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




                             THE BUDGET AND
                            ECONOMIC OUTLOOK

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

            HEARING HELD IN WASHINGTON, DC, JANUARY 27, 2010

                               __________

                           Serial No. 111-20

                               __________

           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, January 27, 2010.................     1

Statement of:
    Hon. John M. Spratt, Jr., Chairman, Committee on the Budget..     1
    Hon. Paul Ryan, Ranking Minority Member, Committee on the 
      Budget.....................................................     2
    Hon. Robert E. Latta, a Representative in Congress from the 
      State of Ohio, prepared statement of.......................     4
    Douglas W. Elmendorf, Director, Congressional Budget Office..     5
        Prepared statement of....................................     9
        Responses to questions for the record....................    53
    Hon. James R. Langevin, a Representative in Congress from the 
      State of Rhode Island, questions for the record............    53

 
                    THE BUDGET AND ECONOMIC OUTLOOK

                              ----------                              


                      WEDNESDAY, JANUARY 27, 2010

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:05 a.m. in room 
210, Cannon House Office Building, Hon. John Spratt [chairman 
of the committee] presiding.
    Present: Representatives Spratt, Schwartz, Becerra, 
Doggett, Blumenauer, McGovern, Tsongas, Etheridge, McCollum, 
Yarmuth, Andrews, Edwards, Scott, Langevin, Larsen, Bishop, 
Moore, Connolly, Schrader, Ryan, Hensarling, Garrett, Diaz-
Balart, Campbell, Lummis and Latta.
    Chairman Spratt. I will call the hearing to order. We meet 
today to consider and to receive testimony from Director 
Elmendorf of the Congressional Budget Office on the latest 
update on the economy and the budget.
    The numbers in the CBO report, or update, released 
yesterday are daunting, to say the least, but to fully 
comprehend the implications of those numbers, the bottom line 
to the budget, it is important to remember the context from 
which they emerge.
    A year ago the economy was in free fall. Job loss was at 
714,000 per month in the month of January alone. Americans' 
retirement savings accounts have plunged about $2 trillion 
between the first quarter of 2008 and the first quarter of 
2009. The record budget surpluses of January 2001 have been 
converted to record deficits as far as the eye could see. As 
President Obama and this Congress began 2009, this was the 
context, this was the economic and fiscal legacy of the 
previous administration.
    Too many Americans today still feel the pain of the 
recession. We received news today from the testimony from Dr. 
Elmendorf that the economy we believe is out of recession, but 
nevertheless there is much work to be done to rebuild the 
economy and to recover full capacity.
    CBO's report today confirmed that the actions we have taken 
over the last year have pulled the economy back from the brink. 
CBO's report confirms that GDP will grow in 2010 and beyond, 
and that the Recovery Act has had a positive effect.
    The report also confirmed that the recession has taken its 
toll on the budget's bottom line, that focusing first on 
rescuing the economy has meant still further cost to the budget 
to show up on the bottom line.
    Economists agree that it is counterproductive to try to 
balance the budget in the midst of a deep and serious 
recession, and rebuilding the economy provides a critical 
foundation for deficit reduction. Nevertheless, the cyclical 
deficits we are now facing should not and cannot persist. The 
short-term cyclical deficits associated with this recession 
should not be confused with the long-term fiscal challenges we 
were facing even before the recession began.
    Because the long-term budget situation remains 
unsustainable as the economy recovers, we must increasingly 
turn our focus to ensuring that the budget recovers as well. As 
we face our fiscal challenges, I am encouraged by the recent 
progress towards the reinstatement of the statutory PAYGO 
model--the statutory PAYGO rule, which we model on the rules 
that helped us turn record deficits into record surpluses in 
the 1990s. I was pleased to see the Obama administration's 
recent announcement that the budget proposal to be sent up next 
Tuesday will be characterized by restraint in domestic 
discretionary spending.
    Clearly on both the economy and the budget, additional 
steps are needed. The report gives us data with which we better 
understand the challenges, serious as they are, which we face.
    Our sole witness today is the Director Doug Elmendorf. And 
before turning to him for his testimony, I want to thank him 
and the entire staff at CBO for all the work that they do for 
us on an ongoing basis. By ``us'' I mean Democrats and 
Republicans. You serve us in a neutral, nonpartisan way, and 
you do it well. The Congress truly could not function without 
you.
    I would also like to invite all Members to join me in 
congratulating the witness on the achievement of a milestone 
earlier this week, his 1-year anniversary as CBO Director.
    Before we take his testimony, however, let me yield to Mr. 
Ryan for his opening statement.
    Mr. Ryan.
    Mr. Ryan. Thank you, Chairman.
    I also want to welcome Dr. Elmendorf to the committee. You 
are a Democratic appointee, but I have got to tell you, I can't 
tell what party you come from. You have been doing a very good 
job of being nonbiased, objective, and that is the role of CBO 
Director, and you are doing that very, very well.
    So I just simply want to say to you: you take a lot of flak 
over at CBO; there is lots of demands of your time. This year I 
don't think I have ever seen a year in which there is more 
demanded on CBO. It is a challenging economic time, and you are 
handling it very, very well. I know people over there are 
working long hours. We want you all to know that we respect 
that, we appreciate it, and we think you are handling yourself 
in a very professional manner. I might have some suggestions on 
how to model things differently, but I just simply want to say 
I think you are doing a fantastic job, and we appreciate it.
    Let me turn to our fiscal crisis now, if I might. When 
President Obama took office, America was in the midst of a 
crisis that shook our financial situation to its core and 
eclipsed access to credit markets. The administration exploited 
this crisis to pursue a relentless increase in Federal 
spending, in the size and reach of the government. Heading in 
this direction has made matters much worse for our fiscal 
future.
    Last year Congress enacted a trillion-dollar surplus--
stimulus, excuse me. Last year Congress enacted a trillion-
dollar stimulus, sold with the promise that would hold 
unemployment below 8 percent, and yet the unemployment rate 
continues to rise and now stands at a 25-year high of 10 
percent. We learned that much of this stimulus, which was 
neither targeted, timely nor temporary, in fact, it was just a 
down payment on government programs.
    Let us turn over to TARP. TARP was advertised as an 
emergency plan to heal financial markets with eventual return 
to the taxpayer. It has now become Washington's latest slush 
fund.
    CBO's budget and economic outlook paints a startling 
picture of both the year we have left behind and the year we 
face, and the time over the next decade. In 2009, Congress 
delivered a $1.4 trillion deficit, the largest in our Nation's 
history, and no doubt because of the recession, that was made 
much worse. Estimates for the current year also are very 
staggering, $1.35 trillion deficit, and our debt will reach 
over 60 percent of GDP this year. Under the current policies of 
our government, by 2020, CBO projects that our debt will soar 
to nearly 100 percent of gross domestic product. Adding to 
that, yearly interest paid to finance this surge in spending 
will more than triple in nominal terms from $207 billion in 
2010 to $723 billion in 2020.
    More troubling than another over $1 trillion deficit is 
that there is more to come. CBO figures don't include what is 
likely to come down the pipeline this year from a request for 
needed war funding to the effort to jam through a new $1 
trillion health care entitlement, to all of the other things 
that are going to happen, doc fix, and so on and so forth.
    I am encouraged by the news yesterday that the 
administration is considering a 3-year freeze on certain 
discretionary spending programs. We need to see the details, 
and this freeze needs to be enforced with a statutory cap if we 
are actually going to hold the line on spending.
    It is time to get serious about ending Washington's 
insatiable appetite for increased spending and expanded 
government. The promise of a discretionary freeze, although a 
step in the right direction, is not enough to secure our 
financial future.
    As astounding as our current budget shortfalls are, long-
term debt projections are profoundly worse. The bipartisan 
Peterson-Pew Commission on Budget Reform warned in its recent 
report that government spending, driven by the growth in health 
care costs and an aging population, will almost certainly bring 
the debt to crisis levels during the next few decades. What is 
once thought as a scenario that would unfold in the distant 
future has compounded and become a pressing issue that we must 
face today.
    We must reform our largest entitlement programs. We used to 
think we had 10 or so years, but because of the financial 
crisis, because of the spending binge that we have engaged in, 
and because of the massive deficits and debt we now are 
confronted with, this problem is here now, not in 10 years.
    We need to do this. I propose a systemic way to reform our 
programs. I call it a roadmap for America's future. My purpose 
in putting this legislation out there is not simply to say we 
have it all figured out, we have got all the ideas. Our purpose 
in putting this out is to say here is a plan to restore our 
fiscal future, to pay off our debts, to fulfill the mission of 
health and retirement security, and make our economy grow so 
people can have good jobs.
    The purpose of doing this is to encourage others to do the 
same. Bring us your plans to solve our entitlement crisis. 
Bring us your ideas to actually pay off our debt.
    There is a unique legacy in this country that is about to 
be severed, and that legacy in this country is each generation 
takes on its challenges so that the next generation is better 
off. Well, as CBO will tell you, as every objective statistic 
will tell you, we know for a fact we are consigning the next 
generation to an inferior standard of living. That is a fact. 
It is irrefutable.
    I encourage you to challenge that. We have got to act, and 
we have got to act now, to turn this around so that we can give 
the next generation this American legacy of having a better 
future, which they will not have unless we act.
    Sorry for getting a little carried away, Mr. Chairman, but 
this is a serious time. We appreciate the work of CBO. We need 
to get to work. Thank you.
    Chairman Spratt. I couldn't agree more.
    Before proceeding I would like to ask unanimous consent 
that all Members be allowed to submit an opening statement for 
the record at this point. Without objection, so ordered.
    [The statement of Mr. Latta follows:]

