivers. And, in 
fact, again one of the reasons that we were focused on 
providing these exclusions was precisely to minimize the 
waiver----
    Mr. Garrett. Let me just remind you what that did. They 
waived it for $420 billion of legislation in the first 2 years, 
including $23 billion for the farm bill. They had a scheme set 
up with regard to SCHIP so that--what he signed in law in 
February. The bill increases SCHIP spending by an annual of 23 
percent for 5 years and then cuts SCHIP funding by 65 percent 
in its sixth year based on their plan. And the bill is 
basically deficit neutral over 10 years in order to meet the 
schedule. So they were able to waive it despite the chairman 
proudly saying that they were doing something great during that 
time.
    Senator Coburn back on June 16th released a report that 
contains some truly interesting information. Despite the claims 
that the Obama administration said that they wouldn't include 
funding in the stimulus package for the so-called program 
called FutureGen project in Illinois, the Department of Energy 
announced that FutureGen would be receiving $1 billion of 
stimulus money. So see Chart 1.


    Now, let us review. This is a project that just last year 
the Secretary said was a waste of money. He said that since 
2003 when the project was announced, the project's estimated 
cost had almost doubled, and innovations in technology and 
changes in the marketplace had created other viable solutions, 
and it became clear the Department of Energy could not in good 
conscience continue to support the program, and none of the 
benefits, et cetera, was worthwhile.
    So, Dr. Orszag, are there any provisions in the statutory 
PAYGO that you are talking about that would do anything to 
curtail this particular program or future programs, such as 
this that come out of the administration?
    Mr. Orszag. Again, as was discussed before, the 
discretionary part of the----
    Mr. Garrett. So the answer is--I don't have much time. So 
the answer is no.
    Mr. Orszag. The discretionary part of the budget is dealt 
with under separate rules.
    Mr. Garrett. Right. The answer is no. We will continue to 
see things out of the administration like this.
    How about chart number 2? Look at chart number 2. Also 
contained in the stimulus package was what was deemed so 
critical that we voted on it without having any time to read 
the bill, and that is the stimulus plan. There was $800,000 for 
repaving a backup runway at the John Murtha Airport. To review, 
this is an airport that, according to ABC News, has only three 
commercial flights and about 20 passengers per day. So is there 
anything in the proposal that would either, A, eliminate this 
particular program that seems to be a waste of money or, B, 
stop this type of program in the future?


    Mr. Orszag. I suppose we can go through the entire 
discretionary----
    Mr. Garrett. I only have two charts.
    Mr. Orszag. Okay. Same answer.
    Mr. Garrett. Okay. So at the end of the day, we come down 
to it, that the program in place that had been touted on by the 
other side since they came into power has not been implemented 
fully as they suggested, has been waived repeatedly as we have 
seen from upwards--in the farm bill for $420 billion and other 
bills and the like; and going forward we will see that it will 
just be a de minimus amount of the portion of the budget.
    Mr. Orszag. I am going to again remind us, though, we 
doubled the size of the Nation's long-term fiscal gap over the 
past 8 years----
    Mr. Garrett. Let me cite those numbers. You keep on saying 
those numbers are around $450 billion under the Bush 
administration, right, that you are citing as an example of 
that?
    Mr. Orszag. Just new, unpaid-for measures in one year 
alone, yes.
    Mr. Garrett. But in the stimulus program, which was $787 
billion, none of that was offset, was it?
    Mr. Orszag. Nor should it be, given that the intention was 
to bolster aggregate demand. There is----
    Mr. Garrett. PAYGO would have an exemption if the intention 
is good?
    Mr. Orszag. No, no, no. Look, there is a much different 
situation when the economy is weak, facing negative--remember 
what the situation was towards the end of last year?
    Mr. Garrett. Are there exemptions in the law for that then?
    Mr. Orszag. Growth was falling. Again--well, two things. 
One is, there are emergency exemptions built into statutory 
PAYGO, as there should be, because we do not need Herbert 
Hoover economics during a great--during a downturn. Cutting 
back--one of the things that is I think crucial to remember--
and I, again, am very concerned about fiscal discipline. But 
during a situation where GDP is falling 6 percent on an 
annualized basis, a temporary increase in the deficit, by all 
mainstream economic thought, is beneficial; and preventing that 
would actually be quite detrimental.
    The problem is, as you go out over time and the economy 
recovers, you don't want structural deficits at that point. And 
this legislation, admittedly not a panacea, is just intended to 
make sure you are not making those structural deficits in 
outyears bigger.
    Mr. Garrett. Thank you.
    Chairman Spratt. Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman.
    Can we get the chart?
    