    Prepared Statement of Hon. Robert E. Latta, a Representative in 
                    Congress From the State of Ohio

    Good morning Chairman Spratt and Ranking Member Ryan. I appreciate 
the opportunity to hear testimony from Congressional Budget Office 
(CBO) Director Elmendorf on the federal budget and economic outlook. 
During these extremely difficult economic times for our nation's 
families, I welcome the opportunity to hear testimony from the CBO 
Director on his projections for the federal budget over the next 10 
years.
    I represent the largest manufacturing district in Ohio, as well as 
the largest agricultural district in Ohio. On the manufacturing side, 
my district went from being the 9th highest manufacturing district out 
of 435 Congressional Districts in the 1st fiscal quarter of 2008 and 
dropping to 15th, according to the latest numbers from the National 
Association of Manufacturing. There has been a consistent loss of jobs 
from my District, and the companies that are still in business have had 
to make tremendous sacrifices to remain in business.
    Individuals, families, and businesses have been struggling during 
our nation's economic downturn, and it is very clear that jobs are 
desperately needed in Ohio. The latest 2009 unemployment rates for Ohio 
and the United States are 10.9%, and 10%, respectively, and 4 out of 16 
counties in my Congressional District have unemployment rates over 14%. 
The American people need jobs, and I have grave concerns with the 
borrow and spend practices of this Congress and Administration over the 
past year; practices which have not helped the economy recover.
    As the President has laid out his preliminary spending proposals 
for the next fiscal year, specifically his proposed spending 
``freeze'', I feel his plan does not go nearly far enough to address 
the serious spending problem we face as a nation. The spending freeze 
outlined in the State of the Union address hits only the tip of the 
iceberg, as it applies to only a small percentage of discretionary 
spending. President Obama signed two omnibus appropriations bills that 
increased non-defense discretionary spending by 10.3 percent in Fiscal 
Year (FY) 2009 and 12.3 percent in FY 2010. If the President was 
serious about a spending freeze, he would go back to the spending 
levels from at least two years ago.
    We are long overdue for an honest review of our spending as the 
U.S. again faces record deficits. CBO has stated our current budget 
deficit will reach $1.35 trillion. By 2020, at the current spending 
levels, United States taxpayers will pay $2 billion per day in interest 
payments alone. In addition to the current spending, it is anticipated 
that the Senate will pass, and soon return to the House of 
Representatives, a bill to increase the statutory debt limit by $1.9 
trillion dollars. These spending sprees must stop. They have not 
assisted with creating jobs and are adding more and more burden to 
future generations.
    With the aggressive spending that has occurred these past few years 
I have serious concerns with the U.S. debt held by foreign holders. Our 
debt as a share of the economy has jumped over recent years, from 
approximately 35% to over 60% this year. Given that we rely on 
foreigners to purchase a great deal of our debt, roughly half, I am 
concerned that there is a danger of reaching a breaking point on our 
debt levels in which these foreign investors begin to lose credibility 
in our fiscal sustainability and long-term economic viability. I am 
interested to hear Mr. Elmendorf's assessment of this current 
situation, and at which point the rate of debt to GDP will have 
negative effects on the U.S. economy.
    I look forward to hearing testimony from Mr. Elmendorf today, and 
look forward to working with him as the FY2011 budget process proceeds. 
Thank you.

    Chairman Spratt. Dr. Elmendorf, once again we welcome you 
to the hearing today. You have prefiled your testimony, and we 
will make it part of the record so that you can summarize it. 
But you are the only witness, and unless you want to call some 
of your colleagues to answer questions we may put, you are the 
only witness today, and you should take as much time as you 
feel is necessary to thoroughly explain your testimony. And in 
that connection, I think it would be useful if you would also 
walk through some of the graphs you brought with you.
    Thank you very much for coming today. We look forward to 
your testimony.

  STATEMENT OF DOUGLAS W. ELMENDORF, DIRECTOR, CONGRESSIONAL 
                         BUDGET OFFICE

    Mr. Elmendorf. Thank you, Mr. Chairman and Congressman 
Ryan, for your kind words about the work that we at CBO have 
been doing during the past year. We very much appreciate the 
support that you both have shown for our work during this past 
year and in many previous years.
    To the two of you and all members of the committee, I 
appreciate the invitation to talk with you today about CBO's 
outlook for the budget and the economy. I will speak fairly 
briefly, and then I will take your questions with assistance 
from my colleagues behind me.
    Under current law CBO projects that the budget deficit this 
year, fiscal year 2010, will be about $1.35 trillion, or more 
than 9 percent of the country's total output. That deficit 
would be only slightly smaller than last year's deficit, which 
was the largest as a share of GDP since World War II.
    We expect that revenues will grow modestly this year, 
primarily because we expect a slow pace of economic recovery. 
We expect that outlays will be about even with last year's 
level as a decline in Federal aid to the financial sector is 
offset by increases in spending from the stimulus program and 
for other purposes.
    Debt held by the public will reach $8.8 trillion by the end 
of this fiscal year, or 60 percent of GDP, the largest burden 
of debt since the early 1950s.
    Looking beyond this fiscal year, the budget outlook is 
daunting. Again, under current law, CBO projects that the 
deficit will drop to about 3 percent of GDP by 2013, but remain 
in that neighborhood through 2020. By that point interest 
payments alone would cost more than $700 billion per year. 
Moreover, maintaining the policies embodied in current law that 
underlie these projections will not be easy. It would mean, for 
example, allowing all of the tax cuts enacted in 2001 and 2003 
to expire in 2011 as scheduled, and not extending the temporary 
changes that have kept the alternative minimum tax, or AMT, 
from affecting more taxpayers.
    But many policymakers have expressed their intention not to 
let current law unfold as scheduled. If instead they extended 
all of the 2001 and 2003 tax cuts, indexed AMT for inflation, 
and made no other changes to revenue or spending, the deficit 
in 2020 would be twice the size of a deficit projection under 
current law. Debt held by the public would equal 87 percent of 
GDP and be rising rapidly.
    The baseline projections also assume that annual 
appropriations will rise only with inflation. If instead 
policymakers increased such spending in line with GDP, which is 
about what actually happened during the past 20 years, the 
deficit in 2020 would be two-thirds again as large as projected 
under current law.
    In sum, the outlook for the Federal budget is bleak. To be 
sure, forecasts of economic and budget outcomes are highly 
uncertain; actual deficits could be significantly smaller than 
we project or significantly larger. We believe that our 
projection balances those risks.
    One set of factors contributing to the bleak budget outlook 
are the financial crisis and severe recession along with the 
policies implemented in response. Analysts define the end of a 
recession as the point at which output begins to expand again. 
By that definition the recession appears to have ended in mid-
2009. However, payroll employment, which has fallen by more 
than 7 million since the beginning of the recession, has not 
yet begun to rise again. And the unemployment rate, as you 
know, finished last year at 10 percent, twice its level of 2 
years earlier.
    Unfortunately CBO expects that the pace of economic 
recovery will be slow in the next few years. Household spending 
will be restrained by weak income growth, lost wealth and 
constraints on their ability to borrow. Investment spending 
will be slowed by the large number of vacant homes and offices. 
In addition, although aggressive action by the Federal Reserve 
and the fiscal stimulus package helped moderate the severity of 
the recession and shorten its duration, the support to the 
economy from those sources is expected to wane. Employment will 
almost certainly increase this year, but it will take 
considerable time for everyone looking for work to find jobs. 
And we project that the unemployment rate will not return to 
its long-run sustainable level of 5 percent until 2014. Thus 
more of the pain of unemployment from this downturn lies ahead 
of us than behind us.
    The deep recession and protracted recovery mean under 
current law, lower tax revenues and higher outlay for certain 
benefit programs. CBO estimates that those automatic 
stabilizers will increase the budget deficit by more than 2 
percent of GDP in both 2010 and 2011. In addition, CBO projects 
that last year's fiscal stimulus package will increase the 
deficit by roughly 2 percent of GDP this year and by a smaller 
amount next year.
    As the economy recovers and the effects of the automatic 
stabilizers and legislative policies fade away, the budget 
deficit will shrink relative to GDP. However, as I have noted, 
the projected deficit remains large throughout the decade even 
under current law, and if current law is changed in some way 
that more closely matches current policy as most people see it, 
the amount of government borrowing relative to GDP would be 
unprecedented in the post-World War II period.
    A large and persistent imbalance between Federal spending 
and revenues is apparent in CBO's projections for the next 10 
years and will be exacerbated in coming decades by the aging of 
the population and the rising costs of health care. That 
imbalance stems from policy choices made over many years. As a 
result of those choices, U.S. fiscal policy is on an 
unsustainable path to an extent that cannot be solved by minor 
tinkering. The country faces a fundamental disconnect between 
the services that people expect the government to provide, 
particularly in the form of benefits for older Americans, and 
the tax revenues that people are prepared to send to the 
government to finance those services. That fundamental 
disconnect will have to be addressed in some way if the Nation 
is to avoid serious long-term damage to the economy and to the 
wellbeing of the population.
    The Chairman asked me to also specifically refer to some of 
the charts in the testimony that we submitted. Of course, we 
have written an outlook of almost 200 pages that I am sure you 
are taking home and poring over in your spare time, but we did 
have several charts in the testimony that I brought today that 
I think are worth attention.
    If one looks at summary figure 1, if you have that in front 
of you, there is a picture of debt held by the public and net 
interest. It is a slightly complicated picture. The amounts are 
expressed as shares of GDP. The solid line is debt held by the 
public. The picture ranges from 2005 up through 2009, the left 
of that vertical line labeled ``actual,'' and then the next 11 
years of our projection. Debt held by the public, which was 
running about 40 percent of GDP before the financial crisis and 
recession, will jump from that 40 percent at the end of fiscal 
year 2008 to basically 60 percent at the end of this fiscal 
year, 2010. So in 2 years we will have increased the size of 
the debt relative to the economy by one-half. Under our 
projection it continues to rise a little further and is roughly 
stable around 65 percent, ending at 67 percent of GDP. Again, 
this is under current law, which assumes that tax cuts expire 
as scheduled, and that appropriations keep pace only with 
inflation.
    The bars are net interest on the debt, again expressed as a 
share of GDP. That net interest actually was quite low last 
year despite the large debt because interest rates were quite 
low. But we and essentially all analysts expect interest rates 
to rise considerably as the economy recovers. And the 
combination of rising debt and rising interest rates will push 
debt payments up. In nominal dollars we expect them to triple 
over the next 10 years, as a share of GDP to roughly double.
    The next picture we included in my testimony today is 
figure 2 which shows revenues and outlays of the government. 
This picture goes back 40 years into the past and then 10 years 
into the future with our projection. You can see that outlays 
have spiked up clearly in the last couple of years; are now at 
their highest level relative to GDP that we have seen; are 
projected to fall back, but to remain well above their long-run 
average, denoted by that horizontal dash line. Revenues have 
fallen very sharply, the lowest share of GDP seen in many 
decades, and are projected to rise again. Again, this is under 
current law, which assumes the expiration of the tax cuts. 
Under that current law revenues move up above their low 
historical level. However, if all of the tax provisions that 
are set to expire under current law were allowed to expire--
that is 2001 and 2003 tax cuts, that is the extension of AMT, 
and also the extension of other expiring provisions--then our 
revenues would remain below their historical average throughout 
the 10-year projection period. It would be inching up close to 
it by the end of the 10 years.
    And I think there is a third picture, which is the picture 
of the unemployment rate. You can see the very sharp rise. Of 
course, over the last several years you can see the decline. On 
this picture the decline looks fairly steep, the line comes 
down, but, of course, it is now so far above the long-run 
sustainable level that even at that pace of decline, it takes a 
number of years to come down. And you can see in that sense 
that more of the bulk of that peak actually lies in front of us 
than behind us, to the right side of that projected line. And 
that is the sense in which I think the pain of unemployment 
going ahead is likely to be greater, notwithstanding the fact 
that we and, again, I think essentially all other analysts, 
expect the GDP will continue to grow.
    Thank you, Mr. Chairman. I am happy to take your questions.
    Chairman Spratt. Thank you very much, Mr. Elmendorf.
    [The statement of Mr. Elmendorf follows:]

         Prepared Statement of Douglas W. Elmendorf, Director,
                      Congressional Budget Office