    
    Dr. Orszag, you are familiar with this chart that shows 
that when the Clinton administration came in, we had inherited 
a great deficit and created a surplus, enough so that if we 
hadn't messed up the budget over the last 8 years we could have 
paid off the national debt held by the public by last year. You 
don't create a chart like that by accident. There are reckless 
fiscal policies in the red and fiscal responsibility in the 
blue.
    My question to you is, how does it feel to get lectured on 
economic policy and fiscal policy by the authors of the red 
policy?
    Mr. Orszag. I am not sure that was a question either. So I 
will just let it stand there.
    Mr. Scott. In the setoffs--we have a 10-year setoff. It 
seems to me that that is one of the problems we got into in 
creating the red. We would score things with setoffs much later 
on that never would take place. Would a 5-year window make more 
sense than things like the Medicaid setoffs put way down and 
when you got there you knew you wouldn't do it? Would a 5-year 
window be more responsible?
    Mr. Orszag. There are tradeoffs. But I would say, actually, 
a big problem was the most expensive things enacted during that 
most recent red period were not even offset at all. So it 
wasn't a question about whether the offsets were back-loaded or 
front-loaded or whatever. They were nonexistent.
    Mr. Scott. Part of the fraud on the numbers was this phase-
in fraud, and I think you were discussing that a little bit 
with the ranking member, where you have a delayed 
implementation and a kind of phase-in so that the 10-year cost 
was--for a billion dollar a year program could only be $2 or $3 
billion in the first 10 years. For the next 10 years, fully 
phased in, you have to pay it all. What does the PAYGO--
statutory PAYGO do about that phase-in fraud?
    Mr. Orszag. Well, what it would do actually is, if you had 
a hockey stick kind of profile, you would have to pay some of 
that up front. And that would actually--so if you can imagine, 
you know, a cost out in year 9 would actually create a PAYGO 
violation to the extent it wasn't fully offset in year one, 
this year, and it would trigger sequestration this year. So 
there are tradeoffs. There is no perfect set of rules.
    But one desirable attribute of this approach is that if you 
try to adopt a hockey stick kind of thing, you could get--
immediately facing a threat of sequestration and that may help 
to prevent hockey sticks.
    Mr. Scott. So you would have to pay--you would have to 
consider the fully phased-in cost, not just the 10-year average 
cost?
    Mr. Orszag. Well, the 10-year average cost would reflect in 
part the fully phased-in cost.
    Mr. Scott. Yeah. But you could have--a 10-year, billion-
dollar-a-year program phased in could cost $3 billion the first 
10 years and $10 billion the last 10 years.
    Mr. Orszag. Right. And one of the problems--I think there 
are a lot of improvements in the version that we have to try to 
prevent gaming, but no set of rules is going to be perfect. And 
there are always going to be very clever Members of Congress 
and Senators and members of staff that can work their way 
around any set of rules. We think in a variety of ways we have 
come up with a better approach than the 1990 legislation to 
prevent gaming. But one has to be constantly vigilant, because 
any set of rules always has some flexibility to it and could be 
abused.
    Mr. Scott. Now, your baseline includes current policy. Does 
that include as policy the 2001, 2003 tax cuts that primarily 
apply to the income over $250,000?
    Mr. Orszag. It includes both those below $250,000 and above 
$250,000. I understand there is some debate about whether--from 
a policy perspective, we do not support extending the tax cuts 
above $250,000. So the fact that--their treatment in the 
baseline for this purpose would be irrelevant, because we don't 
support their extension.
    If you are going to count those tax cuts as part of the 
business line, shouldn't we be able to choose not to extend 
those and instead pay for health care? People may decide that 
they want to have health care than an AMT or health care than 
an estate tax repeal or estate tax rather than other taxes. And 
the whole point of this is making the right choices. Would we 
have the opportunity to make those choices under statutory 
PAYGO as introduced.
    Mr. Orszag. No, you would not have the opportunity to use 
the non-extension of the upper-income tax provisions as an 
offset for health care reform. That non-extension would go for 
deficit reduction.
    Mr. Scott. Shouldn't we have that choice?
    Mr. Orszag. The administration's position is the non-
expansion of those provisions should go for deficit reduction.
    Chairman Spratt. Thank you, Mr. Scott.
    Mrs. Lummis.
    Mrs. Lummis. Thank you, Mr. Chairman.
    I am always amazed, as a freshman Member of Congress, when 
I hear the excuse for Federal spending going forward at 
alarming rates that it was at alarming rates before now. 
Because, as a freshman, I would argue that Congress overspent 
before I got here and Congress is overspending now.
    Could we put up a chart, number one, please?
    This chart illustrates what was happening before I arrived. 
It also illustrates that Democrats reinstituted PAYGO; and at 
the reinstitution of PAYGO, the deficits just got larger, and 
larger, and larger going forward. The red bars are increasing 
deficit levels in billions of dollars.
    So, as a freshman, as I said, I am just stunned by the 
logic in this town where people say, because the Republicans 
overspent while they were in charge, we, the Democrats, get to 
overspend to two and three times the level that the Republicans 
overspent when they were in charge.
    I am dismayed, I am frustrated, I am disappointed with this 
year's spending spree. How does the administration intend to 
enforce fiscal discipline on the discretionary side, 
particularly after fiscal year 2010?
    Mr. Orszag. Again, we have put forward--even just focusing 
on fiscal year 2010--a set of proposals; and thereafter, as you 
know, a glide path that will get non-defense discretionary 
spending to the lowest levels since 1962. We put forward a set 
of specific reductions also as part of the fiscal year 2010 
budget to terminate programs.
    I appreciated that your caucus or members of your caucus 
put forward your own ideas on specific spending reductions that 
could be adopted. I would note that, in terms of specific 
spending reductions, individual programs that you all put 
forward, you were able to come up with $3 billion a year. That 
is a good start, and we are looking at the suggestions, but 
there is also just a recognition that this is hard work, and we 
would want to work with you to do better than that.
    Mrs. Lummis. I would like to return my attention for the 
next question to what is admittedly a small part of that, but 
it is one that irks the American people, and that is earmarks.
    Earlier this year, the President signed a $410 billion 
appropriations bill with nearly 9,000 earmarks; and the reason, 
apparently, that that was signed was because that was last 
year's business. But just last week, the House considered the 
Commerce, Justice, and Science appropriations bill with roughly 
1,100 earmarks in that bill alone. So my question is, would 
this legislation, as it passed the House, be signed into law by 
the President?
    Now, this is a President, when he was campaigning, said 
that he wanted to change earmark policy, that he opposed 
earmarks, and that this was an important hallmark of his 
campaign. Thus far, I haven't seen a demonstration of the 
principle he articulated during his campaign.
    Mr. Orszag. Three things. First, with regard to earmarks 
that go to for-profit entities, we are glad that the Congress 
has agreed we are going to make sure that those are competed. 
So that will be beneficial.
    Second, the administration is now, before a conference 
report, actually asking the relevant agencies to scrub the 
language and look for earmarks that can be identified much 
earlier in the process than had been the case before.
    Third, we have already identified, for example--the example 
that comes to mind is the pre-disaster accounts at FEMA. We 
have expressed concern in one of our statements of 
administration policy about earmarks in those accounts.
    So you will be seeing us expressing concerns where we can 
quickly identify inappropriate earmarks, and I would look 
forward to working with you to reduce them as much as possible.
    Mrs. Lummis. And will the President veto bills that have 
earmarks that don't meet your standards?
    Mr. Orszag. The President will veto bills that don't meet 
his standards. Now exactly what they are, we need to work with 
you, and that was what I was just describing, a process for 
trying to get earmarks down as much as possible and also 
identify them as quickly as possible so that we all know what 
we are talking about.
    Mrs. Lummis. Thank you, Mr. Chairman.
    I have just one more comment. I do not see how we can add 
trillions in deficits in debt over 5 years and still be PAYGO 
compliant.
    But my time is up, and I yield back.
    Chairman Spratt. Ms. Schwartz.
    Ms. Schwartz. Thank you, Mr. Chairman, and thank you for 
this hearing. And, Dr. Orszag, good to be with you.
    I am one of the original cosponsors of the original PAYGO 
legislation, and while we certainly can go back over history--
both positive and negative--the fact is that, going forward, 
this administration has proposed or is taking very seriously 
our rules on PAYGO and suggested making it statutory. I am 
going to embrace that. I believe that we should.
    And I appreciate the fact that you have been very 
straightforward with us about how hard this is going to be to 
do. To be fiscally disciplined is not easy. There are a lot of 
things that call on us to do it, but we are making a determined 
commitment to do so. And your building on the experience of 
1992 is extremely helpful.
    When people say, can you do it--the previous speaker just 
asked, can you change what we do? And the fact is that, in 
1992, the Federal deficit was--it was a lot then. It was $290 
billion. And, by 1998, the government had a surplus of $69 
billion. So we did reverse a trend towards increasing annual 
deficits and a national debt with PAYGO, with spending 
discipline, and with tax discipline as well.
    So I appreciate your pointing out the fact that the change 
in history from 2002-2011 was really due to the previous 
administration's very clear policies on tax decreases and 
increased spending. And that was not sustainable, and we are 
trying to reverse that by being more responsible on both 
spending and tax policy.
    What I want to ask you about--and I recognize that this is 
not easy--I think that we have made it very clear that we work 
with CBO, we listen to CBO. How CBO scores what we do is 
extremely important. I think it is appropriate for CBO to be 
pretty conservative about scoring savings. I think that is very 
important and would want them to do that.
    I think, you know, in health care--and you pointed this out 
in your testimony--that we have made a commitment in health 
care reform working with the administration to make this 
revenue neutral in 10 years, over 10 years, at 10th year--
however you say it. And that is a very strong commitment to pay 
for through savings and through increased revenues if you need 
to. What we are looking at now in Ways and Means is at least 
half coming from savings, which is very significant, and, of 
course, the tough decisions about how we raise revenues.
    There is a frustration--I will put it that way--in some of 
the aspects that you have talked about, in improving the 
delivery system, in the incentives we are going to put in for 
primary care, and helping to do chronic disease management 
better, comparative effectiveness so that we can do research 
and disseminate that to physicians in a more timely fashion so 
that they are providing best practices for their patients, some 
of the accountable care organizations, the kinds of ways that 
we are very determined to make investments now. Health IT that 
we have done already but want to continue to. That we can make 
investments and changes in the delivery system that will save 
money. Most of those investments are not scored to savings.
    Now, in other economic think tanks, in other sort of--I was 
going to say public initiatives. In Pennsylvania, we have 
something called the Health Care Cost Containment Council, and 
they are charged with giving the State legislature actual 
analysis of what investments would save money. I have to ask 
for it. They come back. We sometimes disagree with what they 
say, but it does give us the ability to say we are going to 
actually cover new mandates that is arguable whether it is 
useful to do. Cancer screenings, does it save us money? Should 
we do it?
    Do you think that there is anything more that we should 
encourage CBO to do, that CBO could be doing or someone else 
could be doing to help us in Congress be able to know that 
these investments actually do end up in savings, whether scored 
or not and preferably scored?
    Mr. Orszag. Well, actually, Senator Conrad and Senator 
Gregg asked exactly that question of CBO last week; and the 
letter that came back from CBO said exactly what I said, which 
is cost containment over the long term is difficult, and it 
will be an ongoing process. But in a section on options that 
could reduce long-term cost growth, they pointed to many of the 
same things that you just described: accountable care 
organizations, bundled payments, a process for updating 
Medicare policy and health care policy in a continual way, and 
so on and so forth, most of which is fully under discussion as 
part of health care reform. There wasn't a single item on their 
list that isn't under discussion up here on Capitol Hill.
    So that is a reflection of what I have been trying to say 
for a while, which is no one can quantify out in 2040 or 2050 
what the impact of these things will be, but the set of 
policies under discussion reflect the most auspicious set of 
policies that could help bend the curve under the long term.
    Ms. Schwartz. What you are saying is that, in addition to 
the savings that are quantifiable, we do expect, while 
difficult to quantify, that there will be additional savings, 
particularly over the long term. So when the question is where 
do we go in 10 years, are we actually going to see an increase 
in costs, we actually may see--the suggestion is and the belief 
is from the economists and from all those who work in health 
care is that we are actually going to see more savings than we 
actually have been able to quantify right now in a way that 
will help protect Medicare and be able to pay for Medicare 
going forward and hopefully bring down costs in the private 
sector as well through cost savings and the delivery system. I 
think that is correct.
    Mr. Orszag. Let me even be more direct here, because I 
think this has been a subject that deserves more attention.
    There is no plausible way that we are going to get our 
long-term fiscal situation under control without structural 
change to the health system. And people can disagree about 
whether what we are putting forward is enough or not, but 
without that, a change in the infrastructure so that we have 
computerized records, so that we have a system of evaluating of 
what is working and what is not, without changes in financial 
incentives so that we are oriented towards quality instead of 
quantity, and without some way, in a more facile way, updating 
Medicare policy, there is nothing that anyone can propose that 
will put us on a sustainable fiscal course.
    Now, some people say those set of policies are not enough 
to put us on a sustainable fiscal course, and that may be 
right. But to those of you--those who are saying that, I think 
you have to agree that we have to at least do that. In other 
words, even if you don't think it is sufficient, I think 
everyone has to agree those steps are necessary.
    Ms. Schwartz. Just to make clear that all of those steps 
are actually in the health care reform draft legislation that 
we are debating right now in Congress?
    Mr. Orszag. Correct.
    Chairman Spratt. Mr. Schrader.
    Mr. Schrader. Thank you, Mr. Chairman.
    I apologize for not being here for some of your remarks.
    Why did the Republicans allow PAYGO to lapse?
    Mr. Orszag. I think you would have to ask them. I am not 
exactly sure. But presumably there is--well, I will let you ask 
your colleagues.
    Mr. Schrader. You have talked pretty eloquently about the 
opportunity for health care reforms to bend the cost curve long 
term and get us back into balance hopefully in our long-term 
national debt situation.
    Do you, by offering up the PAYGO legislation and making it 
statutory, do you think that also has an opportunity, given the 
propensity for Congress with all of our well-meaning 
intentions, to help in the cost of government growth over the 
long term, also, compared to what we have been doing?
    Mr. Orszag. It reflects our approach to health care reform. 
I would not support an approach where all we were doing are 
these steps that are aimed at transforming the health system 
and kind of bank on that.
    If I could just spend a second--some people have equated 
what we are trying to do with the steps that we were taking in 
the early 1980s in proponents of supply side economics. Huge 
difference. Those tax provisions, there was a theory that the 
case put for them. They were not offset.
    So we are saying, do the key things that we think will 
change the structure of health care over the long term and that 
are necessary and perhaps sufficient to bending the curve over 
the long term but also offset what you are doing up front, and 
that reflects the PAYGO principle, which is at the heart of 
this legislation.
    Mr. Schrader. A couple of technical questions, if I may.
    The estimates in section 4, they talk about using the 
President's proposed budget as the baseline. Why not use 
whatever is in the budget resolution by Congress instead, since 
it has more force of law? Because the President's budget is a 
proposed budget.
    Mr. Orszag. There are different ways of doing it. I need to 
just check on exactly what section 4 is. Because if it was 
speaking to the exclusions as opposed to the way that the 
ledger works--I mean, one could write the legislation in 
different ways.
    I again, though, want to come back to the constitutional 
issue that was discussed briefly before. One of the reasons 
that OMB scorings has to be used and therefore it would make 
sense to use the President's baseline is a constitutional issue 
regarding the triggering of sequestration.
    Mr. Schrader. This was slightly different. I don't need the 
answer right now.
    The other technical question would be, you talk about the 
scoring procedures and you indicate how usually Congress and 
the executive branch usually end up with somewhat the same type 
of scoring estimates and stuff and scoring procedures. Is there 
any reason you wouldn't want to encourage or, more 
specifically, get Congress and the President of the executive 
branch, if you will, to use the same scoring procedures and 
make that more definitive in the legislation?
    Mr. Orszag. Again, in just looking at the legislation, 
section 4, which describes how the PAYGO ledger works, the 
reason that you are using administration numbers there is a 
constitutional issue. So my previous answer was, now that I see 
the section, was exactly correct, which was that we can't use 
congressional estimates to trigger sequestration and, 
therefore, we can't use congressional estimates to enter items 
on the statutory PAYGO ledger.
    Mr. Schrader. Thank you.
    Mr. Orszag. If you could fix the constitutional problem.
    Mr. Schrader. We can't seem to fix much in that regard, 
which may be a good thing.
    Last question. There is reference in here within 14 days 
the President would--hopefully, it would never go to 
sequestration. It is a deterrent. I understand that. But 
assuming that, unfortunately, we may have to go there for 
whatever reason at some point in our country's history, the 
President issues the order within 10 to 14 days--I forget 
exactly which--but what is the hammer to make it actually 
happen? Is there a time the agencies have to be implementing 
his order?
    Mr. Orszag. Most of these would be automatic, so his order 
would go into effect pretty much immediately. I will have to 
look. But, in general, the agencies--there is nothing 
subsequent that would have to occur after the sequestration is 
triggered.
    Mr. Schrader. One last, last question. With regard to the 
four exceptions for the next year--maybe two--with the AMT, 
estate tax, the SGR, and the low-income tax cuts, I assume that 
is to make sure we don't raise taxes on hardworking Americans 
at this point in time but realize that within a couple of years 
after the economy recovers that those two should be subject to 
PAYGO going forward.
    Mr. Orszag. I think what those exclusions are intended to 
reflect is there have been a series of extensions and waivers 
and to avoid a series of waivers that would undermine--the 
theory of the case, again, is once you get in the habit of 
giving lots of waivers, it is hard to stop. So it is better to 
have a set of rules that you will actually abide by.
    Mr. Schrader. Thank you.
    Chairman Spratt. Mr. Diaz-Balart.
    Mr. Diaz-Balart. Thank you, Mr. Chairman.
    Good to see you, sir. I know you have been slightly busy, 
so we appreciate you being here.
    Actually, a semi-related question. We are now in the midst 
of putting together the Transportation Reauthorization bill. 
And do you--understanding the situation, of course, that you do 
about the DOT trust fund now, which is basically almost 
insolvent. We are going to have to put some general funds money 
into it. Is the administration going to be making 
recommendations as to how we should fund the DOT trust fund, 
the shortfall, and also the reauthorization, or is that 
something that you are----
    Mr. Orszag. What we have said is we would favor an 18-month 
extension and additional funds being provided during that 
period and that those funds would have to be offset.
    So, again, it reflects the statutory principle, even though 
this is a different setting, but we support the notion that any 
additional funds provided to the transportation trust funds 
would be offset; and we would work with the Congress to make 
sure that is the case.
    Mr. Diaz-Balart. Again, Mr. Chairman, if I may, I 
understand that, and I know you are getting some bipartisan 
pushback on the 18-month, which I know you expected on that 
extension, but are you going to make any specific 
recommendations as to either what is in those offsets should be 
or not?
    Mr. Orszag. I think we are working with Mr. LaHood and 
others are working with the relevant committees to decide the 
best way forward on identifying offset. But what we have said 
is it must be offset. So regardless of whether we put forward 
the offsets or we jointly work with you on the offsets or 
however the process works, at the end of the day, it has to be 
offset.
    Mr. Diaz-Balart. I appreciate that.
    Last thing. This may not be a fair question, but I have you 
here. Any comment on the Vice President's statement about the 
fact that--and I am going to paraphrase him roughly--but 
basically that everybody guessed wrong on the impact of the 
stimulus?
    We do know that, and we had other people testify here 
recently, and, obviously, the numbers that the administration 
believed, as far as unemployment numbers, et cetera, that there 
was going to be a cap of about 8 percent if the stimulus were 
to pass, we now see that it has greatly exceeded--it has 
actually greatly exceeded the unemployment according to, again, 
the administration, that would have taken place if we did 
nothing. Again--and the Vice President obviously had a comment 
on that which has gotten a lot of press coverage. Anything you 
want to--this is an opportunity--kind of a softball opportunity 
for you to hit out of the park about what is going on here.
    Mr. Orszag. Let me comment on the unemployment projections. 
The unemployment projections this were embodied in the 
President's budget put forward in February were locked down in 
basically November and December of last year before we had 
information that the last quarter of last year was minus 6 
percent, before there was information about just how weak the 
economic situation towards the end of last year was.
    In the intervening period, it became obvious that the 
situation was worse than that. We are going to be updating our 
economic assumptions when we put out the mid-session review 
later this summer.
    I would note about the path of the unemployment rate is 
that indicators suggest--and this is a small silver lining in 
an otherwise problematic trend--that part of the increase of 
the unemployment rate, a significant part reflects the part 
that people are no longer leaving the labor force but rather 
they are continuing to search for work. That elevates the 
unemployment rate, because, otherwise, they wouldn't even be 
counted. That part of it is actually encouraging, because it 
means people aren't completely giving up.
    That having been said, clearly, the unemployment rate is 
elevated and the whole motivation by the Recovery Act was to 
help bring it down over time, even though the starting level 
was higher than we initially thought.
    Mr. Diaz-Balart. I understand that. But, again, kind of 
paraphrasing the Vice President--and I understand that. This is 
not a precise science. But, clearly, the estimates were wrong, 
flawed.
    Mr. Orszag. Yeah. But that is independent of the Recovery 
Act.
    Mr. Diaz-Balart. I understand that. But it is evident that 
if you looked at the numbers what the administration was saying 
publicly and privately, unemployment--is it not accurate that 
unemployment numbers now are higher than the estimates were if 
we had not done anything?
    Mr. Orszag. What I would say is--we locked down our 
economic projections in November or December of last year. 
Since then, I would say the economic outlook generally 
deteriorated based on what was happening at the end of last 
year. It since either kind of flattened or maybe if you look at 
private sector forecasts turned up slightly.
    Comparing where we are now to when we locked things down, 
yes, it is worse now.
    Mr. Diaz-Balart. Thank you, sir.
    Chairman Spratt. Ms. DeLauro.
    Ms. DeLauro. Thank you very much, Mr. Chairman.
    Dr. Orszag, welcome again to the committee. Delighted to 
see you. I am going to be parochial in my questioning, and it 
is a subject that you and I have had conversations about before 
and that is the legislation which several of us have, the 
National Infrastructure Development Bank Act. And, as you know, 
it establishes a development bank to leverage private-sector 
dollars to invest in transportation, environmental, energy, and 
telecommunications infrastructure.
    There is of late real momentum behind this concept, a 
concept that the President spoke about during the campaign and, 
in fact, was part of the budget submission.
    I might add that, in terms of what this concept could do, 
given the leverage--and it was meant to have a $5 billion 
appropriations price tag for 5 years totaling $25 billion with 
paid-in capital, another $225 billion in callable capital from 
the Treasury, and a conservative leverage, which is what the 
European Investment Bank does, of about 2\1/2\ to 1 allowing 
the bank to issue up to $625 billion in 30-plus year bonds.
    Aside from the economic recovery package, which was $787 
billion to get this economy back on track, again, this is the 
largest sum of resources or the potential for resources to, in 
fact, do something about our infrastructure, make an attempt at 
capital budgeting, if you will, the first attempt to try to do 
that. And in addition to that to take this earmark project, 
process, which is not something that this administration looked 
favorably upon and a whole lot of our other colleagues on the 
other side of the aisle, except when it is their projects, but, 
in fact, it would depoliticize that process in a way to take us 
not only short term but long term to economic recovery and 
growth.
    My question is--and you know all of that, but I needed to 
say it. In any case, do you have a sense of how the cost of 
this proposal should be measured and how your PAYGO proposal 
would apply to this effort?
    Mr. Orszag. A couple comments.
    First, as you know, the administration is working with the 
relevant committees on a possible approach to an infrastructure 
bank, and there are discussions that are ongoing. And, as you 
know, there were provisions made in the budget resolution for 
such an infrastructure bank. So just on the underlying idea, 
something that the administration does support.
    As you know, the treatment of transportation, the 
transportation part of the budget, even for people who have 
spent years in the budget world, is a particularly complex and 
arcane area of budgeting. We have contract authority and 
special rules and odd limits and what have you. And my only 
point is it is not directly relevant to the statutory PAYGO 
legislation, but there are different rules that would apply. 
You could create, in theory, create an infrastructure bank that 
was not funded through----
    Ms. DeLauro. That is what I am making reference to. Because 
this is a much wider portfolio. It is not just transportation. 
In fact, it is a bank and would be a separate entity, not 
supplant what transportation--the transportation bill does, but 
a separate entity.
    Mr. Orszag. If the infrastructure bank had a call on the 
Federal Government, in other words, a free flow of money and 
the creation was just to set up a set of parameters and 
basically make it a mandatory program and then it would just 
evolve as the world evolved, that would presumably fall under 
statutory PAYGO.
    Ms. DeLauro. Yes.
    Mr. Orszag. I don't believe that is the way the existing 
proposals are structured, however.
    Ms. DeLauro. In an answer to which earlier you said--I 
mean, this is a proposal that might contribute to the deficit 
in the immediate future, but its economic benefit in the long 
run of making what are significant investments for today and 
the future clearly outweigh--my view--outweigh the costs in 
terms of its ability to deal with those high unemployment 
numbers that we are talking about. And I don't know if those 
considerations can be applied to this effort.
    We were only able to get about, over the next 2 years, 
about $7 billion as the budget was passed; and, clearly, in 
order to get to the 6\1/4\ or over 6, you know, one has to take 
a look at what the size of the initial appropriations capital 
is. And obviously the concern is how it gets--how it can--the 
financing of this is critical and looking at it in terms of its 
ability to have one of the largest impacts in terms of the 
economic growth of this country for the long term, not a short-
term economic recovery program but a long term.
    So they can deal with high-speed rail, if you wanted to go 
back in history, an Erie Canal, the Rural Electrification 
Administration, all of which had an enormous impact on the 
economy of this Nation. And I would hope that we could have 
some way in which we could look at making this a reality 
instead of a, you know, a vision or a blueprint.
    Chairman Spratt. Ms. McCollum.
    Ms. McCollum. Thank you, Mr. Chair.
    I am going to read back to you from your first paragraph, 
because I think it is important to go back to basics. There has 
been a lot of discussion and people trying to get their points 
across, but I want to make sure that I clearly understand the 
point that you are getting across to me. Because I have to say, 
I believe in it.
    You started out with saying, the PAYGO Act would hold us to 
a simple but important principle: We should pay for new tax or 
entitlement legislation. Creating a new non-emergency tax cut 
or entitlement expansion would require offsetting revenue 
increases or spending reductions.
    So I am going to have two questions. My first question is 
going to be, why should PAYGO apply to both sides, both 
revenues and spending? Because that is one of the reasons why I 
didn't vote for the tax cuts 8 years ago, because I didn't see 
that we were being honest and transparent about the effect it 
was going to have on the economy.
    The second part of your first paragraph is, in the 1990s, 
statutory PAYGO encouraged the tough decisions that helped move 
the government from large deficits to surpluses. I believe it 
can do the same today.
    So if PAYGO only applies to new legislation and not 
budgetary costs we already included in the baseline, does PAYGO 
still make sense? And I believe it does. So could you restate 
again how this isn't the solution to every problem that we are 
facing, but it stops us from digging the hole deeper?
    Mr. Orszag. On your first question, the reason PAYGO needs 
to apply to both sides of the budget is that a reduction in 
revenue of a dollar has the same impact on public debt and the 
evolution of our fiscal future as an increase of spending of 
$1. And, in fact, if you exempted the revenue side of the 
budget, it is the easiest thing in the world to create a tax 
credit that does something that is very similar to a spending 
program, and you create then a substantial bias towards doing 
things in one form rather than the other, even though there may 
not be an underlying rationale for doing so. So it is both that 
revenue reductions increase the deficit, and also that you 
would create a sort of policy problem in how--in incentives for 
creating new proposals in one way as opposed to another.
    Now, it is looking forward. It is the case that all PAYGO 
does is make sure we don't make things worse. But that is not a 
trivial thing for two reasons. One is there has been a period 
of time when we did make things much worse.
    Again, I want to come back--our long-term fiscal gap over 
75 years is about 7 percent or so of the economy. Three percent 
of that, almost half, comes from policies that were enacted 
since 2000 and not offset.
    So we basically doubled the size of our long-term fiscal 
gap by putting income place a bunch of policies and not 
offsetting them. We can't do that again, and that is an 
important thing.
    I go beyond that and say I have what has been described as 
the broken window of budgeting, which is having that discipline 
in place helps create a culture in which you can do even more 
than that. And not having that in place, just like a broken 
window, has been shown to increase crime. Even though it may 
not be the mechanism through which the crime occurs, not having 
it in place creates this era of anything goes that would be 
highly problematic.
    Chairman Spratt. Mr. Langevin is not here.
    Mr. Boyd of Florida.
    Mr. Boyd. Thank you, Mr. Chairman.
    Director Orszag, thank you, sir, for your service and your 
advocacy for this fiscal discipline tool that we are discussing 
today.
    I was interested in some of the comments earlier about the 
overspending that happened in the previous administration and 
some criticism of the fact that that didn't necessarily mean we 
had to do that now, and I agree with that in part. But I notice 
you were asked earlier by Ms. Lummis about the administration's 
intent to instill discipline on the discretionary spending 
side.
    I would like for you to answer two questions for me, if you 
could. One is, what is the total amount of discretionary 
spending, and how much of that is defense? And, secondly, if 
you could, walk us through what would have happened in terms of 
the spending that we put in place, the tax cuts and the 
spending that we put in place since the expiration of PAYGO in 
2002 if PAYGO had not expired and the Congress and the 
administration would have had to comply with PAYGO rules. I 
assume that that would have applied to the 2003 tax cuts; it 
would have applied to the Medicare prescription drug program; 
it would apply to all the AMT fixes, FGR fixes. All of those 
issues. Can you walk us through what we would look like today 
if PAYGO had not been allowed to expire?
    Mr. Orszag. Sure.
    First, with regard to discretionary spending in 2010, we 
project $1.26 trillion in discretionary spending, $687 billion 
of which--in other words, more than half--is for the Defense 
Department, including funding for overseas' contingencies 
operations.
    Mr. Boyd. Does that include Homeland Security?
    Mr. Orszag. Homeland Security is actually in the non-
defense part of the budget. So some of the numbers that are 
discussed about the increase in non-defense discretionary 
spending reflect not only the Census but also Homeland 
Security.
    Non-defense discretionary spending is projected to be $573 
billion.
    With regard to policies that were put in place since the 
PAYGO rules were expired, I would also first note when they 
were waived right before they expired--and on that basis, 
again, I am going to come back to we are talking about hundreds 
of billion of dollars this year in policies that were adopted, 
not offset. If you threw in interest, it would be even more, 
because the rules were not either abided by or didn't exist.
    For the policies that were adopted since 2002, when you 
look at the 2003 tax legislation, the prescription drug benefit 
in particular, you are talking about well over a percent of GDP 
in offset costs. And so you are again talking about well more 
than a hundred billion dollars a year and perhaps in the 
hundreds of billions of dollars a year in policies that were 
adopted and not offset.
    Mr. Boyd. So from that we could conclude that if we had 
those fiscal discipline rules in place and we abided by them, 
we would have been in much better shape today than we are.
    Mr. Orszag. No doubt about it.
    Mr. Boyd. Mr. Chairman, thank you.
    Chairman Spratt. Mr. Berry.
    Mr. Berry. Thank you, Mr. Chairman; and thank you, Dr.
    Orszag, for being here and your service and all of the good 
things that you have done.
    My question is, there is an increase in the money supply 
that the Congress has nothing to do with; isn't that correct?
    Mr. Orszag. Yes, sir. Well, only in the sense that you 
originally created the Federal Reserve.
    Mr. Berry. And authorized them to do such things. But we 
have not lately had anything do with that.
    Mr. Orszag. Yeah.
    Mr. Berry. When that money supply is increased, is there 
any basis for the value of it, other than the good faith and 
credit of the United States?
    Mr. Orszag. I guess what I would say is that the underlying 
rate of inflation can be viewed in a variety of different ways. 
One of the things that influences it is the rate at which the 
money supply is increased.
    Mr. Berry. How does the amount that the money supply has 
been increased compare to the amount of money that we have 
authorized and appropriated by the Congress since the crisis 
began, let us say, last Labor Day?
    Mr. Orszag. There has been a very--instead of measuring it 
in terms of direct money creation--and there are different 
measures of money--if you look at the expansion of the Fed's 
balance sheet, that has actually exceeded the Recovery Act 
funds that have flowed to date, for example, and many of the 
other steps that have been taken.
    Mr. Berry. Do you have any idea how much it is?
    Mr. Orszag. North of a trillion dollars in terms of 
expansion.
    Mr. Berry. Okay. Thank you.
    Thank you, Mr. Chairman.
    Chairman Spratt. I believe that completes our questioning 
for Mr. Orszag. Thank you very much for coming.
    But, before you leave, I would look for you to take one 
question for the record.
    Mr. Orszag. Sure.
    Chairman Spratt. The legislative proposal you submitted 
lists mandatory accounts that would be exempt from 
sequestration but does not list those accounts that would be 
subject to sequestration. For the record and for our purposes, 
could you provide us with a list of those programs that would 
be subject to sequestration and a list of those that would not 
be subject, along with a dollar amount estimated for each?
    Mr. Orszag. I could even take that out of my binder and 
hand it to you now, but we will provide it in writing.
    [The information follows:]

    A bill to reinstitute and update the Pay-As-You-Go requirement of 
budget neutrality on new tax and mandatory spending legislation, 
enforced by the threat of annual, automatic sequestration.

SECTION 1. SHORT TITLE AND TABLE OF CONTENTS.

    (a) Short Title.--This Act may be cited as the ``Statutory Pay-As-
You-Go Act of 2009''.
    (b) Table of Contents.
    Section 1. Short Title and Table of Contents
    Section 2. Purpose and Expiration
    Section 3. Definitions
    Section 4. PAYGO Estimates and PAYGO Ledger
    Section 5. Annual Report and Sequestration Order
    Section 6. Calculating a Sequestration
    Section 7. Special, Temporary Rule to Reflect Current Policy
    Section 8. Application of BBEDCA
    Section 9. Amendments to the Baseline
    Section 10. Technical Corrections
    Section 11. Conforming Amendments
    Section 12. Exempt Programs and Activities

SECTION 2. PURPOSE AND EXPIRATION.

    (a) Purpose.--The purpose of this Act is to re-establish a 
statutory procedure to enforce a rule of budget neutrality on new tax 
and mandatory spending legislation enacted through the end of calendar 
year 2013, by creating an automatic statutory penalty that Congress and 
the President will seek to avoid.
    (b) Expiration.--Sections 1 through 8 of this Act shall expire on 
the later of December 31, 2013, or the issuance and implementation of a 
sequestration order for fiscal year 2014 if one is required by this 
Act.