    Chairman Spratt. Last week in preparation for your 
testimony, we had a panel of four witnesses, all of whom warned 
of the deficit, and most of whom differentiated between the 
short-term cyclical debt and the long-term structural deficit. 
One who was particularly outspoken, as you might imagine, was 
Bob Greenstein, and he said, in effect, that the short-term 
deficits were a necessary encumbrance that had to be undertaken 
in order to respond to the cyclical downturn in the economy. 
These were necessary provisions for the most part, and the real 
concern had to be the long-term structural deficit as opposed 
to the short-term countercyclical measures we have taken.
    Would you agree with that, generally speaking?
    Mr. Elmendorf. So as you know, Mr. Chairman, CBO does not 
recommend fiscal policies in the way that Bob Greenstein and 
others do, but I think it is a widely held view among analysts 
that the danger from the budget deficit arises from its 
persistent large size, not particularly from having a large 
deficit during this downturn.
    I have said on a number of occasions that fiscal policy 
poses two central challenges to macroeconomic stability now, a 
short-run challenge and a long-run challenge. The short-run 
challenge is that fiscal stimulus will be withdrawn very 
rapidly over the next few years under current law. As the 
stimulus package effects wane, as tax rates increase under 
current law, as the automatic stabilizers diminish in 
importance, the deficit actually falls very sharply in the next 
few years, and that is a withdrawal of stimulus that private 
demand will have to overcome to continue to move the economy 
ahead.
    The other challenge that fiscal policy poses to 
macroeconomic stability in the long run is the fact that fiscal 
stimulus doesn't really ever go away, that the budget remains 
very much out of balance for many years to come. How one 
resolves that tension is, of course, a matter for you and your 
colleagues. I think it is a widely held view that the principal 
damage from budget deficits comes from there being large 
periods when the economy is at full employment and when they 
really are crowding out investment in plant and equipment.
    Chairman Spratt. Let me go back to three points I made in 
my opening statement and ask you to comment on policies we have 
taken. A year ago, at the end of the fourth quarter of 2008, 
the economy was in deep recession, I think we would all agree. 
In that month alone the economy shrank by 5.4 percent beneath 
the previous quarter. By contrast, the economy in the third 
quarter of 2009 grew by 2.2 percent. Nothing to cheer over, but 
that is a movement in the right direction for sure, a swing of 
7.6 percentage points, out of recession into growth in less 
than a year.
    Secondly, a year ago, end of January 2009, the job market 
registered a loss of 741,000 jobs, and the previous quarter 
averaged a job loss of about 600,000.
    Also, just for one indication of how all of this was 
impacting individual households, a year ago at the end of the 
fourth quarter, retirement accounts had lost $1.8 trillion, 
nearly $2 trillion over the previous year. Retirement accounts 
had fallen in value from $8 trillion in the first quarter to 
$6.2 trillion in the fourth quarter, a fall of $1.8 trillion in 
1 year alone. By contrast, looking over the past year, 2009, 
retirement savings have risen from $5.9 trillion to $7.7 
trillion at the end of the fourth quarter. All of those are 
dire developments that have turned into positive developments 
over the last year.
    One factor in this turnaround surely, to what extent I know 
is debatable, one factor was the Recovery Act, $787 billion of 
countercyclical effort by the government. It is being shown and 
appears now on the bottom line of the budget because those 
outlays had to be made in the previous fiscal year and to some 
extent the current fiscal year.
    You say, looking at the Recovery Act, and I am quoting from 
your testimony, it moderated the severity of the recession and 
shortened its duration. Can you quantify that? Can you tell us 
to what extent the Recovery Act stimulated this growth in GDP, 
in jobs in this recovery in the retirement phase?
    Mr. Elmendorf. Mr. Chairman, I am happy to offer our 
estimate of the effects. As you know, it is a difficult 
business to judge the effects of a particular piece of 
legislation or the entire Federal budget. Because of that, we 
have reported a range of estimates of effects. But we do 
believe, and have said this on a number of occasions, including 
today's testimony, that, as you said, the stimulus package did 
moderate the severity and shorten the duration of the downturn.
    We estimate that the legislation raised real GDP by 1.3 
percent to 3.5 percent, somewhere within that 1.3 to 3.5 
percent range, during the second half of 2009 relative to what 
it would have been without the stimulus. I think the last 
estimate that we provided of the employment effects was in a 
report that we issued that was required by law in November, and 
this was based on the effects through the third quarter. Our 
estimate through the third quarter was that employment was 
boosted by between 600,000 and 1.6 million jobs.
    Chairman Spratt. So the Recovery Act has had a positive 
impact?
    Mr. Elmendorf. That is our judgment, yes, Mr. Chairman.
    Chairman Spratt. You also warn in your testimony that the 
recession probably ended in the middle of last year, the last 
calendar year, but you warn that it is likely to be a slow slog 
from here to full employment. In fact, I think the date you 
targeted for full employment is 2014, some time away. Would you 
comment on why that is?
    Mr. Elmendorf. I think there are several factors. One is 
that we expect overall economic growth to be only moderate in 
the next few years. In the wake of some past deep recessions, 
the Federal Reserve has cut interest rates sharply, and there 
has been pent-up demand for housing, and for other consumer 
durable goods, and for business investment that has propelled 
the economy on a fast upward trajectory. Given the nature of 
this particular downturn, and something in common with some 
past downturns due to financial crises in our country and 
others, is that that pent-up demand is not there in the same 
way. We have more houses than there is current demand for. So 
we think that the economy is likely to grow more slowly, and 
one direct effect of that is smaller increases in employment.
    A second factor is that hours worked for people who have 
jobs has been on the downward trend for decades, but it 
declined fairly sharply in this recession. And thus we think as 
firms need more labor to produce product as demand starts to 
rise, the first thing they will do is to start to increase the 
hours of people who are already employed rather than to employ 
new people. That will come later.
    A third factor is that recessions often accelerate 
restructuring under way in the economy that pushes companies 
that were struggling over the brink, and pushes companies that 
were doing well perhaps into a dangerous territory. And one way 
that our economy tends to grow and to create jobs is that 
people move, they move to other parts of the country. That kind 
of regional migration has been an important feature in the 
past, but we think will be harder to accomplish in this 
recovery because of the problems in the housing sector. A 
minority, although a significant minority, of people are under 
water in their homes, owing more in mortgages than the houses 
are currently worth. We think they will have difficulty going 
to other locations where jobs are more available. I think that 
will hamper growth a little bit.
    But the biggest factor, again, is the first one, which is 
just that with slow economic growth, we think there will be 
slow growth in employment, and that is a pattern that has been 
consistent in the past. We mentioned in our report the past 
four recessions. Those with fast GDP growth have had fast 
employment growth; those with slow GDP growth had slow 
employment growth.
    Chairman Spratt. Despite the growth in the debt, we have 
not had what you would normally expect in the way of an 
increase in debt service, not yet, because of the historically 
low rate of interest that the national debt bears today. But as 
that rate rises with the resurgence of the economy, the cost of 
debt service will go up, and you have got a frightening number, 
frankly, in your testimony, namely that last year we spent $207 
billion for debt service. By 2020, that will be $723 billion. 
And that, too, is an entitlement.
    We tend to think about Social Security and Medicare and 
Medicaid as being the entitlements of great concern to us. 
Interest on the national debt is truly obligatory; it has to be 
paid. It is an entitlement in the strongest sense of the word.
    Our witnesses last week suggested that we need some 
targets. We don't need to be out there doing ad hoc things. At 
least for the intermediate and the long run, we need some 
target to shoot at, and they were suggesting that we should try 
to bring the deficit down to 3 percent of GDP and bring the 
debt or at least hold the debt to no more than 60 percent of 
GDP. Are those reasonable goals? Do you think they are too 
liberal, too high, too tight, too strict?
    Mr. Elmendorf. So again, Mr. Chairman, it is not our place 
at CBO to suggest what your goals should be. Economists don't 
have any analytic basis for saying this is the crucial point in 
terms of debt or deficits. It is true that as we push in this 
country to 60 percent of GDP at the end of this year and 
beyond, that over the next few years we are moving into 
territory that most developed countries stay out of. We are 
moving into territory that is unusual in our historical 
experience and in the experience of other countries that we 
think of with solid economic situations. That raises the risk 
every step that we go. But what precise point you should stop 
at is not something that has an analytic basis for answering.
    It is true that the numbers that you suggest have been 
discussed fairly widely. I think one thing to note is that our 
baseline projection is for deficits about 3 percent of GDP. And 
the interest payments that you point to are assuming that we 
have deficits of about 3 percent of GDP, not in the next couple 
of years, but beyond that, for the rest of the 10-year period.
    Chairman Spratt. But your baseline is not the worst-case 
scenario by any means.
    Mr. Elmendorf. No. And the challenge there is, again as I 
have said in my opening remarks, that many Members have 
discussed making changes that would increase deficits relative 
to our baseline, and in particular extending the expiring tax 
provisions and indexing the alternative minimum tax. So in some 
ways relative to what many people would think of as current 
policy--the policies we have in place, the tax rates we have 
now--the deficit would be much larger than our official 
baseline. And to get to 3 percent from there would require a 
good deal of policy change.
    Chairman Spratt. Mr. Director, thank you very much for your 
testimony and for the good work CBO does for us continually.
    Mr. Elmendorf. Thank you.
    Chairman Spratt. Mr. Ryan.
    Mr. Ryan. The health care bill is very complex, has a lot 
of moving parts. You and your staff have done a very good job 
of working overtime to give us estimates. But you are currently 
scoring the bill on last year's baseline, and we now have a new 
baseline. So I think it is just for the sake of accuracy, so we 
know what we are doing, to have this scored on this year's 
baseline. So I would like to request that you score the health 
care bill on this year's baseline. When do you think you could 
produce a score so that we know what it will cost using the 
current baseline?
    Mr. Elmendorf. That is a quite reasonable request, 
Congressman. I don't think I have a very good answer. CBO's 
traditional practice across a range of pieces of legislation is 
to continue, when legislation is in process, to continue 
scoring it on the baseline with which we started that process.
    In particular, Congress adopted a budget resolution last 
spring based on our March 2009 baseline projections. We have 
used that for scoring legislation since then, even though we 
updated our outlook for the economy and the budget last August. 
And we as a general matter continue to estimate based on that 
baseline until there is a new budget resolution.
    Now, it is also true that we, in response to a request like 
yours, try to provide a parallel estimate, if you would, based 
on a more recent baseline. And we do that particularly when we 
have a reason to believe that the change in the baseline is 
consequential for the estimate and that an estimate based on 
the earlier baseline might be misleading in some way. We have 
not actually updated the details of the health baseline. So 
there is baseline forecasts that we released, of course, but 
the details that we need for the recalibration of our models to 
do estimates off this new baseline is a project itself of 
several weeks' duration that we have not had time to undertake. 
Maybe after doing that we can then proceed to try to estimate 
some particular bill, and I am not sure at that point which 
health bill you and others would find most interesting.
    Mr. Ryan. I am not sure exactly what the time line is of 
the health bill. I don't even know if the Majority knows what 
the time line is. But you just rescored the stimulus, which is 
enacted law, I understand, but that went up to $862 billion. So 
you are telling us several weeks, meaning we probably won't see 
a score using the new baseline until after this is done, if 
this is done within less than several weeks?
    Mr. Elmendorf. So that is right. Again, it takes us several 
weeks to recalibrate the models. And these are the same people, 
I am afraid, who will also be estimating the President's 
budget.
    Mr. Ryan. I understand. Let me--we have got a lot coming 
down the pike. Let me ask you this. It is CBO's normal practice 
to provide estimates of authorization of appropriations. You 
haven't been able to provide those yet. I think Mr. Lewis, the 
Ranking Member of the Appropriations Committee, has requested 
this information particularly in view of a freeze. When are we 
going to get the estimates of the appropriations authorizing 
required in the health care bill? That, I think, is probably 
easier to achieve before we vote on this. What are the 
appropriations we are talking about here? Can you get that 
estimate?
    Mr. Elmendorf. So we have received that request, and we 
talked with the Ranking Member's staff. In our estimate of the 
health bills we have included a section that offers a range of 
what we believe to be the appropriations necessary to finance 
particular parts of the government that would be responsible 
for running the insurance exchanges or making changes in 
Medicare and so on. Those ranges are in several categories, 
ranges of $5 billion to $10 billion in several of these 
categories.
    To do a complete estimate of the appropriations that might 
be required would be--it doesn't require doing your baseline, 
so it avoids that complexity, but is itself very complicated. 
There are a lot of provisions, as you know, a couple of 
thousand pages of legislation, so that would also take us 
several weeks. It is a completely legitimate question, and we 
would like to provide an answer.
    Mr. Ryan. This is a creation of a new--we haven't created a 
program like this in a generation. And so it would, I think, be 
helpful if we know just the cost of all the government that is 
being created here. And of all the things that I think would be 
easier to do is just the discretionary spending; how many new 
people do we have to hire, how many new agencies, what is all 
this new government, which is the biggest in a generation, 
going to cost? That estimate I would like to think you could 
probably get hopefully before we vote on it.
    Chairman Spratt. Will the gentleman yield?
    Mr. Ryan. Sure.
    Chairman Spratt. Now, there is a question about whether or 
not in parts B and C, in particular the House bill, there is a 
lot of money that is authorized but not appropriated, is 
subject to appropriation. So it is not an indication of what is 
going to be spent, it is an indication of ideally what we would 
spend to serve a particular purpose if the funds were 
available. But we don't want to confuse the number with the 
insurance underwriting provisions, which are more or less an 
entitlement.
    Mr. Elmendorf. Yes, Mr. Chairman.
    I was going to say, Congressman, that we tried in our 
letter to, again, use ranges, not very precise, but ranges of 
the parts that would be critical to implementing the 
legislation, the things without which the mandatory spending 
could not sensibly occur. We have not done the other things 
that really are subject to future appropriation decisions.
    Mr. Ryan. Right.
    I want to be mindful of the time. So we are at 60 percent 
of GDP now. We are heading north. If you use the alternate 
fiscal scenario, I think we are at 85 percent by the end of the 
window, which I think is a more realistic measurement of what 
is going to happen. We get about half our debt from foreigners. 
Is there a tipping point, in your mind, using your background 
academically, whereby foreign investors start losing confidence 
in our ability to turn this thing around? I mean, Greece is 
having a problem floating their bonds because of their debt-to-
GDP ratios. Where, in your mind, do we start hitting that 
nexus, that tipping point? And then just one quick final 
question I will have for you.
    Mr. Elmendorf. So, I don't know. I mean, of all the things 
economists have trouble predicting, which is almost everything, 
swings in investor confidence must be pretty high on that list. 
So it is true we sell almost half; almost half of our debt is 
held now overseas. That is a large increase from a decade ago. 
We have benefited during this financial crisis for all the 
problems here in this country by investors here and around the 
world thinking of U.S. Treasury securities as still the safest 
investment.
    Mr. Ryan. But we were like in the high thirties at the time 
on our projected GDP ratio?
    Mr. Elmendorf. That is right, absolutely. So at the moment 
during that crisis, money came in, interest rates have been 
quite low, as we said. Widespread view among analysts is that 
is ending now; that as investors become more willing to take 
risks again in other investments, and as they focus more on the 
trajectory of U.S. fiscal policy, that there will be much less 
willingness to buy Treasury securities at current low interest 
rates. But so I think analysts widely agree there is an 
increasing risk over time of some flight from Treasury 
securities or flight from dollar assets. But how large that 
risk is, or what would trigger it, or when it would be 
triggered is just beyond our capacity.
    Mr. Ryan. I think the operative word is ``trajectory.'' If 
the trajectory shows that we don't have our fiscal situation 
under control, it gets much worse, investors flee. If we get 
this under control by actually reforming government 
entitlements, the budget, then the trajectory over the long run 
is going in the right direction, and that would restore 
confidence. I think that that kind of answers itself.
    Okay. One last thing. Lots of economists are telling us 
2011 is going to be a slowdown year. I see that in a lot of 
blue chip and a lot of private forecasts. I notice that you 
have it in yours as well with this new baseline that you are 
saying we are going to have a 2.2 percent growth this year, and 
then it is going to slow down next year. Why is that, and to 
what extent is the expiration of the 2001 and 2003 tax cuts 
which occur in 2011 a contributing factor to the slowdown in 
our economy that you are projecting for 2011?
    Mr. Elmendorf. The numbers I focused on most are our 
fourth-quarter-to-fourth-quarter changes. On that basis we 
expect real GDP to grow 2.1 percent this year and 2.4 percent 
next year. Some pickup, but less than would be the case--you 
may be looking at a year-over-year average?