SECTION 3. DEFINITIONS.

    As used in this Act----
    (1) The term ``BBEDCA'' means the Balanced Budget and Emergency 
Deficit Control Act of 1985, as amended including by this Act.
    (2) The terms ``appropriations Act'', ``budget authority'', and 
``outlays'' have the meanings given to them in section 3 of the 
Congressional Budget and Impoundment Control Act of 1974.
    (3) The terms ``baseline'', ``budget year'', ``CBO'', ``current 
year'', ``deposit insurance'', ``OMB'', ``sequester'', and 
``sequestration'' have the meanings given to them in section 250 of 
BBEDCA.
    (4) The term ``AMT'' means the Alternative Minimum Tax for 
individuals under sections 55-59 of the Internal Revenue Code of 1986, 
the term ``EGTRRA'' means the Economic Growth and Tax Relief 
Reconciliation Act of 2001 (Public Law 107-16), and the term ``JGTRRA'' 
means the Jobs and Growth Tax Relief and Reconciliation Act of 2003 
(Public Law 108-27).
    (5) The term ``budgetary effects'' means the amounts by which PAYGO 
legislation changes mandatory outlays or revenues relative to the 
baseline. Budgetary effects that increase mandatory outlays or decrease 
revenues are termed ``costs'' and budgetary effects that increase 
revenues or decrease mandatory outlays are termed ``savings''. For 
purposes of these definitions, off-budget effects and debt service 
effects are not counted as budgetary effects.
    (6) The term ``debit'' refers to the net total amount, when 
positive, by which costs recorded on the PAYGO ledger for a fiscal year 
exceed savings recorded on that ledger for that year.
    (7) The term ``discretionary programs'' refers to programs funded 
though appropriations Acts other than mandatory programs.
    (8) The term ``entitlement law'' means the statutory mandate or 
requirement of the United States to incur a financial obligation unless 
that obligation is explicitly conditioned on the appropriation in 
subsequent legislation of sufficient funds for that purpose.
    (9) The term ``mandatory outlays'' refers to outlays flowing from 
(A) budget authority provided by laws other than appropriations Acts, 
(B) entitlement laws, or (C) the Supplemental Nutrition Assistance 
Program, and the term ``mandatory programs'' refers to programs that 
produce mandatory outlays.
    (10) The term ``outyear'' means a fiscal year that occurs one or 
more years after the budget year.
    (11) The term ``PAYGO ledger'' refers to a table maintained by OMB 
(A) containing a column for each fiscal year 2010 through 2014 and 
recording in the applicable column or columns the average of the 
budgetary effects of each PAYGO Act enacted after the enactment of this 
Act and before January 1, 2014, and (B) displaying the net sum for each 
of those fiscal years of the average budgetary effects of all such 
Acts.
    (12) The term ``PAYGO legislation'' or a ``PAYGO Act'' refer to 
legislation that is scored as increasing or decreasing governmental 
receipts or mandatory outlays relative to the baseline, except that 
when those budgetary effects are caused by substantive legislative 
provisions in appropriations Acts, the current-year and budget-year 
effects of those provisions are not considered PAYGO legislation.
    (13) The term ``timing shift'' refers to a delay of the date on 
which mandatory outlays would otherwise occur from the ninth outyear to 
the tenth outyear or an acceleration of the date on which revenues or 
offsetting receipts or collections would otherwise occur from the tenth 
outyear to the ninth outyear.

SECTION 4. PAYGO ESTIMATES AND PAYGO LEDGER.

    (a) CBO Estimates.--As soon as practicable after Congress completes 
action on any PAYGO legislation, CBO shall provide an estimate of its 
budgetary effects to OMB.
    (b) PAYGO Ledger.--OMB shall maintain and make publicly available a 
document containing a PAYGO ledger and, not later than 7 days 
(excluding weekends and legal holidays) after the enactment of any 
PAYGO legislation, OMB shall record on that ledger its estimate of the 
legislation's budgetary effects in each fiscal year, applying the look-
back requirement of subsection (e) and the averaging requirement of 
subsection (h). The document shall also explain any major differences 
between the OMB and CBO estimates of the budgetary effects of PAYGO 
legislation.
    (c) Basis of OMB Estimates.--When estimating and recording the 
budgetary effects of a PAYGO Act, OMB shall employ economic and 
technical assumptions consistent with those in the President's most 
recent Budget submitted under 31 U.S.C. Sec. 1105 and shall use 
probabilistic methods where appropriate. Once it enters budgetary 
effects on the ledger, OMB shall not change the entries other than to 
correct errors. OMB's assumptions, data, determinations, estimates, and 
methodology under this Act are not subject to review in any judicial or 
administrative proceedings.
    (d) Current Policy Exceptions for Certain Legislation.--
Notwithstanding the definitions in paragraphs (5), (11), and (12) of 
section 3, OMB estimates of provisions of legislation within the four 
areas of the budget identified in section 7 shall be entered on the 
PAYGO scorecard as specified in that section, and the estimates so 
entered shall be treated as the budgetary effects of PAYGO legislation 
for purposes of this section.
    (e) Look-Back to Capture Current-Year Effects.--For purposes of 
this section, OMB shall treat the budgetary effects of PAYGO 
legislation enacted during a session of Congress that occur during the 
current year as though they occurred in the budget year.
    (f) Timing Shifts.--For purposes of this section, OMB and CBO shall 
not count timing shifts in their estimates of the budgetary effects of 
PAYGO legislation.
    (g) Emergency Legislation.--If a provision of PAYGO legislation is 
enacted that the President designates as an emergency requirement and 
that the Congress so designates in statute, OMB shall display the 
budgetary effects of that provision as an addendum in the document 
containing the PAYGO ledger but shall not record the budgetary effects 
in the ledger itself.
    (h) Averaging Used to Measure Compliance Over Ten Years.--OMB shall 
cumulate the budgetary effects of a PAYGO Act over the budget year 
(which includes any look-back effects under subsection (e)) and the 
nine subsequent outyears, divide that cumulative total by ten, and 
enter the quotient in the budget-year column of the PAYGO ledger and in 
each subsequent column, if any, through the column for 2014.
    (i) Scorekeeping Guidelines.--OMB and CBO shall prepare estimates 
under this paragraph in conformance with scorekeeping guidelines 
determined after consultation among the House and Senate Committees on 
the Budget, CBO, and OMB.
    (j) Treatment of Program Conversions.--For purposes of this 
section, and notwithstanding other provisions of this Act----
    (1) If legislation converts an identifiable element of a mandatory 
program into a discretionary program (with that program element or a 
substantially similar one continuing to be authorized), OMB and CBO 
shall not score the conversion of that element as reducing mandatory 
outlays.
    (2) If legislation converts an identifiable element of a 
discretionary program into a mandatory program, OMB and CBO shall 
estimate the legislation's budgetary effects in each year by 
subtracting the discretionary baseline levels of that element from the 
amount by which that legislation increases mandatory outlays in that 
year.

SECTION 5. ANNUAL REPORT AND SEQUESTRATION ORDER.

    (a) Annual Report.--No later than 14 days (excluding weekends and 
holidays) after Congress adjourns to end a session, OMB shall make 
publicly available an annual PAYGO report and publish in the Federal 
Register a notice of the report and information on how it can be 
obtained. The report shall include an up-to-date document containing a 
PAYGO ledger and information about estimating differences as required 
by section 4(b), a description of and justification for any current 
policy exceptions made under section 4(d), information about emergency 
legislation (if any) required by section 4(g), information about any 
sequestration if required by subsection (b), and other data and 
explanations that enhance public understanding of this Act and actions 
taken under it. If Congress does not adjourn to end a session, then for 
the purposes of this Act it shall be deemed to have done so on December 
31 of that session.
    (b) Sequestration Order.--If the annual report issued at the end of 
a session of Congress under subsection (a) shows a debit on the PAYGO 
ledger for the budget year, OMB shall prepare and the President shall 
issue an order sequestering budgetary resources from mandatory programs 
by enough to fully offset that debit, as prescribed in section 6. OMB 
shall include that order in the annual report and transmit it to the 
House of Representatives and the Senate. If the President issues a 
sequestration order, the annual report shall contain, for each budget 
account to be sequestered, estimates of the baseline level of budgetary 
resources subject to sequestration, the amount of budgetary resources 
to be sequestered, and the outlay reductions that will occur in the 
budget year and the subsequent fiscal year because of that 
sequestration.

SECTION 6. CALCULATING A SEQUESTRATION.

    (a) Sequestration Base.--For purposes of this section, OMB shall 
assume that mandatory programs are at the levels in the baseline before 
the implementation of the sequestration order.
    (b) Reducing Non-Exempt Budgetary Resources by a Uniform 
Percentage.--OMB shall calculate the uniform percentage by which the 
budgetary resources of non-exempt mandatory programs are to be 
sequestered such that the outlay savings resulting from that 
sequestration, as calculated under subsection (c), shall fully offset 
the budget-year debit on the PAYGO ledger, if any. If the uniform 
percentage calculated under the prior sentence exceeds 4 percent, the 
Medicare programs described in section 256(d) of BBEDCA shall be 
reduced by 4 percent and the uniform percentage by which the budgetary 
resources of all other non-exempt mandatory programs are to be 
sequestered shall be increased, as necessary, so that the sequestration 
of Medicare and of all other non-exempt mandatory programs together 
produces the required outlay savings.
    (c) Outlay Savings.--In determining the amount by which a 
sequestration offsets a budget-year debit, OMB shall count----
    (1) the amount by which the sequestration in a crop year of crop 
support payments, pursuant to section 256(j) of BBEDCA, reduces outlays 
in the budget year and the subsequent fiscal year;
    (2) the amount by which the sequestration of Medicare payments in 
the 12-month period following the sequestration order, pursuant to 
section 256(d) of BBEDCA, reduces outlays in the budget year and the 
subsequent fiscal year; and
    (3) the amount by which the sequestration in the budget year of the 
budgetary resources of other non-exempt mandatory programs reduces 
mandatory outlays in the budget year and in the subsequent fiscal year.

SECTION 7. SPECIAL, TEMPORARY RULE TO REFLECT CURRENT POLICY.

    (a) Purpose.--The purpose of this section is to establish a 
temporary rule addressing the scoring of legislation affecting four 
areas of the budget and superseding the scoring rules otherwise 
provided by this Act to the extent they are inconsistent. The four 
areas covered by this section are----
    (1) payments made under section 1848 of the Social Security Act 
(titled Payment for Physicians' Services),
    (2) the Estate and Gift Tax under subtitle B of the Internal 
Revenue Code of 1986,
    (3) the AMT, and
    (4) provisions of EGTRRA or JGTRRA that amended the Internal 
Revenue Code of 1986 (or provisions in later statutes further amending 
the amendments made by EGTRRA or JGTRRA), other than----
    (A) the provisions of those two Acts that were made permanent by 
the Pension Protection Act of 2006 (Public Law 109-280),
    (B) amendments to the estate and gift tax referred to in paragraph 
(2), and
    (C) the AMT referred to in paragraph (3).
    (b) Duration.--This section shall remain in effect through December 
31, 2010, for each of the four areas specified in subsection (a), 
except that if the President determines that legislation sufficiently 
consistent with current policy as described in subsection (c)(2) has 
not been enacted in one or more of those four areas by that date, the 
provisions of this section will remain in effect with respect to that 
area or those areas until such legislation has been enacted or until 
December 31, 2011, whichever occurs sooner.
    (c) Current Policy Projection and Initial Current Law 
Projections.----
    (1) For purposes of this section, the budgetary effects of 
legislation of the type referred to in subsection (a) shall be 
estimated relative to the baseline under section 257 of BBEDCA but the 
budgetary effects of that legislation shall be entered on the PAYGO 
ledger only to the extent that they fall outside a range bounded by the 
current policy projection under paragraph (2) and the initial current 
law projection under paragraph (3), as specified under subsections (d), 
(e), or (f), as applicable. Each of those two boundary projections 
shall be estimated using the policy assumptions stated in paragraph (2) 
or (3) as applicable, regardless of the enactment of subsequent 
legislation, but the estimates of the dollar levels of those two 
boundary projections shall change----
    (A) when economic and technical assumptions change with the 
issuance of a new budget under 31 U.S.C. 1105,
    (B) with changes in the assumed effective date of the legislation 
that is measured against those two projections, and
    (C) to the extent the policy assumptions under either of those two 
projections interact with other aspects of law, when legislation 
affecting those other aspects of law is enacted.
    With respect only to legislation affecting the AMT or the 
amendments to provisions of the income tax referred to in subsection 
(a)(4), the dollar levels of those two boundary projections shall be 
estimated separately, and the determination of whether and the extent 
to which budgetary effects fall outside the boundaries shall be made 
separately, for each separate provision within that legislation.
    (2) During the period specified in subsection (b), there shall 
exist a current policy projection in addition to the baseline specified 
in section 257 of BBEDCA. This projection shall----
    (A) with respect to payments made under section 1848 of the Social 
Security Act, assume that the applicable payment rates and payment 
policies in effect for 2009 remain in effect thereafter without change;
    (B) with respect to the estate and gift tax, assume that the tax 
rates, nominal exemption amounts, and related parameters in effect for 
tax year 2009 remain in effect thereafter without change;
    (C) with respect to the AMT, assume that the exemption amounts and 
related parameters in effect for tax year 2009 are increased in each 
subsequent year by an amount equal to the cost-of-living adjustment 
determined under section 1(f)(3) of the Internal Revenue Code of 1986 
for the calendar year in which the taxable year begins, determined by 
substituting ``calendar year 2008'' for ``calendar year 1992'' in 
subparagraph (B) thereof ; and
    (D) with respect to the income tax provisions referred to in 
subsection (a)(4), assume that each such separate provision scheduled 
on June 8, 2009, to be in effect for tax year 2010 remains in effect 
thereafter without change, other than applicable indexing.
    (3) Initial Current Law Projection.--During the period specified in 
subsection (b), there shall exist an initial current law projection in 
addition to the baseline specified in section 257 of BBEDCA. This 
projection shall----
    (A) with respect to payments made under section 1848 of the Social 
Security Act, assume that the applicable payment rates and payment 
policies scheduled on June 8, 2009, to be in effect for each subsequent 
fiscal year shall be in effect as scheduled;
    (B) with respect to the estate and gift tax, assume that the tax 
rates, nominal exemption amounts, and related parameters scheduled on 
June 8, 2009, to be in effect for each subsequent tax year shall be in 
effect as scheduled;
    (C) with respect to the AMT, assume that the exemption amounts and 
related parameters scheduled on June 8, 2009, to be in effect for each 
subsequent tax year shall be in effect as scheduled; and
    (D) with respect to provisions of the income tax referred to in 
subsection (a)(4), assume that each such provision scheduled on June 8, 
2009, to be in effect for each subsequent tax year shall be in effect 
as scheduled.
    (d) Budgetary Effects of Certain Medicare Legislation.--
Notwithstanding the definitions in paragraphs (5), (11), and (12) of 
section 3, OMB shall enter on the PAYGO ledger the budgetary effects of 
any provision of PAYGO legislation that amends or supersedes the system 
of payments under section 1848 of the Social Security Act----
    (1) only to the extent that the level of net Medicare outlays are 
estimated to be higher in a fiscal year than if that provision of PAYGO 
legislation had instead enacted (or maintained) the current policy 
projection, or
    (2) only to the extent that the level of net Medicare outlays are 
estimated to be lower in a fiscal year than if that provision of PAYGO 
legislation had instead enacted (or maintained) the initial current law 
projection.
    (e) Budgetary Effects of Estate and Gift Tax Legislation.--
Notwithstanding the definitions in paragraphs (5), (11), and (12) of 
section 3, OMB shall enter on the PAYGO ledger the budgetary effects of 
any provision of PAYGO legislation that amends the estate and gift 
tax----
    (1) only to the extent that total revenues in a fiscal year are 
estimated to be changed because tax liability under the estate and gift 
tax is estimated to be higher in tax year 2010 than if that provision 
of PAYGO legislation had instead enacted (or maintained) the current 
policy projection,
    (2) only to the extent that total revenues in a fiscal year are 
estimated to be changed because tax liability under the estate and gift 
tax is estimated to be lower in tax year 2010 than if that provision of 
PAYGO legislation had instead enacted (or maintained) the initial 
current law projection,
    (3) only to the extent that total revenues in a fiscal year are 
estimated to be changed because tax liability under the estate and gift 
tax is estimated to be lower in a tax year after 2010 than if that 
provision of PAYGO legislation had instead enacted (or maintained) the 
current policy projection, or
    (4) only to the extent that total revenues in a fiscal year are 
estimated to be changed because tax liability under the estate and gift 
tax is estimated to be higher in a tax year after 2010 than if that 
provision of PAYGO legislation had instead enacted (or maintained) the 
initial current law projection.
    (f) Budgetary Effects of AMT and Certain Income Tax Legislation 
Taken Separately; Stacking Order and Interactive Effects.--
Notwithstanding the definitions in paragraphs (5), (11), and (12) of 
section 3, OMB shall enter on the PAYGO ledger the budgetary effects of 
any PAYGO legislation that amends the AMT or amends one of the income 
tax provisions referred to in subsection (a)(4)----
    (1) only to the extent that the level of income tax revenues is 
estimated to be lower and the level of outlays for refundable tax 
credits is estimated to be higher in a fiscal year than if that PAYGO 
legislation had instead enacted (or maintained) the current policy 
projection with respect to that provision of the income tax, or
    (2) only to the extent that the level of income tax revenues is 
estimated to be higher and the level of outlays for refundable tax 
credits is estimated to be lower in a fiscal year than if that PAYGO 
legislation had instead enacted (or maintained) the initial current law 
projection with respect to that provision of the income tax.
    In making estimates under this section of the budgetary effects of 
a PAYGO Act that amends both the AMT and at least one separate 
provision of the income tax, or amends more than one separate provision 
of the income tax, OMB shall first estimate the budgetary effects of 
any amendment to the AMT contained in that Act, and shall then estimate 
the budgetary effects of each remaining amendment to the income tax 
contained in that Act as though any AMT amendments contained in that 
Act and the preceding amendments made by that Act had been enacted but 
the succeeding amendments had not. For purposes of this section, each 
separate income tax rate shall be considered a separate provision.

SECTION 8. APPLICATION OF BBEDCA.

    For purposes of this Act----
    (1) notwithstanding section 275 of BBEDCA, the provisions of 
sections 255, 256, and 257 of BBEDCA, as amended by this Act, shall 
apply to the provisions of this Act;
    (2) references in sections 255, 256 and 257 to ``this part'' shall 
be interpreted as applying to this Act;
    (3) references in sections 255, 256 and 257 of BBEDCA to ``section 
254'' shall be interpreted as referencing section 5 of this Act;
    (4) the reference in section 256(b) of BBEDCA to ``section 252 or 
253'' shall be interpreted as referencing section 5 of this Act;
    (5) the reference in section 256(d)(1) of BBEDCA to ``section 252 
or 253'' shall be interpreted as referencing section 6 of this Act;
    (6) the reference in section 256(d)(4) of BBEDCA to ``section 252 
or 253'' shall be interpreted as referencing section 5 of this Act;
    (7) section 256(k) of the BBEDCA shall apply to a sequestration, if 
any, under this Act;
    (8) references in section 257(e) to ``section 251, 252, or 253'' 
shall be interpreted as referencing section 4 of this Act; and
    (9) the term ``direct spending'' in section 257 of BBEDCA shall be 
interpreted as applying to mandatory programs or the funding for 
mandatory programs, as appropriate.