    Mr. Ryan. Yes. 2.2 to 1.9.
    Mr. Elmendorf. Right. So it depends whether you are looking 
at the average for a year relative to the other year or 
quarter-end-to-quarter-end. The reason I prefer this is because 
the tax cuts will expire on a calendar date, and we think that 
will then depress economic growth in the first part of 2011 
relative to what would otherwise occur.
    Mr. Ryan. How much do you shave off of growth because of 
the expiring tax cuts?
    Mr. Elmendorf. So, in a very rough sense, if we were to 
take those expirations out of our projection, we would raise 
GDP growth over the next couple of years from here, say, to the 
end of 2011 by about 1\1/2\ percent cumulatively.
    Mr. Ryan. One and a half percent?
    Mr. Elmendorf. Cumulatively. That is if the tax cuts were 
extended on a permanent basis. We have done a different sort of 
calculation in the paper we released a week or two ago about 
policies to create employment and jobs. We looked at a set of 
temporary policies including a temporary extension of those tax 
provisions. A temporary extension has less stimulus effect on 
growth.
    Mr. Ryan. Right. Permanent income effect applies if it is 
permanently extended.
    Mr. Elmendorf. Now, these are effects for 2010 and 2011 we 
are talking about, of course. Over a longer term the extra 
borrowing of several trillion dollars over the next decade that 
would ensue from that change in policy would crowd out 
investment and would tend to damp growth over the back half of 
the 10-year window and beyond.
    Mr. Ryan. I have got some technical questions I want to ask 
you about the freeze proposal, questions dealing with 
unobligated balances and things like that. Can I, just in the 
interest of time, give you some stuff in writing that you can 
work back with us?
    Mr. Elmendorf. Even better. Great. Thank you, Congressman.
    Mr. Ryan. Thank you. I yield.
    Chairman Spratt. Ms. Schwartz.
    Ms. Schwartz. Thank you, Mr. Chairman, and thank you for 
the hearing. And I was going to say welcome to Dr. Elmendorf, 
but--and you are welcome--but it is, I think, both good news 
and bad news. I appreciate your comments on where we stand 
right now and some of the actions that we have taken in the 
last year that have helped stabilize the financial situation 
and is beginning to turn the economy around. That is good news 
to the American people, although, as all of us know, that until 
we start to see new jobs, expansion of the economy here at 
home, they are really just numbers to people. But we can be 
more hopeful that we are beginning to regrow this economy, and 
that is good news.
    But it is daunting, the numbers that you present, in terms 
of the deficit. Again, I think some of this is good news on our 
part because we are taking it seriously. And I want to just ask 
a couple questions about, one, how we got here. I think that we 
don't want to go over a lot of history, but I think it does 
help for us to understand what we inherited and the situation 
and how we got here. And we know that President Obama inherited 
a $1.3 trillion deficit for this year. It is just about that 
now even with the additional Recovery Act, the additional $700 
billion to $800 billion. That is good news, right? That it is 
stable at least, it didn't go up, but there was some 
anticipation that it was going to go up?
    Mr. Elmendorf. I guess so, Congresswoman.
    Ms. Schwartz. Again, I am not looking to paint a rosy 
picture here. I want to say we are trying to keep things 
somewhat stable. But you have mentioned that the revenues were 
down. When you say that, it makes it sound like ``How did that 
happen?'' That we didn't know that? We actually know why 
revenues were down in the last 8 to 10 years. It is because 
there were dramatic tax cuts, particularly for wealthiest 
Americans; is that right?
    Mr. Elmendorf. There certainly were very substantial tax 
cuts, a good share of which were received by higher-income 
Americans, and that is a feature that is holding down revenues 
relative to what they would have been otherwise, absolutely.
    Ms. Schwartz. And if we do maintain the tax cuts for 
Americans below a $200,000 family income, but not for the 
wealthiest Americans, would that help to be able to bring some 
more revenue into the government over the next number of years?
    Mr. Elmendorf. Again, our current law baseline lets all the 
tax expire. Extending all of them costs much more, makes the 
deficit much worse, as I said. Extending only some of them will 
have a partial effect. I think the lion's share of the money 
from extending those expiring tax provisions would go to people 
below the income thresholds that you suggest, although 
certainly a significant amount would go to people above those 
thresholds.
    Ms. Schwartz. Well, we obviously are looking at that.
    The other piece of what got us here is the biggest 
extension under Medicare since its beginnings: Part D, the 
prescription drug benefit. I wasn't here at the time, but 
certainly I think as Democrats we believe that we should extend 
prescription drug benefits to seniors, but we also believe it 
should have been paid for, and we believe now it should be paid 
for.
    So the notion of how we budget this new health care bill is 
really very important going forward. I appreciate your comments 
about how we are--you have to look very, very clearly about 
what the cost is to the health care bill. But in the analysis 
that you have already done in both the House bill and the 
Senate bill, and, again, you can't predict which one we will--
and exactly what it is going to look like--but in both cases 
you anticipated a reduction in the deficit if we enact 
comprehensive health care reform. And it may not be going as 
far as you might like or might expect that we can do in dealing 
with--and again, you don't create policy, I understand, in 
terms of bringing down the deficit, but it actually is a very 
clear reduction of over $100 billion in your estimates. So 
would you say that enacting health care reform would have a 
positive effect on the deficit?
    Mr. Elmendorf. Yes, Congresswoman. We estimated that both 
the bill to pass the House and the bill to pass the Senate 
would reduce budget deficits over the next 10 years by $130 
some billion if they unfolded as written, and would reduce 
budget deficits in the subsequent decade, again, if they unfold 
as written. These reductions are, as you say, in the direction 
of reducing deficits. They are, as you understand, a small step 
in that direction.
    Ms. Schwartz. I think that appropriately you are very 
conservative in the way you anticipate savings, and that is a 
good thing. We don't want to overanticipate savings. But there 
are some of us who feel if done well and done right, we will 
actually see potentially more savings. Which could be very 
helpful.
    I will just end by saying we are taking very seriously the 
issue of the deficit. By creating a Commission--if it is not 
done statutorily will be done by Executive Order--to focus on 
the debt and the deficit, and on all aspects of the budget as 
both spending and tax revenue is all really very important, as 
well as through PAYGO, which we have pushed actively in the 
House. Could you comment on how important it is for us to take 
it seriously by enacting both PAYGO in the Senate and House, 
and the Commission?
    Mr. Elmendorf. So I think analysts believe, including those 
at CBO, that the PAYGO rules and discretionary spending caps in 
the 1990s did help to restrain policy actions that might 
otherwise have worsened the budget deficit. And they did so 
particularly during the period when attention of policymakers 
in both parties was focused on a deficit problem. At the end of 
the decade, as the deficit problem was temporarily going away, 
then those restraints were widely ignored, but during the 
period when attention was focused on that problem, those 
restraints helped.
    Of course, all those constraints can do is to prevent or 
discourage policy actions that would make the deficit worse; 
they don't create actions to make the deficit better. Those 
sorts of actions require difficult decisions, and a Commission 
doesn't eliminate the need for those difficult decisions. It 
may provide a mechanism for encouraging those decisions to be 
made. We don't have a lot of evidence about that, and, as you 
say, CBO doesn't have a position on whether that should be 
pursued or not.
    Ms. Schwartz. We are taking it seriously. Thank you.
    Mr. Elmendorf. Thank you, Congresswoman.
    Chairman Spratt. Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman.
    First, with all due respect to our Vice Chairman, I am 
finding it challenging to find any context by which I can call 
a $1.3 trillion deficit good news. Having said that, Dr. 
Elmendorf, I thought I awoke to good news yesterday when I read 
the Washington Post: Obama to Propose Freeze on Spending; New 
York Times: Obama to Seek Spending Freeze to Trim Deficits. 
Frankly, I was overwhelmed by the headlines, and then I read 
the article, and I became underwhelmed.
    First, do you have an understanding or have you studied the 
President's proposal?
    Mr. Elmendorf. I only know what I read in the newspapers, 
Congressman. As you know, the President will release the budget 
next week, and then we will complete and report our analysis of 
it.
    Mr. Hensarling. Dr. Elmendorf, let us see if we are reading 
the same newspapers. The newspapers I read say that the 
President's proposal will exempt 83 percent of the budget. Do 
the newspapers you read say the same thing?
    Mr. Elmendorf. So I didn't take notes, Congressman. I am 
loath to do instant analysis of things that you are telling me 
I should remember from yesterday's reading of the newspaper. 
What is true is that, as you know, most spending in the 
government is now in these mandatory programs, discretionary 
spending is smaller, and when one exempts the defense- and 
security-related pieces, one is down to less, much less, than 
half.
    Mr. Hensarling. When you actually have the details of the 
proposal, I would appreciate your analysis.
    You may or may not recall this from the articles. I 
understand that this is not an immediate freeze, something that 
could take place today, a rescision could take place today, but 
it is a freeze promised to take place in the future for fiscal 
year 2011. Is that your understanding from your reading of the 
proposal?
    Mr. Elmendorf. Yes, that is my understanding.
    Mr. Hensarling. Dr. Elmendorf, obviously we don't have the 
President's budget proposal, but we have his 10-year budget 
proposal from last year. So I am trying to figure out what does 
it mean, as I understand it, to apply a 3-year freeze to 17 
percent of the budget? First, as I understand it, this is on 
top of two omnibus appropriations bills that increase 
nondefense discretionary 10.3 in fiscal year 2009, 12.3 in 
fiscal year 2010. We already know about the $1.2 trillion 
stimulus plan that still has us mired in double-digit 
unemployment.
    So if you will indulge me, but just a little back-of-the-
envelope calculation, isn't the President in some way saying 
after increasing spending 10 percent one year, 12 percent the 
next year, I am going to freeze it for the next 3 over a 5-year 
budget window? So isn't he really saying, my idea of fiscal 
responsibility is I am going to propose 5 percent spending 
growth a year in these accounts when I actually wanted to spend 
double-digit? Is that a fair assessment?
    Mr. Elmendorf. Congressman, I can't speak to the details of 
the proposal until we have numbers to analyze. Your 83 and 17 
may well be right, but we can't do that calculation until we 
see the details.
    Mr. Hensarling. Well, let me try another set of numbers on 
you. Again, we have the President's 10-year spending plan that 
he submitted last year. It starts out at almost $3.6 trillion 
in fiscal year 2010. It ends up in 2019 at $5.2 trillion. Now, 
as I understand the plan, he is proposing a $250 billion 
savings, according to what I understand from the White House. I 
assume, don't know, that the President will submit another 10-
year budget plan.
    If you take $250 billion savings over a 10-year period, 
again, this is using his last year's budget, don't know what is 
this year's budget, but if we applied his proposed so-called 
freeze to his last year's budget, what it appears to me is it 
is a proposal to raise Federal spending 44.3 percent as opposed 
to 45 percent. Again, we don't have his numbers, but do you at 
least recall that the spending trajectory was proposed to go 
from $3.6 trillion to $5.2 trillion?
    Mr. Elmendorf. I don't remember the specifics of that 
calculation, but your point is that their $250 billion estimate 
is certainly a small share of the deficits that we project 
under the baseline, which are a good deal smaller than the 
deficits that we projected for the President's budget last 
year.
    Mr. Hensarling. Would that qualify, as you said, I believe, 
in your testimony, quote/unquote, minor tinkering.
    Mr. Elmendorf. I think it is a small step, and I doubt 
there is a single step that can accomplish the extent of 
deficit reduction that many people have in mind.
    Mr. Hensarling. Well, I see my time is running by. I 
certainly have high hopes for tonight, but I fear the 
President's plan is a lot more about trying to impact newspaper 
headlines and not budget baselines.
    I yield back the balance of my time.
    Mr. Elmendorf. Can I emphasize, Congressman, also we will 
certainly report back to you fully on our analysis of the 
President's budget when we have the details that we need to do 
that.
    Chairman Spratt. Mr. Doggett.
    Mr. Doggett. Thank you, Mr. Chairman.
    And thank you, Dr. Elmendorf.
    Just to be clear on this last line of questioning, during 
the 8 years that the Republicans were in power, did they enact 
a freeze on any kind of spending in any one of the 8 years?
    Mr. Elmendorf. Not that I am aware of, Congressman.
    Mr. Doggett. Not that I am aware of either.
    But I think it is appropriate that they scrutinize the 
President's recommendation, but it needs to be scrutinized 
against real world history.
    One of my concerns is that, as Congress moves forward to 
try to encourage job growth, that we may have the effect of 
producing few jobs and great deficits, and I think that is a 
potential problem with some of the ideas that have been 
advanced by Democrats and certainly the principal idea advanced 
by Republicans to encourage job growth.
    You pointed out, I believe, that while spending was high 
relative to gross domestic product, that we have the lowest 
revenues, I believe you said, as a percentage of output that we 
have had coming into the Federal Government in decades?
    Mr. Elmendorf. Yes.
    Mr. Doggett. And I think the problem is that, most of the 
questions you have received this morning, Doctor, only address 
half of the budget. They focus on the direct spending, but they 
ignore the growth in tax expenditures, the use of the Tax Code 
sometimes to advance policies that may be very similar to the 
objectives, some worthy, some not so worthy, that occur through 
direct spending.
    In terms of our long-term national debt and all of the 
negative aspects associated with it with foreign borrowers and 
reduced standard of living, in terms of the national debt 
alone, it doesn't really make any difference whether the debt 
is affected by tax expenditures or direct expenditures. They 
have the same effect on the debt, do they not?
    Mr. Elmendorf. Yes, that is correct, Congressman.
    Mr. Doggett. And as we look at some of the ideas that were 
considered last year, let me go to the Democrats first. You 
have provided us an excellent analysis this month in the 
policies for increasing economic growth that CBO put out. One 
of the politically popular ideas was what is called bonus 
depreciation. And I believe your analysis is that if we use the 
Tax Code to do that, that for every dollar that we drain from 
the Treasury, we will get back 20 cents to up to maybe the 
dollar itself. Is that right?
    Mr. Elmendorf. Yes, Congressman, I think that is correct.
    Mr. Doggett. So it is not really necessarily the best bang 
for the buck to go that approach, even though it may be 
politically popular.
    And then last year when we considered the stimulus, one of 
the popular ideas then was what is called loss carried back. 
And your testimony last January was that the effect of this 
provision on business spending would probably be small. We 
limited it then to small businesses, but then the only way, 
apparently, we could get enacted an extension of unemployment 
and COBRA benefits in December was to tell the Treasury to 
write checks for $33 billion this year to businesses in what is 
called loss carried back. And one of those was a bond insurer 
that made bad bets on subprime mortgages, and it got about a 
billion by itself.
    Let me just ask you, for businesses of various types that 
got those, but since a defunct business that didn't have a 
single employee could get loss carried back and get a check 
written by the Treasury, if the Treasury writes a check to a 
company that has no employees, does that contribute any more 
than zero to growth and output?
    Mr. Elmendorf. It doesn't contribute very much, 
Congressman.
    I mean, I think there is a longstanding view in the 
economics profession of encouraging the tax changes for 
businesses that encourage types of behavior to be much more 
effective than simply changing cash flow.
    Mr. Doggett. Let me move in my final seconds here to the 
principal Republican idea, which is that the solution to all of 
our problems is to extend the Bush tax cuts, which added so 
much to our moving from surplus to debt shortly after the Bush 
administration took over.
    In the final two pages of your report, you indicate that 
extending for 1 year, all of the Bush tax cuts and the AMT 
patch for 2 years, that that will get us in output about 10 
cents to 40 cents for every dollar that it costs the Treasury; 
isn't that right, on page 25?
    Mr. Elmendorf. Yes, that is right, Congressman.
    Mr. Doggett. And then if we did--since the Republicans 
don't want to do that; they want to do it permanently. The 
final sentence of your report is that if there were a permanent 
extension of all of those tax cuts, we would get much less than 
the 10 to 40 cents per dollar we would get for doing it for 1 
year; is that right?
    Mr. Elmendorf. Yes, that is right, Congressman.
    Mr. Doggett. And that would cost us to do that about 
another $5 trillion, wouldn't it?
    Mr. Elmendorf. I think $4.5 trillion is the number I have 
in my head, yes, Congressman.
    Mr. Doggett. Thank you so much.
    Chairman Spratt. Mr. Campbell.
    Mr. Campbell. Thank you, Mr. Chairman.
    And thank you, Dr. Elmendorf, for your, I think, accurate 
and rational yet sobering report. In the report, you use the 
term ``unsustainable,'' a term which a number of people use in 
terms of the current budget deficit track and a term I have 
used myself. And I assume that is in reference to the CBO 
baseline, which we admit, the chairman admitted, is actually, 
taking into account political realities, probably one of the 
more optimistic scenarios for the budget deficit going forward.
    I am not sure that there is a complete understanding of the 
consequences of inaction here in this town. We use the term 
unsustainable. Can you be a little more specific and describe 
to us what happens? We do nothing. We now look at deficits of 
$500 billion to a $1.5 trillion as far as the eye can see. What 
happens?
    Mr. Elmendorf. I think the particular thing that is 
unsustainable is to have Federal debt constantly rising as a 
share of GDP, because that requires an ever larger share of 
investors' portfolios to be occupied by Treasury securities, 
and at some point, they will refuse to hold them or will insist 
on much higher interest rates to do so.
    The thing that is particularly unsustainable is expecting 
that investors will just constantly pile more and more of their 
portfolios, investors here and abroad, into Treasury 
securities. What can go wrong is that interest rates can spike 
up when there is a crisis of confidence and their sentiment 