SECTION 9. AMENDMENTS TO THE BASELINE.

    In section 257 of BBEDCA----
    (a) Strike ``entitlement authority'' and insert in lieu thereof 
``entitlement laws''.
    (b) Amend subsection (b)(2)(A) to read----
    ``(A) If any law expires before the budget year or before any 
outyear, then any program with estimated current-year outlays of more 
than $50,000,000 operating under that law is assumed to continue to 
operate under that law as in effect immediately before its expiration. 
For purposes of the preceding sentence, the Food, Conservation, and 
Energy Act of 2008 or a similar successor act is treated as a program 
assumed to be continued after its scheduled expiration.''.
    (c) Amend subsection (b)(2)(D) to read----
    ``Payments of social insurance, deposit insurance, pension 
insurance, and any similar statutory financial insurance guarantees are 
assumed to be made in full regardless of the sufficiency of the funds 
supporting those programs, and funding for flood insurance and any 
similar contractual insurance programs is assumed to be sufficient to 
fulfill existing contracts.''.
    (d) Amend subsection (c)(1) by striking ``Budgetary resources'' and 
inserting in lieu thereof ``Except as provided in subsection (d), 
budgetary resources'' and by striking ``to offset pay absorption and 
for pay annualization'' and inserting in lieu thereof ``to adjust Pell 
grant funding''.
    (e) Amend subsection (c)(2) to read----
    ``(2) EXPIRING HOUSING CONTRACTS.--New budget authority shall be 
added to the baseline in the budget year and the outyears to cover the 
costs of renewing expiring subsidized housing contracts that were 
funded in the current year under multiyear contracts whose budget 
authority was recorded in years prior to the current year. The amount 
added (before adjusting for inflation) shall be the amount needed to 
renew the expiring contracts through an uninterrupted series of 12-
month contracts, assuming unchanged rental or equivalent prices.''.
    (f) Amend subsection (c) (4) to read----
    ``(4) PELL GRANTS.--Notwithstanding paragraph (1), new budget 
authority for the Pell grant program shall be included in the baseline 
in an amount sufficient to cover the costs of the program at the 
maximum award level specified in the most recently enacted full-year 
appropriations Act, the budget authority in the budget year shall be 
adjusted for any cumulative funding shortfall or surplus from prior 
academic years, and the adjustment for inflation under paragraph (5) 
shall not apply.''.
    (g) Insert after subsection (c) the following, and redesignate the 
subsequent subsections accordingly----
    ``(d) DISASTERS.--Notwithstanding subsections (b) and (c), 
temporary mandatory funding and tax provisions related to major natural 
or man-made disasters shall be assumed to expire on schedule, and 
discretionary funding for major natural or man-made disaster shall not 
be projected. In lieu, the baseline shall include a disaster allowance 
that is not designated as mandatory or discretionary and is not 
allocated to any committee of Congress. The amount of budget authority 
assumed for this disaster allowance shall equal a probabilistic 
estimate of the amount of federal exposure to the risk of major natural 
or man-made disasters occurring in the remainder of the current year, 
the budget year, and each outyear, and the amount of outlays shall 
equal the estimated expenditures of that budget authority. Major 
disasters shall include disaster costs other than those normally 
covered by routine firefighting funding and normal and ongoing costs of 
disaster agencies, programs, or activities.''.

SECTION 10.--TECHNICAL CORRECTIONS.

    (1) Section 250(c)(18) of BBEDCA is amended by striking ``the 
expenses the Federal deposit insurance agencies'' and inserting ``the 
expenses of the Federal deposit insurance agencies''.
    (2) Section 256(k)(1) of BBEDCA is amended by striking ``in 
paragraph (5)'' and inserting ``in paragraph (6)''.

SECTION 11.--CONFORMING AMENDMENTS.

    (a) Section 256(a) of BBEDCA is repealed.
    (b) Section 256(b) of BBEDCA is amended by striking ``origination 
fees under sections 438(c)(2) and 455(c) of that Act shall each be 
increased by 0.50 percentage point.'' and inserting in lieu thereof 
``origination fees under sections 438(c)(2) and (6) and 455(c) and loan 
processing and issuance fees under section 428(f)(1)(A)(ii) of that Act 
shall each be increased by the uniform percentage specified in that 
sequestration order, and, for student loans originated during the 
period of the sequestration, special allowance payments under section 
438(b) of that Act accruing during the period of the sequestration 
shall be reduced by the uniform percentage specified in that 
sequestration order.''.
    (c) Section 256(c) of BBEDCA is repealed.
    (d) Section 256(d) of BBEDCA is amended----
    (1) by redesignating paragraphs (2), (3), and (4) as paragraphs 
(3), (5), and (6);
    (2) in paragraph (1) to read as follows:
    ``(1) CALCULATION OF REDUCTION IN PAYMENT AMOUNTS.--To achieve the 
total percentage reduction in those programs required by section 252 or 
253, subject to paragraph (2), and notwithstanding section 710 of the 
Social Security Act, OMB shall determine, and the applicable 
Presidential order under section 254 shall implement, the percentage 
reduction that shall apply, with respect to the health insurance 
programs under title XVIII of the Social Security Act----
    ``(A) in the case of parts A and B of such title, to individual 
payments for services furnished during the one-year period beginning on 
the first day of the first month beginning after the date the order is 
issued (or, if later, the date specified in paragraph (4)), and
    ``(B) in the case of parts C and D, to monthly payments under 
contracts under such parts for the same one-year period,
    such that the reduction made in payments under that order shall 
achieve the required total percentage reduction in those payments for 
that period.'';
    (3) by inserting after paragraph (1) the following:
    ``(2) UNIFORM REDUCTION RATE; MAXIMUM PERMISSIBLE REDUCTION.--
Reductions in payments for programs and activities under such title 
XVIII pursuant to a sequestration order under section 254 shall be at a 
uniform rate, which shall not exceed 4 percent, across all such 
programs and activities subject to such order.'';
    (4) by inserting after paragraph (3), as so redesignated, the 
following:
    ``(4) TIMING OF SUBSEQUENT SEQUESTRATION ORDER.--A sequestration 
order required by section 252 or 253 with respect to programs under 
such title XVIII shall not take effect until the first month beginning 
after the end of the effective period of any prior sequestration order 
with respect to such programs, as determined in accordance with 
paragraph (1).'';
    (5) in paragraph (6), as so redesignated, to read as follows:
    ``(6) SEQUESTRATION DISREGARDED IN COMPUTING PAYMENT AMOUNTS.--The 
Secretary of Health and Human Services shall not take into account any 
reductions in payment amounts which have been or may be effected under 
this part, for purposes of computing any adjustments to payment rates 
under such title XVIII, specifically including----
    ``(A) the part C growth percentage under section 1853(c)(6);
    ``(B) the part D annual growth rate under section 1860D-2(b)(6); 
and
    ``(C) application of risk corridors to part D payment rates under 
section 1860D-15(e).''; and
    (6) by adding after paragraph (6), as so redesignated, the 
following:
    ``(7) EXEMPTIONS FROM SEQUESTRATION.--In addition to the programs 
and activities specified in section 255, the following shall be exempt 
from sequestration under this part:
    ``(A) PART D LOW-INCOME SUBSIDIES.--Premium and cost-sharing 
subsidies under section 1860D-14 of the Social Security Act.
    ``(B) PART D CATASTROPHIC SUBSIDY.--Payments under section 1860D-
15(b) and (e)(2)(B) of the Social Security Act.
    ``(C) QUALIFIED INDIVIDUAL (QI) PREMIUMS.--Payments to States for 
coverage of Medicare cost-sharing for certain low-income Medicare 
beneficiaries under section 1933 of the Social Security Act.''.

SECTION 12. EXEMPT PROGRAMS AND ACTIVITIES.

    (a) Designations.--Section 255 of BBEDCA is amended by 
redesignating paragraph (i) as (j) and striking ``1998'' and inserting 
in lieu thereof ``2010''.
    (b) Social Security, Veterans Programs, Net Interest, and Tax 
Credits.--Subsections (a) through (d) of section 255 of BBEDCA are 
amended to read as follows----
    ``(a) SOCIAL SECURITY BENEFITS AND TIER I RAILROAD RETIREMENT 
BENEFITS.--Benefits payable under the old-age, survivors, and 
disability insurance program established under title II of the Social 
Security Act (Title 42, United States Code, section 401 et seq.), and 
benefits payable under section 231b(a), 231b(f)(2), 231c(a), and 
231c(f) of Title 45 United States Code, shall be exempt from reduction 
under any order issued under this part.
    ``(b) VETERANS PROGRAMS.--The following programs shall be exempt 
from reduction under any order issued under this part:
    Canteen Service Revolving Fund (36-4014-0-3-705);
    National Service Life Insurance Fund (36-8132-0-7-701);
    Native American Veteran Housing Loan Program (36-1120-0-1-704);
    Service-Disabled Veterans Insurance Fund (36-4012-0-3-701);
    Veterans Insurance and Indemnities (36-0120-0-1-701);
    Veterans Reopened Insurance Fund (36-4010-0-3-701);
    Veterans Special Life Insurance Fund (36-8455-0-8-701);
    United States Government Life Insurance Fund (36-8150-0-7-701);
    Benefits under chapter 21 of title 38, United States Code, relating 
to specially adapted housing and mortgage-protection life insurance for 
certain veterans with service-connected disabilities (36-0120-0-1-701);
    Compensation and Pensions (36-0102-0-1-701) to include Burial 
Benefits under Chapter 23 of Title 38;
    Benefits under chapter 33 of title 38, United States Code, relating 
to educational assistance provided by the Post-9/11 Educational 
Assistance Act of 2008 (36-0137-0-1-702);
    Benefits under chapter 39 of title 38, United States Code, relating 
to automobiles and adaptive equipment for certain disabled veterans and 
members of the Armed Forces (36-0137-0-1-702);
    Benefits under chapter 35 of title 38, United States Code, related 
to educational assistance for survivors and dependents of certain 
veterans with service-connected disabilities (36-0137-0-1-702);
    Assistance and services under chapter 31 of title 38, United States 
Code, relating to training and rehabilitation for certain veterans with 
service-connected disabilities (36-0137-0-1-702);
    Benefits under subchapters I, II, and III of chapter 37 of title 
38, United States Code, relating to housing loans for certain veterans 
and for the spouses and surviving spouses of certain veterans Housing 
Program Account (36-1119-0-1-704); and
    Special Benefits for Certain World War II Veterans (28-0401-0-1-
701);.
    ``(c) NET INTEREST.--No reduction of payments for net interest (all 
of major functional category 900) shall be made under any order issued 
under this part.
    ``(d) REFUNDABLE INCOME TAX CREDITS.--Payments to individuals made 
pursuant to provisions of the Internal Revenue Code of 1986 
establishing refundable tax credits shall be exempt from reduction 
under any order issued under this part.''.
    (c) Other Programs and Activities, Low-Income Programs, and 
Economic Recovery Programs.--Subsections (g) and (h) of section 255 of 
BBEDCA are amended to read as follows----
    ``(g) OTHER PROGRAMS AND ACTIVITIES.----
    (1)(A) The following budget accounts and activities shall be exempt 
from reduction under any order issued under this part:
    Activities resulting from private donations, bequests, or voluntary 
contributions to the Government;
    Activities financed by voluntary payments to the Government for 
goods or services to be provided for such payments;
    Administration of Territories, Northern Mariana Islands Covenant 
grants (14-0412-0-1-808);
    Advances to the Unemployment Trust Fund and Other Funds (16-0327-0-
1-600);
    Appropriations for the District of Columbia (to the extent they are 
appropriations of locally raised funds);
    Black Lung Disability Trust Fund Refinancing (16-0329-0-1-601);
    Bonneville Power Administration Fund and borrowing authority 
established pursuant to section 13 of Public Law 93-454 (1974), as 
amended (89-4045-0-3-271);
    Claims, Judgments, and Relief Acts (20-1895-0-1-808);
    Colorado River Basins Power Marketing Fund, Western Area Power 
Administration, (89-4452-0-3-271);
    Compact of Free Association (14-0415-0-1-808);
    Compensation of the President (11-0209-0-1-802);
    Construction, Rehabilitation, Operation and Maintenance, Western 
Area Power Administration (89-5068-0-2-271);
    Comptroller of the Currency, Assessment Funds (20-8413-0-8-373);
    Continuing Fund, Southeastern Power Administration (89-5653-0-2-
271);
    Continuing Fund, Southwestern Power Administration (89-5649-0-2-
271);
    Dual Benefits Payments Account (60-0111-0-1-601);
    Emergency Fund, Western Area Power Administration (89-5069-0-2-
271);
    Exchange Stabilization Fund (20-4444-0-3-155);
    Federal Deposit Insurance Corporation, Deposit Insurance Fund (51-
4596-4-4-373);
    Federal Deposit Insurance Corporation, FSLIC Resolution Fund (51-
4065-0-3-373);
    Federal Deposit Insurance Corporation, Non-Interest Bearing 
Transaction Account Guarantee (51-4458-0-3-373);
    Federal Deposit Insurance Corporation, Office of Inspector General 
(51-4595-0-4-373);
    Federal Deposit Insurance Corporation, Senior Unsecured Debt 
Guarantee (51-4457-0-3-373);
    Federal Housing Finance Agency, Administrative Expenses (95-5532-0-
2-371);
    Federal Payment to the District of Columbia Judicial Retirement and 
Survivors Annuity Fund (20-1713-0-1-752);
    Federal Payment to the District of Columbia Pension Fund (20-1714-
0-1-601);
    Federal Payments to the Railroad Retirement Accounts (60-0113-0-1-
601);
    Federal Reserve Bank Reimbursement Fund (20-1884-0-1-803);
    Financial Agent Services (20-1802-0-1-803);
    Foreign Military Sales Trust Fund (11-8242-0-7-155);
    Hazardous Waste Management, Conservation Reserve Program (12-4336-
0-3-999);
    Health Education Assistance Loans Program Account (75-0340-0-1-
552);
    Host Nation Support Fund for Relocation (97-8337-0-7-051);
    Internal Revenue Collections for Puerto Rico (20-5737-0-2-806);
    Intragovernmental funds, including those from which the outlays are 
derived primarily from resources paid in from other government 
accounts, except to the extent such funds are augmented by direct 
appropriations for the fiscal year during which an order is in effect;
    Medical Facilities Guarantee and Loan Fund (75-9931-0-3-551);
    National Credit Union Administration, Central Liquidity Facility 
(25-4470-0-3-373);
    National Credit Union Administration, Corporate Credit Union Share 
Guarantee Program (25-4476-0-3-376);
    National Credit Union Administration, Credit Union Homeowners 
Affordability Relief Program (25-4473-0-3-371);
    National Credit Union Administration, Credit Union Share Insurance 
Fund (25-4468-0-3-373);
    National Credit Union Administration, Credit Union System 
Investment Program (25-4474-0-3-376);
    National Credit Union Administration, Operating fund (25-4056-0-3-
373);
    National Credit Union Administration, Share Insurance Fund 
Corporate Debt Guarantee Program (25-4469-0-3-376);
    National Credit Union Administration, U.S. Central Federal Credit 
Union Capital Program (25-4475-0-3-376);
    Office of Thrift Supervision (20-4108-0-3-373);
    Operation and Maintenance, Alaska Power Administration (89-0302-0-
1-271);
    Operation and Maintenance, Southeastern Power Administration (89-
0302-0-1-271);
    Operation and Maintenance, Southwestern Power Administration (89-
0303-0-1-271);
    Panama Canal Commission Compensation Fund (16-5155-0-2-602);
    Payment of Vietnam and USS Pueblo prisoner-of-war claims within the 
Salaries and Expenses, Foreign Claims Settlement account (15-0100-0-1-
153) ;
    Payment to Civil Service Retirement and Disability Fund (24-0200-0-
1-805);
    Payment to Department of Defense Medicare-Eligible Retiree Health 
Care Fund (97-0850-0-1-054);
    Payment to Judiciary Trust Funds (10-0941-0-1-752);
    Payment to Military Retirement Fund (97-0040-0-1-054);
    Payment to the Foreign Service Retirement and Disability Fund (19-
0540-0-1-153);
    Payments to Copyright Owners (03-5175-0-2-376);
    Payments to Health Care Trust Funds (75-0580-0-1-571);
    Payments to Social Security Trust Funds (28-0404-0-1-651);
    Payments to the United States Territories, Fiscal Assistance (14-
0418-0-1-806);
    Payments to trust funds from excise taxes or other receipts 
properly creditable to such trust funds;
    Payments to widows and heirs of deceased Members of Congress (00-
0215-0-1-801);
    Postal Service Fund (18-4020-0-3-372);
    Reimbursement to Federal Reserve Banks (20-0562-0-1-803);
    Salaries of Article III judges;
    Soldiers and Airmen's Home, payment of claims (84-8930-0-7-705);
    Tennessee Valley Authority Fund, except non-power programs and 
activities (64-4110-0-3-999);
    Tribal and Indian trust accounts within the Department of the 
Interior which fund prior legal obligations of the Government or which 
are established pursuant to Acts of Congress regarding Federal 
management of tribal real property or other fiduciary responsibilities, 
including but not limited to Tribal Special Fund (14-5265-0-2-452), 
Tribal Trust Fund (14-8030-0-7-452), Indian Land and Water Claims 
Settlements (14-2303-0-1-452), White Earth Settlement (14-2204-0-1-
452), and Indian Water Rights and Habitat Acquisition (14-5505-0-2-
303);
    United Mine Workers of America 1992 Benefit Plan (95-8260-0-7-551);
    United Mine Workers of America 1993 Benefit Plan (95-8535-0-7-551);
    United Mine Workers of America Combined Benefit Fund (95-8295-0-7-
551);
    United States Enrichment Corporation Fund (95-4054-0-3-271);
    Universal Service Fund (27-5183-0-2-376);
    Vaccine Injury Compensation (75-0320-0-1-551);
    Vaccine Injury Compensation Program Trust Fund (20-8175-0-7-551); 
and
    Western Area Power Administration, Borrowing Authority, Recovery 
Act (89-4404-0-3-271).
    (B) The following Federal retirement and disability accounts and 
activities shall be exempt from reduction under any order issued under 
this part:
    Black Lung Disability Trust Fund (20-8144-0-7-601);
    Central Intelligence Agency Retirement and Disability System Fund 
(56-3400-0-1-054);
    Civil Service Retirement and Disability Fund (24-8135-0-7-602);
    Comptrollers general retirement system (05-0107-0-1-801);
    Contributions to U.S. Park Police annuity benefits, Other Permanent 
Appropriations (14-9924-0-2-303);
    Court of Appeals for Veterans Claims Retirement Fund (95-8290-0-7-
705);
    Department of Defense Medicare-Eligible Retiree Health Care Fund 
(97-5472-0-2-551);
    District of Columbia Federal Pension Fund (20-5511-0-2-601);
    District of Columbia Judicial Retirement and Survivors Annuity Fund 
(20-8212-0-7-602);
    Energy Employees Occupational Illness Compensation Fund (16-1523-0-
1-053);
    Foreign National Employees Separation Pay (97-8165-0-7-051);
    Foreign Service National Defined Contributions Retirement Fund (19-
5497-0-2-602);
    Foreign Service National Separation Liability Trust Fund (19-8340-
0-7-602);
    Foreign Service Retirement and Disability Fund(19-8186-0-7-602);
    Government Payment for Annuitants, Employees Health Benefits (24-
0206-0-1-551);
    Government Payment for Annuitants, Employee Life Insurance (24-
0500-0-1-602);
    Judicial Officers' Retirement Fund (10-8122-0-7-602);
    Judicial Survivors' Annuities Fund (10-8110-0-7-602);
    Military Retirement Fund (97-8097-0-7-602);
    National Railroad Retirement Investment Trust (60-8118-0-7-601);
    National Oceanic and Atmospheric Administration retirement (13-
1450-0-1-306);
    Pensions for former Presidents (47-0105-0-1-802);
    Postal Service Retiree Health Benefits Fund (24-5391-0-2-551);
    Rail Industry Pension Fund (60-8011-0-7-601);
    Retired Pay, Coast Guard (70-0602-0-1-403);
    Retirement Pay and Medical Benefits for Commissioned Officers, 
Public Health Service (75-0379-0-1-551);
    Special Benefits for Disabled Coal Miners (16-0169-0-1-601);
    Special Benefits, Federal Employees' Compensation Act (16-1521-0-1-
600);
    Special Workers Compensation Expenses (16-9971-0-7-601);
    Tax Court Judges Survivors Annuity Fund (23-8115-0-7-602);
    United States Court of Federal Claims Judges' Retirement Fund (10-
8124-0-7-602);
    United States Secret Service, DC Annuity (70-0400-0-1-751); and
    Voluntary Separation Incentive Fund (97-8335-0-7-051).
    (2) Prior legal obligations of the Government in the following 
budget accounts and activities shall be exempt from any order issued 
under this part:
    Biomass Energy Development (20-0114-0-1-271);
    Check Forgery Insurance Fund (20-4109-0-3-803);
    Credit liquidating accounts;
    Credit reestimates;
    Employees Life Insurance Fund (24-8424-0-8-602);
    Federal Aviation Administration, Aviation Insurance Revolving Fund 
(69-4120-0-3-402);
    Federal Crop Insurance Corporation fund (12-4085-0-3-351);
    Federal Emergency Management Agency, National Flood Insurance Fund 
(58-4236-0-3-453);
    Geothermal resources development fund (89-0206-0-1-271);
    Homeowners Assistance Fund (97-4090-0-3-051);
    International Trade Administration, Operations and administration 
(13-1250-0-1-376);
    Low-Rent Public Housing--Loans and Other Expenses (86-4098-0-3-
604);
    Maritime Administration, War Risk Insurance Revolving Fund (69-
4302-0-3-403);
    Natural Resource Damage Assessment Fund (14-1618-0-1-302);
    Overseas Private Investment Corporation, Noncredit Account (71-
4184-0-3-151);
    Pension Benefit Guaranty Corporation Fund (16-4204-0-3-601);
    Rail service assistance within the Safety and Operations account 
(69-0700-0-1-401);
    San Joaquin Restoration Fund (14-5537-0-2-301);
    Servicemembers' Group Life Insurance Fund (36-4009-0-3-701); and
    Terrorism Insurance Program (20-0123-0-1-376).
    (3) Non-budgetary accounts and activities, including the following, 
are exempt from sequestration under this part:
    Credit financing accounts;
    Deposit funds;
    Federal Reserve;
    Government Sponsored Enterprises, including the Federal National 
Mortgage Association and the Federal Home Loan Mortgage Corporation; 
and
    Thrift Savings Fund.
    ``(h) LOW-INCOME PROGRAMS.--The following programs shall be exempt 
from reduction under any order issued under this part:
    Academic Competitiveness/Smart Grant Program (91-0205-0-1-502);
    Child Care Entitlement to States (75-1550-0-1-609);
    Child Enrollment Contingency Fund (75-5551-0-2-551);
    Child Nutrition Programs (with the exception of special milk 
programs) (12-3539-0-1-605);
    Children's Health Insurance Fund (75-0515-0-1-551);
    Commodity Supplemental Food Program (12-3512-0-1-605);
    Contingency Fund (75-1522-0-1-609);
    Family Support Programs (75-1501-0-1-551);
    Federal Pell Grants under section 401 Title IV of the Higher 
Education Act;
    Grants to States for Low-Income House Projects in Lieu of Low-
Income Housing Credit Allocations, Recovery Act (20-0139-0-1-604);
    Grants to States for Medicaid (75-0512-0-1-551);
    Payments for Foster Care and Permanency (75-1545-0-1-609);
    Special Supplemental Nutrition Program for Women, Infants, and 
Children (WIC) (12-3510-0-1-605);
    Supplemental Nutrition Assistance Program (12-3505-0-1-605);
    Supplemental Security Income Program (28-0406-0-1-609); and
    Temporary Assistance for Needy Families (75-1552-0-1-609).''.
    (d) Economic Recovery Programs.--Section 255 of BBEDCA is amended 
by adding the following after subsection (h)----
    ``(i) ECONOMIC RECOVERY PROGRAMS.--The following programs shall be 
exempt from reduction under any order issued under this part:
    All programs enacted in, or increases in programs provided by, the 
American Recovery and Reinvestment Act of 2009;
    Exchange Stabilization Fund-Money Market Mutual Fund Guaranty 
Facility (20-4274-0-3-376);
    Office of Financial Stability (20-0128-0-1-376);
    Financial Stabilization Reserve (20-0131-4-1-376);
    GSE Mortgage-Backed Securities Purchase Program Account (20-0126-0-
1-371);
    GSE Preferred Stock Purchase Agreements (20-0125-0-1-371);
    Office of Financial Stability (20-0128-0-1-376);
    Special Inspector General for the Troubled Asset Relief Program 
(20-0133-0-1-376);
    Troubled Asset Relief Program Account (20-0132-0-1-376);
    Troubled Asset Relief Program Equity Purchase Program (20-0134-0-1-
376);
    Troubled Asset Relief Program, Home Affordable Modification Program 
(20-0136-0-1-604).''.

    Chairman Spratt. Thank you very much. We look forward for 
working with you for the passage of this particular bill.
    Thank you again, Dr. Orszag.
    Now, Douglas Holtz-Eakin and Bob Greenstein.
    Earlier, Alice Rivlin was to testify, but, due to the 
schedule change, she could not make it, but if there is no 
objection, her testimony will be made part of the record at 
this point.
    [The prepared statement of Alice Rivlin follows:]

 Prepared Statement of Alice M. Rivlin, the Brookings Institution and 
                         Georgetown University

    Chairman Spratt and members of the Committee: I am happy to be back 
before this Committee to support the enactment of statutory PAYGO. 
Enshrining in law the PAYGO rules which Congress adopted in 2007 would 
highlight their importance and make them easier to enforce. Statutory 
PAYGO is a small, but important step toward restoring fiscal discipline 
to the federal budget. Along with President Obama, the Blue Dog 
Coalition, and many other proponents of responsible federal budgeting, 
I urge you to take this step without delay.
          the long term budget outlook: impending catastrophe
    No one needs to remind this Committee that the outlook for the 
federal budget is worrisome--indeed, scary. Long before the financial 
crisis and the current deep recession, this Committee was anxiously 
pointing out that current federal spending and revenue policies are on 
a risky, unsustainable course. Promises made under the major 
entitlement programs (especially Medicare and Medicaid) will increase 
federal spending rapidly over the next couple of decades, as the 
population ages and medical spending continues to rise faster than 
other spending. Federal expenditures are projected to grow 
substantially faster than revenues, opening widening deficit gaps that 
cannot not be financed.
    The financial crisis and the recession, combined with the measures 
the government has taken to mitigate both, have worsened the budget 
outlook dramatically. The federal deficit will probably reach 13 
percent of the GDP this year and will likely remain at worrisome levels 
even as the economy recovers. Federal debt held by the public, 
including our foreign creditors, is projected to double as a percent of 
GDP over the next decade. The recent rise in long term Treasury rates 
is a timely reminder that our creditors, foreign and domestic, may lose 
faith in America's willingness to take the difficult steps necessary to 
move the budget toward balance. This loss of faith--reversing the 
widespread perception that U.S. Treasuries are the safest securities in 
the World--could lead to rapidly rising interest rates, killer debt 
service costs for the federal government and others, a plunging dollar, 
and an aborted recovery.
    As I testified before this Committee on January 27, 2009, I 
strongly believe that most of the emergency actions that authorities 
have taken to stimulate the economy and rescue the financial sector 
were the right policies in these dire circumstances. An escalating 
deficit and huge amounts of debt were necessary to avoid a much deeper 
and longer recession and a total meltdown of the financial system. 
However, these actions have made it absolutely necessary for Congress 
and the Administration to work together aggressively to bring future 
deficits under control. Unpopular actions to restrain future spending 
and augment future revenues must be taken now, even before recovery has 
been achieved. Putting Social Security on a sound fiscal base, credibly 
reducing the rate of growth of federal health spending, and raising 
future energy-related and other revenues are all actions that could be 
taken now to reduce future deficits.
    Immediate actions to reduce long-term deficits--such as fixing 
Social Security this year--will enhance the prospects for recovery by 
restoring confidence in government and reducing long-term interest 
rates. These actions to reduce future deficits will require political 
courage. Stronger budgetary rules, such as statutory PAYGO, can bolster 
political courage.
            statutory paygo: one tool for fiscal discipline
    PAYGO is budget speak for ``do no harm'' or ``don't make future 
deficits worse.'' PAYGO rules are designed to discourage Congress and 
the Administration from enacting legislation that would add new 
mandatory benefits or reduce revenues without taking other actions that 
would have equal and opposite effects on the deficit over a ten year 
period. Statutory PAYGO affecting both mandatory spending and taxes was 
in effect from 1991 through 2002, when the legislation lapsed and was 
not reenacted. Currently PAYGO is part of the House and Senate rules, 
but does not have the force of law.
    I believe that statutory PAYGO proved a highly effective deterrent 
to deficit-increasing legislation in the 1990's--at least until the 
surplus was achieved in 1998. The effects of PAYGO were not visible to 
the public or the press because they involved spending and taxing 
proposals that never saw the light of day. At the Office of Management 
(OMB) in President Clinton's first term my uncomfortable job was to 
tell the President and rest of the Administration that many of their 
most cherished ideas could not even be proposed because we could not 
find a way to off-set them under the PAYGO rules. Similar conversations 
took place in Congressional committees. Detractors of PAYGO, who point 
out that a serious sequestration has never been enforced, miss the 
point that sequestration is a deterrent, not a policy. It would be a 
more powerful deterrent if it could be waived only by enacting a law 
subject to veto. I believe sequestration would be an even more 
effective as a deterrent if there were fewer exceptions to its 
automatic cuts.
             the difficult problem of defining the baseline
    The most difficult decision in designing a strong PAYGO rule is 
answering the question, ``Don't make deficits worse compared to what?'' 
Should the baseline be strictly current law or a more realistic 
appraisal of what is likely to happen? In general, it is best to stick 
with current law, because it is the easiest rule to understand and 
explain. However, occasionally extending currently law is clearly not 
what most people expect to happen.
    President Obama's statutory PAYGO proposal recognizes that four 
specific provisions of existing law are so unrealistic that 
incorporating them in a current law baseline would make the PAYGO rule 
unworkable. The proposal recognizes that Medicare payments to 
physicians under Part B will not automatically be cut by 21 percent as 
the law requires; the estate and gift tax will not expire in 2010 and 
return to pre-2001 levels in 2011; that the current AMT patch will not 
be allowed to expire without replacement; and that all of the 2001 and 
2003 tax provisions will not all expire at the end of 2010. Critics of 
the Administration's proposal point out that allowing these adjustments 
to a current law baseline amounts to accepting the damage already done 
to future budgets that these bizarre legislative provisions were 
designed to hide. They argue that in making these exceptions Congress 
would be ducking the responsibility to face the consequences of its 
past lack of budgetary courage. I agree that these are four examples of 
legislative sleight of hand covering up future bad news. But the bad 
news must be dealt with head-on in a comprehensive policy process. 
Keeping these four legislative anomalies in the current law baseline 
for PAYGO purposes, would only guarantee that PAYGO would be 
immediately waived and its future usefulness seriously impaired.
                     moving beyond statutory paygo
    While I support the Administration's proposal for Statutory PAYGO, 
I regard it as a small first step on the arduous path that will move 
the budget to long run sustainability. We also need firm caps on 
discretionary spending. But the biggest threat to future budget 
solvency is not new legislation; it is the budgetary consequences of 
legislative decisions already made--both with respect to mandatory 
spending and the tax code.
    While the current annual budget process involves Herculean efforts 
to scrutinize discretionary spending, it leaves entitlement programs 
and revenues on automatic pilot outside the budget process. Fiscal 
responsibility requires that all long-term spending commitments be 
subject to periodic review along with taxes and tax expenditures. There 
is no compelling logic for applying caps and intense annual scrutiny to 
discretionary spending, while leaving huge spending commitments, such 
as Medicare or the home mortgage deduction entirely outside the budget 
process and not subject to review on a regular basis. Nor is there any 
good reason for subjecting new mandatory spending and revenue 
legislation to an elaborate PAYGO procedure while ignoring the budget 
implications of past legislation.
    I am a member of a bipartisan group called the Fiscal Seminar 
(sponsored by The Brookings Institution and the Heritage Foundation) 
that addressed this problem in a controversial paper entitled, Taking 
back our Fiscal Future, in 2008. We proposed that Congress enact long 
run budgets for the three biggest entitlement programs. These budgets 
would be reviewed every five years. Spending overruns would trigger 
automatic spending cuts or revenue increases that would take effect 
unless Congress acted. We recognized that we had proposed only a 
partial solution--the tax side of the budget should be included--and 
others may have better ideas. However, we clearly identified a glaring 
defect in the budget process that stands in the way of getting the 
federal budget on a sustainable long run track. We believe it is 
imperative for Congress to adopt a new budget process that includes ALL 
spending and revenue and subjects the budget impacts of long-term 
commitments to serious periodic review.
    Thank you, Mr. Chairman and members of the Committee.

    Chairman Spratt. Our witnesses are no strangers to us.
    Bob Greenstein is the founder and executive director of the 
Center on Budget and Policy Priorities. He provides testimony, 
expertise, and assistance to us on a wide range of budget 
policies; and we are fortunate to have you with us here today.
    Douglas Holt-Eakin, we know him well. He served as the 
sixth Director of CBO, worked with both President Bushes and 
with the McCain campaign. We are glad to have you with us as 
well.

  STATEMENTS OF DOUGLAS HOLTZ-EAKIN, PH.D., FORMER DIRECTOR, 
 CONGRESSIONAL BUDGET OFFICE AND ROBERT GREENSTEIN, EXECUTIVE 
        DIRECTOR, CENTER ON BUDGET AND POLICY PRIORITIES

    Chairman Spratt. Let us begin with you, Mr. Holtz-Eakin. 
You have submitted your testimony. We will make it part of the 
record and you may summarize it as you see fit.
    The floor is yours.

                STATEMENT OF DOUGLAS HOLTZ-EAKIN

    Mr. Holtz-Eakin. Thank you, Mr. Chairman, for the chance to 
be back at the House Budget Committee, one of my favorite 
places.
    Let me make just a few brief points which have--given the 
conversation thus far--won't be terribly original.
    Point number one is that this discussion begins with a 
budgetary outlook that is quite bleak. The President's budget, 
as priced by CBO, shows very large deficits which get only as 
low as 3.9 percent of GDP over the next 10 years. They are 
above that and rising towards the end of the budget window. The 
net effect of that is debt in the hands of the public as a 
fraction of GDP again doubles from 40 to 82 percent and is 
rising at the end of that window; and we find ourselves in the 
position on this trajectory that the United States is borrowing 
large amounts of money, two-thirds of which is used simply to 
pay the interest on debt.
    So this is a situation which, taken at face value, is 
alarming, to say the least. And, at least to my eye, it is an 
optimistic outlook, because there are many assumptions in the 
President's budget which I don't see as likely to come to pass; 
and they are in my written testimony. But the revenues from 
cap-and-trade auction of permits doesn't look to be likely to 
arrive on the schedule that is assumed in the budget; and some 
of the tax proposals may not materialize.
    The upshot of that is from a perspective of the actions 
that are presumed to be in there, everything is a risk toward 
even larger deficits, additional debt, and that poses to this 
Nation a very serious economic threat.
    So, in light of that, I welcome the notion that the 
administration is interested in statutory measures that would 
stop the decay in our fiscal situation and maybe even improve 
it, and I believe the legislation that they submitted for the 
Congress represents such a step, and it should be applauded for 
that. But it is, at best, a modest step in the right direction 
and for the reasons that have been noted earlier.
    This PAYGO proposal does not constitute a broad-based, 
comprehensive budget enforcement approach. Multi-year 
discretionary spending caps are not present, as everyone has 
noted; and the absence of a comprehensive approach does lead to 
the possibility of gaming the PAYGO proposals in a way that 
limits their effectiveness.
    For example, at least as I read the legislation, it does 
appear possible to create programs on the discretionary side, 
convert them to mandatory programs and evade this entirely. And 
that is troubling if one wants to limit the growth in spending 
which, in the end, is the ultimate threat to the Federal 
budget.
    So I think a stronger proposal would be one that was more 
comprehensive, did focus on spending and getting it under 
control and put us moving in the right direction.
    The second, as has been discussed extensively, is the 
notion that we would exclude these large policies, sustainable 
growth rate mechanisms, tax policy from 2001, 2003, from the 
PAYGO rules. And this does a couple of things.
    Number one, those will increase deficits. I mean, there is 
no way around it. There will be large, significant impact on 
the deficit by excluding them. So you can't pretend that you 
haven't incurred that.
    The second is it creates an unlevel playing field. Those 
policies are preferred under these rules to other policies, and 
it is not obvious to me why a Congress would adopt a set of 
rules that would prefer some policies over others. The idea 
should be that we have a level playing field, a policy debate, 
and an enforcement mechanism to make sure those policies don't 
damage the fiscal situation.
    That is one of the ways in which these proposals would 
actually change the balance between Congress and the 
administration. The administration's policies get preferential 
treatment. The administration does the scoring, as a matter of 
necessity, under this proposal; and the Congress should 
recognize that that is part of what goes on in these proposals.
    The other thing that jumps out is that they strike me as 
unnecessarily complex for what they accomplish. I think the 10-
year averaging, unlike the previous version of PAYGO that we 
saw, raises more problems than it solves. It would be entirely 
possible to squeeze the Medicare sustainable growth rate 
procedures right through this 10-year averaging. Every year, 
you could give the docs a big update, promise to cut it 37 
percent in the outyears. The 10-year average would be zero. You 
could repeat this charade year after year. So that doesn't 
strike me as improvement.
    That is a problem, and I would encourage you to revisit 
that in anything you pass through the Congress.
    And, in closing, I think it is important to recognize that 
rules such as PAYGO are no substitute for the genuine political 
will to solve the problem that we can see before us in any 
budgetary presentation. And it is unlikely, I think, that these 
rules will be in place for the legislation on health care 
reform that both Houses of Congress will contemplate this year 
and so that we will see in that discussion whether the Congress 
understands the gravity of the problem that faces us.
    The very best-case scenario is that legislation will not 
worsen an already bleak fiscal picture. That is the best thing 
that could happen. And I find that a troubling best-case 
scenario. The possibility that the Congress would choose to do 
less than the best and actually make this worse while 
ostensibly reforming the health care system is something I 
think we ought to keep our eye out for.
    I thank you for the chance to appear today, and I look 
forward to your questions.
    [The prepared statement of Douglas Holtz-Eakin follows:]

      Prepared Statement of Douglas Holtz-Eakin, Former Director, 
                      Congressional Budget Office

    Chairman Spratt, Ranking Member Ryan, and Members of the Committee, 
thank you for the opportunity to discuss the outlook for the U.S. 
federal budget and, in particular, the Administration's PAYGO 
proposals. I wish to make three primary points:
     The budgetary outlook for the federal government is bleak, 
the policy risks are that it will worsen, and a failure to address the 
deficits and rising debt are a danger to the Nation's economic outlook.
     The Administration's PAYGO proposals are a modest step, at 
best, toward this objective. Stronger budgetary controls would be more 
comprehensive in scope and focused on controlling federal spending.
     PAYGO procedures are not a substitute for the political 
will to undertake fiscally-responsible policy proposals. The health 
care reform debate will be a test of whether Congress and the 
Administration are serious about addressing the budgetary outlook.
    I discuss these in more detail below.
                           the budget outlook
    The federal budget outlook is bleak. As estimated by the 
Congressional Budget Office, under the President's Budget proposals, 
the federal deficits exceeds $600 billion every year from 2010 to 2019, 
falls only as low as 3.9 percent of Gross Domestic Product (GDP) in 
2013, and is rising both in absolute value and as a fraction of GDP 
toward the end of the budget window. As a result, debt in the hands of 
the public is estimated to be 82 percent of GDP in 2019--up from 41 
percent in 2008--and rising. In 2019, net interest costs are 
essentially $800 billion, over two-thirds of the overall deficit.
    The bottom line is clear: these policies place the U.S. on a path 
of dangerously large deficits, spiraling debt burdens, and borrowing 
dominated by the need to pay interest costs on previous borrowing.
    On balance, I think this is an optimistic assessment of the outlook 
as the budget has large political and economic risks. To begin, the 
expected climate auction revenues are unlikely to materialize. There 
has never been a climate bill that auctioned a significant fraction of 
the permits. There has never been a climate bill that passed the 
Senate. There has never been a climate bill that has been voted on the 
floor in the House. In short, there has to be an incredible shift in 
the history for this to happen in a timely enough fashion to get the 
anticipated revenues that exceed $600 billion. Evidence from the House 
debate further solidifies the assessment that the odds are that it 
won't happen and the deficit will be higher.
    In the same way, many of the Administration's tax hikes on 
individuals and businesses are politically difficult and economically 
undesirable. The business community has correctly pointed out the anti-
competitive impacts of moving away from the ability to defer taxes on 
foreign-source income. Higher marginal tax rates will impact productive 
Americans and small businesses. If the economy is not strong in 2011, 
will it be a good idea to hit it with a massive tax hike? In short, 
these revenue increases are risky.
    In contrast, the tax credits and spending that these revenues are 
planned to pay for are already on the books courtesy of the 
``stimulus'' bill. A reasonable reading of the outlook is that all the 
revenue will not show up, all the spending and transfers will not go 
away, and deficits will be even higher than CBO estimates.
    In addition, interest rates could easily exceed the projected 
levels, adding an economic risk to the policy risks. As debt continues 
to pile up, U.S. international creditors will impose unpleasant terms 
and a potentially-struggling economy will be further burdened.
                  the administration's paygo proposal
    In light of the budgetary outlook, it is encouraging that the 
Administration has put forward proposed statutory changes to impose 
PAYGO rules on the budget process. At the same time, the proposals are 
far from a comprehensive framework for budgetary enforcement, contain 
too many ``loopholes'', are needlessly complex, and ultimately are not 
likely to contribute significantly to improving the fiscal outlook.
    The first observation is that the PAYGO proposals fall short of a 
comprehensive framework for budget enforcement. In particular, they are 
not accompanied by complementary proposals for discretionary spending 
such as multi-year spending caps. In their absence, there will be an 
unavoidable temptation to migrate proposals to the appropriations 
process. The Administration's proposals do recognize this incentive and 
attempt to mitigate it. However, my reading of the language suggests it 
remains possible to start initiatives as discretionary programs, 
convert them to mandatory spending after several years, and avoid PAYGO 
constraints.
    A more comprehensive approach would be desirable. And any such 
budget enforcement initiative would be well-served to focus on the 
outlay side. As successive publications of the CBO's Long Term Budget 
Outlook have made clear, the long-run fiscal policy problem is a 
spending problem; it is not reasonable to expect to ``grow our way'' 
out of the problem or economically feasible to ``tax our way'' out of 
it. Setting in place comprehensive budgetary controls to limit spending 
growth should be the top enforcement priority.
    A second issue with the Administration's proposals is the 
exemptions for particular policies such as fixes to the Alternative 
Minimum Tax, updates to physicians' payments in Medicare baseline 
policies, extension of the tax policies enacted in 2001 and 2003, and 
(apparently) the resources to fund Fannie Mae and Freddie Mac. Spending 
is spending, tax cuts are tax cuts, and deficits are deficits. Any 
PAYGO should provide a level playing field among such initiatives and 
these proposals do not.
    In effect, the Administrations proposals tilt the playing field 
toward their preferred policies. In this regard, it is worth noting 
that the operation of the PAYGO procedures potentially raise the power 
of the Administration relative to Congress, as the Office of Management 
and Budget would have the only say over the scorekeeping related to 
operation of the proposals.
    In addition to the favored treatment of particular policy 
initiatives, the proposals exempt large amounts of spending from the 
potential for sequester. This has a two-fold effect on the operation of 
the enforcement. First, it becomes unlikely that a substantial 
sequester will be tolerated on such a narrow budgetary base, thereby 
undermining the very discipline that PAYGO is intended to introduce. 
Second, because the procedures will be most effective in negative 
``small'' violations, it begs the question as to whether these 
proposals represent a significant enough advance over the existing 
rules in both the House and Senate budget procedures.
    Finally, the procedures appear to be needlessly complex. In 
previous implementations of PAYGO, it was necessary to offset any 
deficit increases as they occurred in each budget year, or else face a 
sequester in that year. These proposals require the average deficit 
increase over the next 10 years to entered into the budget year and, 
thus, trigger a potential sequester. This appears to permit nothing to 
be offset up front. Why is this a better system, given that it is both 
more complicated and less stringent?
                           fiscal discipline
    Fiscal discipline will not take the form of new rules for the 
budget process. Instead, it must be a collective political effort. 
There is a lot of talk about the need for bipartisanship in Washington, 
and I think fiscal responsibility would be a good place to start. And 
there is no greater opportunity than in proposals to reform the health 
care system.
    Health care reform is one of the most important issues facing the 
United States is its underperforming health care sector. There are 
three major problems. First, it costs too much. For the past three 
decades health care spending per person has grown roughly 2 percentage 
points faster every year than income per capita. That is, in the horse 
race between costs and resources, costs have been winning. The result 
is that health care spending right now exceeds 17 cents of every 
national dollar--and will rise to 20 percent by the end of next decade. 
Within the federal budget, the rising cost of Medicare and Medicaid 
threatens a tsunami of red ink in the decades to come.
    Second, because health care is getting more expensive, the cost of 
health insurance is skyrocketing. Over the last decade, insurance costs 
have increased by 120 percent--three times the growth of inflation and 
four times the growth of wages. With higher costs has come reduce 
insurance coverage--more than 45 million are uninsured. It is important 
to solve the first problem--rising costs--before committing to large-
scale coverage expansions. Doing them in the wrong order will be 
prohibitively expensive, and likely cause the reform effort to unwind.
    Finally, both the health insurance and health care systems under-
perform. A job loss typically also means loss of health insurance. High 
spending has not yielded comparably high outcomes for infant mortality, 
longevity, or treatment of chronic disease.
    Health care reform can address these issues. However, it will not 
automatically be consistent with budgetary objectives. It seems likely 
that mandatory health care legislation addressing reform will be 
considered before any PAYGO legislation is put in place. One will not 
be able to count on its provisions to constrain the budgetary impact of 
health care reform. Instead, the Congress must make a commitment to 
impose this on the legislation.
    This suggests that the first principle should be to focus on the 
value provided by care. Any reform that does not address low-value care 
and cost growth will fail. Suppose, for example, that the ``reform'' 
consisted of a mandate to purchase insurance, thereby achieving 
``universal'' health insurance. In the absence of changes to the growth 
in health-care spending, this insurance would become increasingly 
expensive and ultimately force families to evade the mandate as a 
matter of economic necessity. At the same time, those dollars that were 
devoted to health care would purchase care that was of no greater 
overall effectiveness than at present. In short, the reform would fail 
to address the policy problems.
    Fiscal responsibility also suggests that it would be unwise to move 
immediately to universal coverage or other massive expansion. Reforms 
to the delivery system could generate system-wide savings that could be 
funneled to expanding coverage, and opportunities within government 
programs could generate savings as well. But it is implausible that 
these savings would be sufficient for an immediate, large-scale 
coverage expansion costing over $1 trillion. Instead, the fiscally-
responsible reform should be a process that leads to increasing 
insurance.
    I believe that a fiscally responsible and durable reform is more 
likely if it is genuinely bipartisan enterprise. Any other path will 
likely lead to even larger budget pressures; perhaps so large that it 
undercuts the momentum of health reform itself and opens the economy to 
the risk of higher interest rates and pressures from international 
capital markets.

    Chairman Spratt. Bob Greenstein.

                 STATEMENT OF ROBERT GREENSTEIN

    Mr. Greenstein. Mr. Chairman, Congressman Ryan, and members 
of the committee. I appreciate the opportunity to explain why I 
think pay-as-you-go discipline is very important and enactment 
of a statutory pay-as-you-go rule would be beneficial. I would 
like to make five points.
    First, as you know, the U.S. faces a serious long-term 
fiscal problem that we need to address. But without changes in 
policies we face the prospect of rapidly growing Federal 
deficits and debt over time that in the long run will pose a 
threat to the U.S. economy, to the standard of living of 
Americans, and to the ability of the government to meet the 
needs of its citizens.
    Second, I would note that this proposal represents a 
significant break from the past. The last administration pushed 
deficit financing of nearly all of its major initiatives, 
including the 2001 and 2003 tax cuts and the 2004 prescription 
drug legislation. In contrast with this proposal, the Obama 
administration is proposing to bar deficit financing for its 
own top initiatives like health care reform, even though that 
may make the initiatives harder to push through Congress. 
Proponents of fiscal responsibility should applaud that 
commitment.
    Third, while a well-designed pay-as-you-go rule can make a 
real contribution to fiscal discipline, it will have little 
effect if there is no real commitment on the part of Congress 
to abide by it. That is why we think criticism of the 
President's proposal to exempt the cost of extending certain 
specified policies that are scheduled to expire is misguided.
    To be sure, it would be highly desirable to pay for any 
extensions of expiring current policies. But it has become 
quite clear that there is no chance the tax cuts enacted in 
2001 and 2003 that benefits the middle-class provisions enacted 
to limit the scope of the estate tax, relief to prevent the 
alternative minimum tax from hitting tens of millions of 
middle-class families and the deferral of a requirement to cut 
Medicare physician payments by 21 percent, there is no chance 
that they will be allowed to expire or be paid for.
    Doesn't make any sense to put in place a pay-as-you-go rule 
that says these extensions must be paid for when everyone knows 
that they won't be. Rather than making a phony promise that 
will inevitably lead to a series of waivers of the pay-as-you-
go statute, waivers that would undermine support for the rule 
itself and open the door to wholesale waivers for other costly 
new policies, rather than doing that, it is better to 
acknowledge up front that these specified extensions of current 
law will not be subject to the rule and insist that the rule be 
strictly applied to any other legislation that is not paid for. 
As a result, I believe these exceptions actually strengthen the 
fiscal discipline aspects of the rule.
    And I would note that this aspect of the proposal parallels 
the treatment in this year's budget resolution with respect to 
House enforcement of its own pay-as-you-go rule.
    Fourth, I would note that the pay-as-you-go rule proved 
very successful in the 1990s, an experience that demonstrates 
the vacuity of claims that pay-as-you-go is some gimmick with 
no real effect.
    For a good part of the 1990s, Congress and the President 
paid for virtually all increases and mandatory programs and tax 
cuts, including even paying for the extension of the measures 
known as the tax extenders. Pay-as-you-go contributed to 
achieving the first Federal budget surpluses in 30 years.
    Fifth and finally, having made the first four points, I do 
want to emphasize that abiding by the pay-as-you-go rule will 
certainly not be sufficient by itself to address the Nation's 
long-term fiscal problems. Budget rules such as PAYGO can be 
important. The actual policy decisions, including those made in 
coming months on issues like health care, will be even more 
important in demonstrating a real commitment to begin dealing 
with the problem.
    The decisions that will be made on health care reform are 
crucial. I believe it is essential for Congress and the 
President to demonstrate a commitment to the PAYGO principle by 
fully paying for the cost of health care reform over the next 
10 years, and it is also crucial that health care reform be 
designed to produce changes in our health system that begin the 
steps of the slowing of the growth of health care costs 
systemwide, both the public and private sectors, without which 
we will never be able to assure sustainability of the Federal 
budget.
    Let me close by saying that a failure to deal with the 
long-term fiscal problem will have deleterious consequences. 
Eventually, the run-up in debt would harm the economy and the 
standard of living of Americans. It is also possible that even 
before the debt rises to such levels failures to address the 
problem would leave credit markets around the world to decide 
that continuing to lend large amounts to the U.S. to finance 
its deficits isn't desirable, pushing up interest rates and 
potentially triggering a financial crisis that could cost 
millions of U.S. jobs.
    It is also clear that spiraling deficits and efforts to 
deal with them in a crisis atmosphere could threaten crucial 
Federal programs that provide assistance to the Nation's most 
vulnerable citizens as well as to veterans, students seeking a 
college education, and many others. I need only cite what is 
going on in the crisis atmosphere in the State of California 
right now as an example. In that circumstance, rather than 
being addressed, vital unmet needs would grow.
    The bottom line is that virtually no one in this country 
would go unharmed if we simply keep kicking the can down the 
road and putting off for years to come beginning to address the 
long-term fiscal problem.
    Thank you.
    [The prepared statement of Robert Greenstein follows:]

Prepared Statement of Robert Greenstein, Executive Director, Center on 
                      Budget and Policy Priorities

    Mr. Chairman, Congressman Ryan, and members of the Committee, I 
appreciate the opportunity to appear here today to explain why I think 
pay-as-you-go discipline is important, why enactment of a statutory 
pay-as-you-go rule to reinforce Congressional rules can be beneficial, 
and why enactment of a statutory pay-as-you-go rule is not itself 
sufficient to achieve fiscal sustainability.
    To explain my view of the benefits and limits of a pay-as-you-go 
rule, I would like to make three points:
     The United States faces a serious long-term fiscal problem 
that must be addressed. The current high deficits levels are 
unfortunate, although it would not be sensible to try to reduce them 
while the economy remains weak. Deficits are then expected to decline 
over the next few years as the economy improves. But without changes in 
current policies, we face the prospect of rapidly growing federal 
deficits and debt over time that will pose a significant threat to the 
U.S. economy, to the standard of living of all Americans, and to the 
ability of the government to meet the needs of its citizens.
     A well-designed pay-as-you-go rule can make a real 
contribution to the fiscal discipline needed to address the long-term 
fiscal problem, if there is a real commitment to abiding by the 
principle that any new tax cuts or mandatory program increases must be 
paid for. Putting the pay-as-you-go rule in statute does not guarantee 
that Congress and the President will comply with the rule. Just as is 
the case with House and Senate rules, a statutory PAYGO rule can be 
waived if there is sufficient support in the Congress for tax cuts or 
entitlement increases that are not paid for and the President does not 
veto legislation that violates the rule. But a statutory pay-as-you-go 
rule can increase the likelihood the pay-as-you-go principle will be 
followed. Some lawmakers may be more hesitant to support a waiver of a 
statutory rule they have supported. In addition, it would be harder for 
a future Congress to simply eliminate a rule that has been written into 
statute. Finally, the process of enacting such a rule may help create 
and demonstrate commitment to the principle behind the rule.
    As noted, the statutory rule will have little effect if there is no 
real commitment to living by it. That is why we think criticism of the 
President's proposal to exempt the cost of extending specified current 
policies that are scheduled to expire under current law is misguided. 
To be sure, the Center on Budget and Policy Priorities believes that in 
light of the long-term fiscal problem we face, it would be highly 
desirable to pay for any extensions of expiring current policies. But, 
it has become absolutely clear that there is no chance that tax cuts 
enacted in 2001 and 2003 that benefit the middle class, provisions 
enacted in 2001 that limit the scope of the estate tax, relief to 
prevent the alternative minimum tax from hitting tens of millions of 
middle-class families, and the deferral of the requirement to cut 
Medicare physician reimbursement payments by 21 percent starting next 
January (which could cause a major exodus of physicians from the 
Medicare program) will either be allowed to expire or be paid for. It 
makes no sense to put in place a pay-as-you-go rule that says these 
extensions must be paid for when everyone knows they will not be. 
Rather than making a phony promise that will lead inevitably to a 
series of waivers of the pay-as-you-go statute--waivers that will 
undermine support for the rule itself and open the door to waivers for 
other costly policies--it is appropriate to acknowledge up front that 
these specified extensions of current policy will not be subject to the 
rule and to insist that the rule be strictly applied to any other 
legislation that is not paid for. I should note that this is exactly 
the approach followed in this year's budget resolution with respect to 
House enforcement of its pay-as-you-go rule,.
     Abiding by the pay-as-you-go principle will not itself be 
sufficient to deal with the long-term fiscal problem. To put the budget 
on a sustainable basis it will be necessary to increase revenues above 
the level produced under current policies (and under President Obama's 
budget proposals) and to reduce the growth of spending--especially 
health care spending--below what is currently anticipated.
    Before exploring these points in more detail, I would like to make 
a plea. While budget rules, such as the pay-as-you-go rule, can be 
important, actual policy decisions that will be made in the next few 
months will be far more important in demonstrating a real commitment to 
begin dealing with the long-term fiscal problem. In particular, the 
decisions that are made about health reform will be crucial. Whether a 
statutory pay-as-you-go rule is enacted or not, it is essential for the 
Congress and the President to demonstrate a commitment to the pay-as-
you-go principle by fully paying for the cost of health care reform 
over the next 10 years. That will require some painful steps, such as 
adopting politically unpopular changes both in tax laws and in payments 
to health care providers. But if Congress and the President do not 
demonstrate that they are willing to take such steps to keep from 
making an already unsustainable fiscal situation worse, the enactment 
of a statutory pay-as-you-go rule will ring hollow and will not 
persuade anyone (including financial markets) that policymakers are 
willing to deal in a real way with the problems we face. In addition, 
it is absolutely crucial that the health reform that is enacted 
produces changes in our health system that begin taking the steps 
necessary to slow the growth of health care costs systemwide (i.e., in 
both the public and private sectors). We will never be able to ensure 
sustainability of the federal budget--or the health of the economy--
unless we bring down the growth rate of those costs.
                        long-term fiscal problem
    Projecting federal spending and revenues for coming years, much 
less for coming decades, is an inexact science and subject to great 
uncertainty. Nevertheless, there is virtual consensus among budget 
analysts that current fiscal policies are not sustainable. (Economists 
generally define a sustainable fiscal path as one in which debt held by 
the public does not steadily increase as a share of the nation's gross 
domestic product.). While the precise estimates have differed according 
to the specific assumptions made, the Congressional Budget Office, the 
Government Accountability Office, the Office of Management and Budget 
in both Republican and Democratic administrations, and the Center on 
Budget and Policy Priorities have all conducted analyses which find 
that, unless current policies are changed, federal deficits and the 
debt held by the public will grow steadily in coming decades, relative 
to the size of the economy, and reach levels far in excess of those 
previously experienced in the United States or that are safe for the 
economy.\1\
---------------------------------------------------------------------------
    \1\ See ``The Long-Term Fiscal Outlook is Bleak: Restoring Fiscal 
Sustainability Will Require Major Changes to Programs, Revenues, and 
Nation's Health Care System,'' Richard Kogan, Kris Cox, and James 
Horney, Center on Budget and Policy Priorities, December 16, 2008; 
``The Long-Term Budget Outlook,'' Congressional Budget Office, December 
2007; ``The Nation's Long-Term Fiscal Outlook: March 2009 Update,'' 
United States Government Accountability Office, March 2009; ``Part 
III--The Long-Run Budget Outlook,'' in Chapter 13 of the ``Analytical 
Perspectives'' volume of the Budget of the U.S. Government: Fiscal Year 
2010 and the Budget of the U.S. Government: Fiscal Year 2009.
---------------------------------------------------------------------------
    For example, in the Center's most recent study of the long-term 
fiscal problem, published last December, we projected that if current 
policies remain unchanged--assuming for example, that the middle-class 
tax cuts enacted in 2001 and 2003 are extended beyond 2010 and AMT 
relief is continued--deficits will grow to levels far in excess of this 
year's unusually large deficit (likely to total 13 percent of GDP), 
which is swollen by the deepest recession since World War II. We 
project that by 2050, the deficit will total 21 percent of GDP with the 
economy operating at full capacity. Moreover, by that year, the federal 
debt held by the public would total 280 percent of GDP, far in excess 
of the record-high 109 percent of GDP reached at the end of World War 
II.\2\ The increase in deficits relative to the size of the economy 
under current policies is driven by a decline in revenues as a share of 
GDP (to 17.2 percent of GDP by 2050) and a big increase in the cost of 
Medicare, Medicaid, and Social Security (from 8.5 percent of GDP last 
year to 18.9 percent in 2050). (It's worth noting that other programs 
do not contribute to the growth in deficits as a share of GDP. All 
mandatory programs other than Social Security, Medicare, and Medicaid 
are projected to shrink relative to GDP both over the next 10 years and 
in the decades that follow. In addition, both defense and non-defense 
discretionary spending have generally fallen as a share of GDP over the 
last 25 years and are projected to continue to do so.)
---------------------------------------------------------------------------
    \2\ Because these projections were made last December, they do not 
take into account the full effects of the economic downturn that are 
apparent now or the cost of the American Recovery and Reinvestment Act 
(ARRA) enacted this year to help stimulate the economy. Because these 
effects are temporary, however, they have a much smaller effect on the 
long-term fiscal problem than many people assume. For instance, the 
Center on Budget has estimated that roughly $800 billion in stimulus 
costs would increase the size of the long-term problem by only 3 
percent. See, ``Economic Recovery Bill Would Add Little to Long-Run 
Fiscal Problem,'' Kris Cox and Paul N. Van de Water, Center on Budget 
and Policy Priorities, January 16, 2009.
---------------------------------------------------------------------------
    The increase in the cost of the ``big three'' programs--Medicare, 
Medicaid, and Social Security--is partly due to demographic changes; 
with the aging of the baby-boom population, an increasing share of the 
population will be elderly. But the growth of Medicare and Medicaid is 
much greater than the growth of Social Security, and the primary reason 
for the growth in those two programs is the growing cost of providing 
health care per person. (CBO has estimated that more than three-
quarters of the projected growth of Medicare and Medicaid through 2050 
is due to rising per person health care costs.) It is important to note 
that the anticipated rising per-person cost of providing health care 
through Medicare and Medicaid reflects the anticipated cost of 
providing care system wide. Medicare and Medicaid costs per person have 
essentially followed the path of system-wide costs--private as well as 
public--for more than 30 years and are expected to do so in the future 
under current policies.
    It also may be noted that since entitlements other than the ``big 
three'' are actually declining as a share of GDP and are projected to 
continue doing so for as far as the eye can see, we do not face a 
general entitlement problem. The causes of our long-term fiscal problem 
are, essentially, rapidly-rising health care costs systemwide, an aging 
population, and an inadequate revenue base.
    Other projections differ somewhat from ours--some have higher 
deficits and debt, some have lower. But virtually all agree that 
deficits and debt will grow to levels that will pose a real threat to 
the economic health of the United States and the well-being of its 
citizens. It is clear that this long-term problem must be addressed.
                       pay-as-you-go in the 1990s
    A pay-as-you-go rule was first established in the Budget 
Enforcement Act (BEA), which was part of the 1990 deficit reduction 
agreement negotiated by President George H.W. Bush and Congressional 
Democrats and Republicans. It is important to remember that the 
enforcement procedures were a secondary part of that deal--the most 
important part of the deal was a package of specific changes in law 
that increased revenues and cut mandatory program spending. Those 
legislative changes, along with an enforceable agreement to limit 
future discretionary appropriations, reduced deficits by an estimated 
$500 billion below the levels projected under then-current policies 
over five years.
    The pay-as-you-go rule was intended to lock in the savings achieved 
through the tax increases and mandatory cuts by requiring that any 
subsequent legislation that undid any of those tax or spending 
provisions, or otherwise cut taxes or increased mandatory spending, had 
to be paid for with offsetting tax increases or budget cuts. (The BEA 
also established statutory caps on discretionary appropriations to 
enforce the agreement to limit that spending.) Specifically, the pay-
as-you-go rule required the Office of Management and Budget to 
determine at the end of a session of Congress whether all of the tax 
and mandatory spending legislation (other than legislation designated 
as emergency legislation) enacted during that session had the net 
effect of increasing the deficit in the current fiscal year (and the 
fiscal year most recently ended if the legislation had any effect in 
that year). If OMB estimated that the deficit had been increased, the 
BEA required implementation of automatic cuts--called sequestration--in 
spending for mandatory programs that were not specifically exempt 
(generally, exempt programs were programs meeting the needs of low-
income Americans, Social Security, and programs in which the government 
has a contractual requirement to make payments, such as interest on the 
federal debt). The Senate also adopted a pay-as-you-go rule aimed at 
prohibiting consideration of tax and entitlement legislation that would 
increase the deficit.
    The pay-as-you-go approach proved very successful in the 1990s (an 
experience that demonstrates the vacuity of claims that pay-as-you-go 
is a gimmick with no real effect). Congress and the President paid for 
any increases in mandatory programs and any tax cuts, including the 
extension of expiring measures such as ``tax extenders.'' \3\ Along 
with the effects of the deficit reduction packages enacted in 1990 and 
1993 and a vibrant economy (which was likely helped by the federal 
government's commitment to fiscal discipline), the pay-as-you-go rule 
helped achieve the first federal budget surpluses in 30 years. At the 
end of that decade, however, the broad consensus on the importance of 
abiding by the pay-as-you-go rule broke down in the face of federal 
budget surpluses, and Congress and the President began enacting waivers 
that allowed spending increases and tax cuts without offsets. In 2001, 
in particular, large tax cuts were enacted that were not paid for. The 
statutory pay-as-you-go rule then was allowed to expire at the end of 
2002. A Senate pay-as-you-go rule remained in effect, but was modified 
in a way that allowed consideration of legislation that increased the 
deficit so long as the deficit increase had been assumed in the budget 
resolution, which made the rule rather ineffectual.
---------------------------------------------------------------------------
    \3\ During the 1990s, every mandatory increase and tax cut was paid 
for except for one emergency spending measure. In the face of lingering 
high unemployment 1993, a final six-month extension of extended 
unemployment benefits enacted in the 1990-1991 recession was declared 
an emergency by both the Congress and the President and for that reason 
was not subject to the pay-as-you-go statute.
---------------------------------------------------------------------------
                           pay-as-you-go now
    At the beginning of the 110th Congress, the House adopted a new 
pay-as-you-go rule to limit House consideration of tax and entitlement 
legislation that would increase the deficit, and the Senate reinstated 
a version of the pay-as-you-go rule that had been in effect in the 
Senate in the 1990s. These rules have had significant effect in 
deterring enactment of new tax and entitlement policies that would 
increase the deficit.\4\ Those who doubt this deterrent effect have not 
been involved in the numerous difficult discussions that have occurred 
with lawmakers and their staffs over how to pay for proposed increases 
in entitlement benefits or tax cuts and have not seriously considered 
what would have happened in the absence of the rules.
---------------------------------------------------------------------------
    \4\ See ``The House Has Complied This Year with Its New `Pay-as-
you-go' Rule: But Greater Challenges Lie Ahead,'' Richard Kogan and 
James Horney, Center on Budget and Policy Priorities, November 7, 2007.
---------------------------------------------------------------------------
    There have been exceptions to the rule, however. The House and 
Senate enacted substantial tax cuts and entitlement increases as part 
of legislation aimed at stimulating the sagging economy and shoring up 
the nation's financial system without offsetting the costs of those 
provisions. This was entirely appropriate. The original statutory pay-
as-you-go rule, the current House and Senate rules, and the President's 
proposed statutory rule all provide exceptions for emergency 
legislation. Legislation needed to deal with a near meltdown of the 
financial system and the worst economic downturn since the Great 
Depression certainly qualifies as emergency legislation. Not only would 
abiding by a requirement to find offsets for these efforts have greatly 
complicated and delayed enactment of this crucial legislation, placing 
the economy and financial markets at risk, but it also would have 
undermined the goal of stimulating the economy during a recession. With 
severely lagging consumer purchases, business cutbacks in employment 
and investment, state and local government reductions in employment and 
purchases of goods and services, and short-term interest rates near 
zero, a deficit-financed increase in federal spending (for direct 
purchases of goods and services, transfers to individuals who would 
increase their purchases, and relief for state and local governments to 
reduce the cutbacks they are making) and a reduction in federal taxes 
were the best, if not only, hope of boosting aggregate demand, braking 
the spiral of cutbacks and layoffs, and keeping an already dire 
situation from reaching tragic proportions. If the stimulus legislation 
had raised other taxes or cut other spending to offset the cost of the 
tax cuts and increased spending provided in the legislation, there 
would have been no net increase in the aggregate demand for goods and 
services and no boost to the economy. Any sensible pay-as-you-go rule 
should allow for an emergency exception for circumstances such as those 
we have recently faced.
    The other notable exceptions cannot be defended on such policy 
grounds, but they illustrate the political reality that any statutory 
pay-as-you-go rule needs to take into account. Congress--particularly 
the Senate--has demonstrated an unwillingness to offset the cost of 
extending several current policies such as relief from the alternative 
minimum tax and the deferral of the large reductions in Medicare 
physician reimbursements required under the so-call sustainable growth 
rate (SGR) rules. The budget resolution adopted this year also makes 
clear that the cost of extending the expiring reductions in middle-
class taxes and the estate tax enacted in 2001 and 2003 will not be 
offset. Given the long-term fiscal problem the nation is facing, and 
the inevitable need for higher revenues and slower spending in coming 
decades, I believe it is unwise to extend any expiring tax cuts or 
relief from required reductions in spending without offsetting the cost 
of those extensions, and I wish that enactment of a pay-as-you-go rule 
would ensure that they would be paid for. But, it is clear that the 
majority of lawmakers do not believe these extensions should be paid 
for and that, regardless of whether a statutory pay-as-you-go rule is 
enacted that applies to those extensions, Congress will not let those 
provisions expire or offset the cost of extending them.
    Given that basic political reality, it is appropriate that the pay-
as-you go rule make an exception for the cost of extending the 
specified policies. That is what the President's proposal would do, and 
what the language in this year's budget resolution that governs 
application of the House pay-as-you-go rule did.
    I believe these exceptions strengthen the rule. If there are no 
such exceptions, there is no doubt that Congress will vote to waive the 
application of pay-as-you-go when legislation extending those policies 
is considered. I fear that those waivers will undercut support for the 
pay-as-you-go rule itself--that having voted to waive the rule a number 
of times for these extensions, Congress is more likely to vote to waive 
the rule for other tax cuts or entitlement increases. For example, it 
is absolutely clear that Congress will not let the estate tax exemption 
level and tax rates revert to the levels set in law prior to 2001. It 
also is clear that Congress will not pay for the cost of extending the 
estate-tax exemption and tax rate at the levels currently in effect 
and, unfortunately, that there is considerable support in the Senate 
for further increasing the exemption level and further reducing the tax 
rate without paying for the billions of dollars of additional revenue 
losses that would generate. If the pay-as-you-go rule is designed so 
that it applies even to the cost of extending the current estate-tax 
parameters, then the rule will unquestionably be waived. And if the 
Senate Finance Committee already must secure a waiver just to bring 
legislation to the Senate floor that simply extends current estate-tax 
policies, no additional waiver will be needed for a Finance Committee 
bill that goes considerably beyond that and further increases the 
exemption amount and reduces the tax rate without offsetting the cost.
    To be sure, it is not certain that it will be possible to hold the 
line at extension of the current estate-tax policies in any case (or to 
pay for any costs of further weakening the estate tax). But there will 
be a much greater chance of doing so if the line in the sand is clearly 
drawn at extending current policies. The principle should be clear--if 
Congress extends current policies there will be no need to waive pay-
as-you-go, but any attempt to go beyond extension of current policies 
without offsetting the cost--i.e., to engage in new deficit financing--
will require a vote to waive the PAYGO rule that lawmakers have pledged 
to support.
    A number of critics of the President's proposal to except the cost 
of extensions of current policies from the pay-as-you-go rule have made 
their point by analogy, comparing the proposal, for instance, to a 
promise to abide by a diet that excludes chocolate cake or other highly 
caloric desserts from dietary restrictions. Such analogies are clever, 
but inaccurate; they miss the mark. A more apt analogy is with a 
promise to limit caloric intake in order to lose weight. If a person 
promises to eat nothing for 30 days, the promise is meaningless and 
clearly will not help achieve the desired outcome. The person will 
violate the promise every day, and after the person takes the first 
bite each day there is no useful yardstick to encourage the dieter to 
stop eating before he or she is satiated. If, however, the person sets 
a daily caloric intake at a reasonable level, the pledge might actually 
help the dieter stop overeating. It is true that the promised diet 
would be meaningless if the caloric intake is set at such a high level 
that the dieter can eat virtually anything he or she would like without 
exceeding the limit. But anyone who thinks the Congressional appetite 
for tax cuts and entitlement increases would be satisfied once Congress 
extends the expiring policies has not been paying attention. Drawing a 
line at extending current policies thus should help significantly in 
promoting fiscal responsibility.
    It is important to be clear that simply putting the pay-as-you-go 
rule in statutory form and enforcing it with an automatic sequestration 
does not by itself substantially increase the effectiveness of the rule 
beyond what the House and Senate rules have already accomplished. The 
House rule can be waived if the Rules Committee recommends such a 
waiver and a majority of the House then votes for the resolution (or 
``rule'') the Rules Committee has reported. The Senate rule can be 
waived with a \3/5\ vote of the Senate. It is true that in order to 
waive a statutory pay-as-you-go requirement, Congress would have to 
include a specific waiver in legislation and that the President could 
veto the legislation containing the waiver if he objects to the 
violation of the pay-as-you-go rule. But the President already can veto 
any legislation that violates the pay-as-you-go principle if he objects 
to the violation.
    Nonetheless, I believe that enacting a statutory pay-as-you-go rule 
to reinforce the current House and Senate rules would be useful. It 
seems likely that at least some lawmakers would be more reluctant to 
support an effort to override a statutory pay-as-you-go requirement 
than to vote for a waiver of House and Senate rules. It also would be 
more difficult for a new Congress to simply eliminate a statutory rule. 
Finally, the very process of enacting a statutory pay-as-you-go rule 
could help build support for and commitment to the pay-as-you-go 
principle. And that commitment is the key to success of any pay-as-you-
go rule. Just as no diet will succeed in getting a person to eat less 
if he or she is not committed to losing weight, no budget process rule 
can force Congress and the President to forgo deficit-increasing 
legislation if they are not committed to bringing deficits under 
control. And, just as a sensible and realistic diet can help a 
committed individual lose weight, so can a sensible and realistic pay-
as-you-go rule help Congress and President adhere to a commitment to 
stop digging the deficit hole deeper.
                    pay-as-you-go is not sufficient
    Abiding by the pay-as-you-go principle and avoiding making the 
long-term fiscal problem worse than it is under current policies is not 
enough to put the federal budget on a sustainable path. This is not to 
underestimate the importance of this first step, both in symbolic and 
substantive terms. As a symbol, it is particularly important because it 
will demonstrate a clear break with the approach taken in the first 
years of this decade when Congress and the President enacted large tax 
cuts and new entitlement benefits (particularly a new Medicare 
prescription drug benefit) without offsets and substantially increased 
both short- and long-term deficits. In substantive terms, it is 
important because major changes in policies, such as health care 
reform, that are not paid for would add significantly to the long-term 
problem.
    Of course, merely avoiding making the fiscal problem worse will not 
avoid the inevitable day of reckoning for the federal budget. As I 
noted earlier, without changes in current policies, deficits are 
projected to rise to and remain at unsustainable levels.
    Congress and the President will have to take further steps to 
increase revenues above the level produced under current policies or 
under the policies proposed by President Obama and, similarly, to 
reduce spending below the levels produced under current policies or 
those the President has proposed. Such steps will not be easy, but they 
are necessary. Ideally, there will be a time in the near future when it 
is possible for the President and Democratic and Republican 
Congressional leaders to work together to develop a broad and balanced 
package of revenue increases and spending reductions that will 
significantly shrink projected deficits, as occurred in 1990 when 
President George H.W. Bush negotiated a deficit reduction package with 
the Congress. In the meantime, it is critical to abide by the pay-as-
you-go principle--and to do so in designing a health reform package 
that is both paid for and contains elements that will facilitate the 
long-term reduction in the growth of health-care costs.
    A failure to deal with the long-term fiscal problem would have very 
deleterious consequences. Eventually, the run-up in debt would 
seriously harm the U.S. economy and the standard of living of 
Americans. It is also possible that even before the debt rises to such 
levels, the failure to address the problem would lead credit markets 
around the world to decide that continuing to lend large amounts to the 
United States to finance its deficits is not desirable, pushing up 
interest rates and potentially triggering a world-wide financial 
crisis. It is also clear that spiraling deficits, and any effort to 
deal with them in a crisis atmosphere, could threaten crucial federal 
programs that provide assistance to the nation's most vulnerable 
citizens as well as to veterans, students seeking a college education, 
and many others. Rather than being addressed, vital unmet needs would 
grow. Virtually no one in this country will go unharmed if we do not 
begin to address the long-term fiscal problem in a thoughtful, 
responsible manner.

    Chairman Spratt. Just to the two of you, let me put a few 
basic questions.
    Do you both agree that process plays a significant part in 
our efforts to get our hands around this problem and in fact 
did have a significant role to play in our successes in the 
1990s?
    Mr. Greenstein. I agree with that. I sometimes think the 
role of process gets overstated. It is critical, it is 
necessary, but it is far from sufficient. Nothing substitutes 
for actually making the hard choices themselves. I think that--
--
    Let me make a distinction. I think process can be very 
useful as in the pay-as-you-go rules of the 1990s in averting 
policy decisions that make the problem worse. I don't think 
process does that much in actually starting to fill the hole 
itself. For that, we just need policymakers of both parties to 
start making the tough choices. However, keeping the hole from 
getting deeper is very important; and process can be very 
important in helping to accomplish that.
    Chairman Spratt. Mr. Holtz-Eakin.
    Mr. Holtz-Eakin. Process certainly matters, but I guess I 
am going to agree with Bob in that I think it is most useful in 
cementing policy choices that the Congress has made.
    If you can decide which direction you want to head, as in 
the 1990s, you can use PAYGO budget enforcement and the budget 
process measures to make sure you don't get off that path. The 
concern I have about this particular set of proposals is that 
it takes the proposals the administration has chosen and says, 
let us stay on that path, but their budgetary path is a path to 
disaster.
    So I think make some big choices, get us on the right path, 
and then process the support that that policy decision is a 
good one.
    Chairman Spratt. Mr. Greenstein, Dr. Holtz-Eakin was 
critical of the 10-year averaging that is built into this 
particular proposal. Do you think that is a wise, useful 
proposal?
    Mr. Greenstein. I have mixed feelings about it.
    On the one hand, let's take an issue like health care. I 
certainly think that we need the 10-year averaging approach for 
health care. We know that measures to slow the rate of growth 
of health care costs take time. They gradually phase in over 
time. It would be too great a constriction not to allow that.
    On the other hand, I share a concern that you could have in 
other circumstances a temptation to put all your deficit 
reduction in some huge effect in the 9th or 10th year, and then 
it is so big you can't let it take effect.
    So I am not positive where I come--I think this needs some 
further thought in looking at this before you actually move the 
bill. One possibility might be, unless you think this is too 
complex, to put in such a 10-year averaging rule for health 
care reform--I think the circumstances strongly warrant it 
there--but maybe not apply it across the board to everything, 
as the administration's proposal would do.
    Chairman Spratt. Doug?
    Mr. Holtz-Eakin. I still think that, on balance, it creates 
more problems than it solves. You know, we have experience with 
PAYGO rules from the 1990s that were much simpler. They 
supported, effectively, deficit reduction that had been agreed 
upon in a bipartisan way. I think that is a good model.
    There is an eloquent argument to exempt health care. I do 
not underestimate the capacity of people to come up with 
eloquent arguments to exempt every policy that they prefer. So 
I would pick a simple set of rules. And the 10-year averaging 
just looks to be too big a hole to drive things through, and 
particularly in these circumstances where the last thing you 
want to do is hide things in the out-years. It is the worst 
thing in this moment.
    Chairman Spratt. A lot of the things we are dealing with 
have a lot longer time horizon than 5 years. Do you think it is 
unreasonable to have a 5-year life on this particular proposal? 
Or should we put it in there, in a sense, in a tentative way to 
test whether or not it is useful?
    Mr. Greenstein. I think that is a good question. A minimum 
of 5--I think there is a balance. I am not sure I would pass 
it, and I don't know if it would cost you votes in passing it 
to try to make it permanent.
    I think there is a question as to whether to have a 5-year 
life or whether to have a 10-year life, but definitely no less 
than 5 years.
    Now, an argument for the 5 years might be that there is 
some value in getting congressional leaders periodically to 
reaffirm their commitment to it. You could look at what 
happened in the late 1990s when, even though we still had PAYGO 
on the books, we kind of walked away from it.
    On the other hand, you could argue that is a bit of a 
special circumstance. Budget surpluses were reappearing, and 
people began to take PAYGO less seriously.
    So I haven't really thought through whether it should be 5 
years or 10. I might have a slight inclination for 10 years 
over 5, though.
    Chairman Spratt. Doug?
    Mr. Holtz-Eakin. I don't think it is obvious, but I think 
that if you go for something that looks like 4 or 5 years, that 
is a sensible horizon. I don't think stretching it out to 10 
would buy you any additional discipline in the process. And if 
it looks like it is not working effectively after 2 or 3 years, 
it is going to be changed anyway. So I think if you, you know, 
pick 5 years and get started on the process, that would be 
good.
    Chairman Spratt. Bob Greenstein, Dr. Holtz-Eakin was 
critical of--as I understood your testimony--the tax measures 
giving preferred status to the current policy tax measures that 
were adopted in 2001 and 2003 and the AMT and the sustainable 
growth rate.
    What the OMB has done here really is recognized a political 
reality and said it is not realistically likely that these will 
not be renewed, and so let's simply assume they will be for 
purposes of this particular rule. Do you see fault in that?
    Mr. Greenstein. No. As I said in my testimony, I think that 
strengthens the rule, because going the other route would 
simply lead the rule to be, right out of the box, all sorts of 
big waivers. And then we would create an atmosphere in which 
the routine thing to do was to waive PAYGO.
    The only thing I would note there, if we are talking 
political reality, I would note that--and I think this is the 
right thing to do--the administration proposed that, with 
regard to the estate tax, the line be drawn at the 2009, 
today's current policy. There is a question for you, with 
regard to the 2001 and 2003 tax cuts, whether you want to draw 
the pay-as-you-go line at the continuation of the full tax cuts 
or whether you wanted to take the two top rates, the upper-
income provisions, and draw the line there, which would have 
some parallel to the proposal with regard to the estate tax.
    I would note something important in the administration's 
proposal. If you go the route it proposed, which is to say that 
extending the full 2001 and 2003 tax cuts is exempt from PAYGO, 
then it is critical to maintain the provision that they 
included, under which if you don't extend the full tax cuts, if 
you roll back the tax cuts at the top, you do not get to spend 
the savings for something else. That is very important to 
maintain in the bill.
    You can either maintain it as is or what I think might be 
even better, just draw the pay-as-you-go line to put 
continuation of the top two rates and a few of the other upper-
income provisions on the other side--in other words, apply 
PAYGO to them.
    Chairman Spratt. Doug, your response to that?
    Mr. Holtz-Eakin. I understand the political reality point, 
and there is something to that. And, in the end, it is a 
judgment about how to take this step to, sort of, get more 
discipline in the process.
    You know, I will just make a couple of observations about 
it.
    Number one, in the House rules and in the Senate, there has 
been a waiver for small items, as well. It is not obvious that 
just the size of the policy drives the desire to waive PAYGO 
rules. And so, if it is the case that they get waived, it could 
be for small items, as well. You have to get the discipline 
regardless.
    The second is that the budget, in the end, is designed to 
reflect costs. And it is not about the benefits, and it is not 
about virtues. It is a numerical accounting of the costs of 
what the Federal Government does. And if the Congress wants to 
say the benefits of extending these policies are so large that 
we want to waive the rules, then they should. But that should 
be done publicly and not embedded in a piece of PAYGO 
legislation. I think that is a better overall process for 
policymaking.
    And the last thing is, by doing it this way, they are 
deciding policy. We don't have a consensus policy on 
physicians' updates. The Congress has done a different thing 
every year. But they have said zero is current policy. We 
haven't got a consensus policy on what to do with the AMT. In 
fact, many different patches have been applied. But they have 
made an assertion in setting this up that there is a particular 
way that is the right way. You know, estate tax--you can go 
down the line. You know, Bob wants to draw the line at a 
different place on the 2001, 2003 tax policy.
    So, you know, I think all of that argues for not giving 
these preferential treatments, because we don't know what the 
right treatment is. The assertion by the administration is that 
they have the right treatment. Congress should have the 
opportunity to decide that.
    Chairman Spratt. Thank you both for your testimony.
    Mr. Ryan?
    Mr. Ryan. Thank you, Chairman.
    Bob, you just said something that I thought was pretty 
interesting, and I agree with it. If we don't fully extend all 
of the 2001, 2003 tax cuts, let's say dividends, capital gains, 
top rates, which probably is what is going to happen, make sure 
it goes to deficit reduction, doesn't get plowed into something 
else, I would like to think we can all agree on that as this 
thing continues through the process. I believe it is written 
that way right now.
    Mr. Greenstein. It is in the administration's----
    Mr. Ryan. Right. So I hope--I think all of us would agree 
with that. Even though I would prefer to keep those, I hope we 
can keep that kind of language and that framework put together. 
And that is something I think we can all have consensus on.
    Would you add anything to this bill? Any other enforcement 
mechanism you have seen, Bob and Doug, that you have liked and 
that you think ought to be added to this?
    Mr. Greenstein. No. The only other change I would consider 
making--and it sounds like Doug and I have a similar view on 
this--is, I understand what the administration was trying to do 
in the rules it is proposing on mandatory and discretionary 
programs, so that, for example, they don't want you to get 
credit for savings----
    Mr. Ryan. Timing shift----
    Mr. Greenstein. No, no, the timing shift stuff is 
excellent. You want to make sure that, at the end of the 10-
year period, you don't move a payday and get credit. And they 
ruled that out. That is very good.
    It is this question about converting mandatory to 
discretionary programs and discretionary to mandatory programs. 
The way they wrote it, it has some pluses that would strengthen 
discipline and some minuses.
    But I am worried about the same thing I think Doug is 
worried about, about the potential to create a new 
discretionary program, let's say for a year, and then you 
convert it to a mandatory program and you move out from under 
the PAYGO.
    So I probably--I think we are saying the same thing, Doug 
and I, on that. I probably wouldn't include that in the bill.
    Mr. Ryan. What would you add, Doug?
    Mr. Holtz-Eakin. Oh, I guess I would second what I think 
was the request of the chairman at the end of Dr. Orszag's 
testimony on finding out exactly what the base is for the 
sequester. Because if you have a really tiny base and you have 
a substantial PAYGO violation, it is going to be difficult 
politically to make it go, and the same kinds of arguments 
coming into play. So I would worry about the base and 
broadening it as much as you can.
    I would add discretionary spending caps. I think that is 
the simple solution to all the gaming issues that arise. They 
have written a very complicated piece of legislation to try to 
control that, but the simpler way to do it is just to put the 
caps in and get that enforcement back into the process. And 
that would be the biggest piece, addition that I think you 
could add.
    The last thing that I, and maybe only I, worry about right 
now is, given the large current TARP interventions and Fannie 
Mae/Freddie Mac and what is going on and the continued, what 
appears to be, use of credit-reform-style scoring for these 
kinds of financial transactions, I worry about creating 
something, the initial estimate being a tiny, ``Oh, we are only 
going to lose 10 percent on this,'' the reality being we are 
losing 25 or 30 percent, and that additional spending just 
flying right through here.
    So if there was a way to catch that, where the re-estimates 
revealed exactly what that mandatory process was----
    Mr. Ryan. Are you saying we should stick with the original 
cash basis, or are you saying we should just----
    Mr. Holtz-Eakin. I think there are arguments to be made for 
going back to the original cash basis, number one. I understand 
the other side of that. But my point is simply, if you are 
going to do it in a credit reform fashion, which makes sense in 
some cases, the re-estimates are no longer benign when they are 
that big and we have this scale of intervention. I don't know 
quite what to do with that.
    Mr. Ryan. In a----
    Chairman Spratt. Bob had----
    Mr. Ryan. Oh, go ahead, Bob. I didn't realize.
    Mr. Greenstein. I was just going to say I disagree, but let 
me explain why, with Doug on putting discretionary caps in this 
bill.
    I don't think you need it to prevent the gaming because 
there is a cap set for each year in the budget resolution. And 
if you try and move things around, you are going to violate the 
budget resolution cap.
    But the larger reason is the following. Pay-as-you-go keeps 
you from digging the hole deeper. It doesn't start to address 
the underlying hole itself. It seems to me that the right 
configuration is we need, sooner or later--sooner is better 
than later--a bipartisan agreement, the sort of thing that 
happened in 1990, where we are going to need to take 
entitlements below the baseline, we are going to need to take 
revenues above the baseline, and multiyear discretionary caps. 
I think that is where you put the multiyear discretionary caps.
    Mr. Ryan. In a reconciliation kind of----
    Mr. Greenstein. It is even larger than reconciliation.
    Mr. Ryan. Yeah, a budget agreement.
    Mr. Greenstein. Yeah, it is a share the pain, everything on 
the table, big budget agreement. In such an agreement, I do 
think multiyear discretionary caps make sense, a la 1990 and 
1993.
    Mr. Ryan. I like to point to the 1997 one, but, yeah, sure.
    In 1965, when Medicare Part A was created, the projection 
for its 1970 cost was $2.86 billion, and it ended coming in at 
$4.8 billion. Then its projection for 1985 was $6.8 billion; it 
came in at $47.7 billion. Its projection for 1990, $8.7 
billion; the costs then came in at $65.7 billion.
    Now, obviously, benefits got added to it, but we have 
underestimated these programs dramatically. And are you 
concerned that we are on the verge of doing the same thing over 
again?
    My concern is, we are creating this new health care 
entitlement. We are going to have a pay-for package like in 
1997, where you cobble together some provider cuts, you cobble 
together revenue raisers, a mishmash of them, and over the next 
handful of years, Congress gives them back. I mean, Congress--
Ways and Means, I can just tell you, these groups come back and 
they eat these things back. And what ends up happening is these 
pay-for packages evaporate, and you have the program growing 
much faster than ever anticipated, and we have on our hands, 
then, another huge unfunded liability, new runaway entitlement.
    Do you share those concerns? I will just go Bob, Doug, and 
then I will be finished.
    Mr. Greenstein. In other circumstances, I might. I don't 
that much right now, but let me explain why.
    I think the notion of having a health care bill that is 
fully paid for with hard, scorable savings and then, in 
addition to that, you put in a number of things that we think 
will save some money over time, we hope they will--CBO is 
uncertain, the evidence is not there, and they are not 
scorable, so you don't get credit for them. But the goal is you 
have scorable savings that are ongoing and then stuff that you 
aren't scoring if it turns out it saves you more money.
    So I think it tilts things in the right direction if--you 
raised the key point--if the savings hold. The single most 
important reason why we need statutory PAYGO is we really need 
every mechanism we can to lock in the savings that are going to 
be in the health care bill, should a health care bill be 
enacted.
    The other things that gives me some optimism is we have 
heard both the President and OMB Director Orszag in the last 5, 
6 weeks really toughening the rhetoric, insisting--you know, I 
think they have put out a very clear message, they insist that 
the bill be fully paid for with scorable savings. I interpret 
that to mean, and hope if the bill is signed we will see 
further statements by the President, that if there are 
subsequent attempts to roll back the savings without paying for 
those, that he would veto such legislation.
    Mr. Ryan. Well, we just borrowed $104 billion this week. We 
are borrowing half of this year's budget. That is the least we 
could expect, I think, from the administration.
    Doug, just to wrap it up?
    Mr. Holtz-Eakin. I am very worried about exactly that 
scenario. You mentioned the 1997 agreement. We basically gave 
it all back in the end. And that was in an era with PAYGO. So 
the notion that upfront you would have these hard, scorable 
savings sounds very nice, but no guarantee that you will get 
the right result. And so that is a concern to me.
    The cost projections are incredibly uncertain. People talk 
a lot about how the drug bill came in under the projected 
costs. I am familiar with that. One of the things that I would 
point out is, you know, it is not all dollars. Incentives 
matter. That was a bill that was built on competitive bidding 
by private industry, and, you know, Medicare is not. And so, if 
you do it Medicare style, we will probably underestimate it and 
it will be much bigger than we think, so that will be bad.
    So I would just say, having watched since 2001 the 
evolution of the budget pretty carefully, all this rhetoric is 
quite nice, but it is no substitute for actually doing 
something about it. Everything that this President has said the 
last President said, and it is time to actually get some 
action.
    Chairman Spratt. Any further questions? Mr. Schrader?
    Mr. Schrader. Thank you, Mr. Chair. Just a few here.
    Mr. Eakin, you mentioned or referenced a concern of, you 
know, the discretionary to mandatory. And I appreciate both the 
comments on the year-to-year piece. So is there an opportunity 
for a specific language, perhaps, to be developed to prevent 
the gaming year to year, as you have alluded to?
    Because, certainly, there is adequate, I think, protections 
in the bill to keep an ongoing discretionary program from just 
being added, if you will, to the mandatory category and 
increasing it from there. I think we covered that little piece.
    Is there specific language?
    Mr. Holtz-Eakin. I don't have some. But if that is 
something you would be interested in, I could certainly work on 
it.
    Mr. Greenstein. I would just add, I don't think you want to 
be so rigid as to say that every single year has to balance 
exactly, or you end up contorting your policies in ways that 
may not be good policies. So we need to figure out the balance 
between avoiding gaming but having requirements that are so 
rigid that they become the enemy of sensible policy 
development.
    I don't have specific language, but we would be happy to 
think about it more and make some suggestions.
    Mr. Schrader. We probably don't have a lot of time, but if 
you all could think about it, that would be very helpful.
    Also, to talk to you about--you know, I think it is a 
little disingenuous by some of my colleagues to talk about the 
exemptions that are in this bill when, indeed, they have been 
exempted and not paid for since their inception under the Bush 
administration. So I take that criticism with a big grain of 
salt, quite frankly. However, I think the good news is that 
Congress and this current administration seems to be wanting to 
get a handle on those.
    I am confused about why we would want to immediately raise 
taxes on the middle class and lower-income Americans by dealing 
with them immediately in the midst of the worst recession in 
history, Mr. Eakin, rather than put it off for a couple years 
and then, frankly, deal with those things, would be a less 
detrimental effect to folks in this economy.
    Mr. Holtz-Eakin. I am not advocating doing that. I am 
simply saying that there is this judgment call in writing the 
legislation about including a specific carveout for those 
policies. As a matter of the political reality and good 
economic policy, you are not going to want to raise taxes on 
people in the middle of a terrible recession. I don't think 
there is any disagreement about that. And the question is----
    Mr. Schrader. Some of my colleagues on the other side of 
the aisle would disagree with that, I think, based on their 
comments.
    Mr. Holtz-Eakin. So the question is, how do you write PAYGO 
legislation which serves the purpose of broadly enforcing the 
fiscal discipline--and, I think, including all policies in that 
is the right way to go--knowing that, ultimately, they have to 
be waived in certain circumstances?
    Mr. Schrader. Thank you.
    It would seem to me that, while I agree with the comment 
that a process or a piece of legislation is no substitute for 
political will, it would be my observation that, prior to PAYGO 
being instituted in the 1990s in a serious way, along with 
political will, that things increased dramatically, and we 
didn't have any control.
    So would you say PAYGO is of no use at all, particularly 
looking at the Bush years when that was abrogated entirely and 
we ended up with a war off-budget, we ended up with disasters 
off-budget? Part D may have come in under cost but still was 
off-budget. It would seem that, by not dealing with it at all, 
we went back to the merrily-spend-as-you-go thing.
    So could both of you comment on that?
    Mr. Greenstein. As I said, I think pay-as-you-go is very 
valuable. I would just--it is not the panacea, as Peter Orszag 
said. It doesn't itself make the hard choices to start to fill 
the hole, but it is critically important to help keeping the 
hole from getting even bigger. And, as you have just noted, in 
recent years we have just been making the hole even bigger.
    Mr. Schrader. You know, one of the great trivia games among 
budgeteers is to try to figure out how much PAYGO contributed 
to balancing the budget in the 1990s. How much does it deserve 
credit, versus a big revenue boom, versus everything else that 
went on? And I think the answer can't be zero, but I really 
believe that the fundamental impetus was the recognition in the 
late 1980s that large deficits were a financial threat, the 
failure of Gramm-Rudman-Hollings because it targeted the wrong 
thing, which was the deficit, instead of what Congress 
controlled, which was spending patterns, and that political 
will turned out to be very important, and the PAYGO rules 
supported it.
    So it had a role, but it is not everything.
    Mr. Schrader. Last comment.
    Mr. Greenstein. Congress made big deficit-reduction 
actions, took them in 1990 and 1993, and PAYGO locked that in. 
It prevented the backsliding.
    And it is similar to the point I made a few minutes ago in 
response to Mr. Ryan, that if we get a health care bill that is 
fully paid for, which would be a major accomplishment, PAYGO 
can help us lock in the pay-fors and reduce the chances--it is 
no guarantee--but it reduces the chances of backsliding in 
subsequent years.
    Mr. Schrader. Thank you.
    I yield back my time, Mr. Chair.
    Chairman Spratt. Bob Greenstein, Doug Holtz-Eakin, thank 
you, as always, for excellent insights and answers to our 
questions and for the help you continually give this committee. 
We very much appreciate your coming today.
    One final housekeeping detail. I would like to ask 
unanimous consent that members who didn't have the opportunity 
to ask questions be given 7 days to submit questions for the 
record.
    Without objection, so ordered.
    The meeting stands adjourned.
    [Whereupon, at 12:20 p.m., the committee was adjourned.]

                                  
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