about buying those securities changes.
    But even before you hit the crisis point, of course, what 
is going wrong in a more subtle, less obvious, but still very 
damaging way is that the more of those Treasury securities that 
are being held, the less investors will be holding of shares, 
the ownership of physical plant and equipment, the sorts of 
things that make workers more productive over time and raises 
incomes over time.
    Mr. Campbell. What does that mean? Does that mean, then, we 
have much lower GDP growth? Does that mean the Federal 
Government's debt rating gets reduced and we are actually 
perhaps physically unable to sell the debt at some point? What 
are the----
    Mr. Elmendorf. That is all possible. I think most observers 
expect that the government will act, that the unsustainability 
will be resolved through action, not through witnessing some 
collapse down the road. If literally nothing is done, then 
eventually something very, very bad happens. But I think the 
widespread view is that you and your colleagues will take 
action.
    Mr. Campbell. And I think--I wish it were not true, but I 
sense that that won't happen until people fully understand that 
very, very bad thing and how very, very bad it is.
    Mr. Elmendorf. Again, it is not something----
    Mr. Campbell. I know you don't like to alarm people, but I 
think, frankly, we have to alarm people.
    Mr. Elmendorf. I think we have given an accurate, as you 
say, sobering view. Again, we are not trying to overly 
dramatize. We are not trying to sugarcoat. We are presenting 
the facts for you and for the American people. And then it is 
up to you all to make whatever decisions you choose to make.
    Mr. Campbell. A couple of more questions if I can in the 
time that I have got. If you said that, all right, we are going 
to let spending grow with GDP, stay where it is with GDP and we 
are going to balance this budget on tax increases entirely, do 
you have any sense--and throw the health care bill in there as 
a tax increase as well--do you have any sense for what kind of 
tax increases that would require?
    Mr. Elmendorf. Well, I can give you one illustrative case. 
If you look at the budget in 2020, if your goal were to balance 
the budget in 2020, our baseline projection is a deficit of 
about $700 billion. If you extended the 2001 and 2003 tax cuts 
and index the AMT, the deficit would be about twice that size, 
as I said, $1.4 trillion. So, by comparison, individual income 
tax revenues in our baseline, even before you take account of 
the fact of this extra cut, are $2 \1/2\ trillion. So if we 
want to narrow a gap of $1.4 trillion by increasing a category 
whose baseline size is $2.4 trillion, that requires a very 
substantial increase. So it is very difficult, given those 
numbers.
    But can I say also, that number is quite large, doing all 
of those changes on the spending side to be equivalently 
radical changes in the spending categories.
    Mr. Campbell. I understand that. But I think the point is 
that if you keep spending where it is as a percent of GDP--
forget the health care bill, from that increasing it. 
Potentially it is a 50 percent, 60 percent increase in every 
single Federal tax on every single human being in this country.
    Mr. Elmendorf. It would take--I haven't done the percentage 
calculation. We have done them on some occasions in the past in 
requests, but it would take a very substantial increase in tax 
rates no doubt.
    Mr. Campbell. Thank you, Mr. Chairman.
    Chairman Spratt. Mr. McGovern.
    Mr. McGovern. Thank you, Mr. Chairman.
    And thank you, Dr. Elmendorf. This is a very important 
hearing.
    If I could follow up on the remarks of Ms. Schwartz and Mr. 
Doggett, I think it is important that we all understand how we 
got in this mess to begin with. And when I hear my Republican 
friends talk about the importance of trying to rein in 
spending, I would just remind them that, under the Clinton 
administration, total spending grew at an average annual rate 
of 3.5 percent. Under the Bush administration, total spending 
grew at an average annual rate of 8.4 percent. The fact is that 
President Obama inherited a mess of an economy as a result of 
what I believe are fiscally irresponsible policies of the 
previous administration.
    And there is no question that we need to take some strong 
and bold action. I will say, also, that for all the whining 
about the Reinvestment and Recovery Act, I can tell you, from 
my experience in Massachusetts, that teachers' jobs have been 
saved. Police officers' jobs have been saved. Firefighters' 
jobs have been saved. Jobs have been created in the 
construction industry and in some of the high tech industries. 
So we have seen the benefit.
    Has it created as many jobs as I would have liked to have 
seen? No. But without it, I think we would be in a much bigger 
mess than we are in right now. So I find it ironic that the 
same people who drove this economy into a ditch are now 
complaining about the size of the tow truck. The fact of the 
matter is, we are in a mess, and some tough measures have to be 
taken.
    I want to praise the President for his announcement in the 
newspaper, trying to figure out a way to deal with the deficit 
and with the debt so it is not thrust on the backs of our kids 
and our grandkids. But one of the things I worry about is not 
what we are spending on defense, but specifically war costs.
    I mean, we have been fighting wars since 2001. And they 
have been expensive. And we have been paying for these wars or 
funding these wars through emergency supplemental 
appropriations where there are no offsets. I mean, hundreds of 
billions of dollars have been spent but not offset. And no 
matter what you think about the war in Afghanistan, I think the 
President is making a mistake by trying to increase troops in 
Afghanistan. But we are told now we are going to have another 
emergency supplemental, another $33 billion or $35 billion, and 
it goes on and on and on. And I think this notion of paying for 
wars with emergency supplementals and not offsetting I think is 
the wrong way to do it. But I think it has a devastating impact 
on our deficits and our debt. I appreciate your comments on 
that subject. I am afraid these wars are going to bankrupt us. 
And I would appreciate anything you have to add to that.
    Mr. Elmendorf. On the point you made earlier about the 
stimulus package, Congressman, we agree that, relative to what 
would have occurred without that package, there is more GDP and 
employment.
    Mr. McGovern. Which is a good thing.
    Mr. Elmendorf. I think I am allowed to say I think that is 
a good thing. Yes, sir.
    Mr. McGovern. Thank you.
    Mr. Elmendorf. On the cost of the wars, again, it is a 
policy choice. To date, Congress has appropriated about $1.1 
trillion for fighting in Afghanistan and Iraq and related 
activities.
    Mr. McGovern. Do you know how much of that was offset? How 
much did we pay for, or is that all on our credit card?
    Mr. Elmendorf. Well, there is no specific linkage of 
particular spending decisions to particular revenue-raising 
decisions. It is certainly true that the deficits over that 
period have well exceeded $1.1 trillion.
    Mr. McGovern. I guess my point is that, if you are going to 
fight these wars, you ought to pay for them, because there are 
impacts--it impacts very negatively on our deficits and on our 
debts. And this notion that we can fight these wars and not 
even have to talk about how we pay for them I think is a bad 
way to do business.
    Mr. Elmendorf. Again, that is really a policy choice.
    I think the analytic point that many economists would make 
is that if one is undertaking a lasting stream of spending 
without paying for that, then there is a lasting stream of 
deficits, which is what is very damaging. For unusual spikes of 
spending, there is a logic to not bumping up tax rates and 
bumping them down again to pay for that.
    Mr. McGovern. But these wars have gone on for quite a long 
time, and they will probably go on for a lot longer. So the 
idea that this is a short-term expenditure is not reality.
    Mr. Elmendorf. It has certainly not been short term.
    Mr. McGovern. The point I am just trying to make is, when 
you do these things and you don't pay for them, you are adding 
to our debt. And if we are talking about trying to control 
deficit spending, then, clearly, this issue should be on the 
table because we have been there since 2001. We are probably 
going to be there a lot longer than anyone wants to admit. I 
think we need to deal with this issue up front.
    Thank you.
    Mr. Elmendorf. Thank you, Congressman.
    Chairman Spratt. Thank you, Mr. McGovern.
    Mr. Latta.
    Mr. Latta. Thank you, Mr. Chairman.
    Director, thanks very much for being with us today. I 
represent the largest agriculture and manufacturing district in 
the State of Ohio. Our unemployment numbers just came out for 
the State just the other day, and we are not going down; we are 
going up. We are up to 10.9 percent statewide. My district is 
even worse than that because of the manufacturing that we have 
got. I have 4 of my 16 counties right now with 14 percent.
    So when you talk about, you know, slow growth in job 
recovery, I can see it, because every week that I am home, I 
try to get out across my district. And my manufacturers are 
hanging on by their fingernails right now. They always turn to 
us and ask what we are going to be doing for them, and I cannot 
tell them right now.
    And it is pretty tough because I hear you talking about 
these plants, that we are not going to see this recovery coming 
quickly, because you are absolutely right. A lot of these 
plants are down to 32 hours to try to save their brother and 
sister next to them on each machine. They have said, what do we 
do? And they have cut down to 32 hours on a lot of them, and 
you have got plant managers that are cleaning bathrooms and the 
outside contractors no longer working at these plants. So you 
have got more unemployment.
    But you know, when I look at your testimony today, and it 
is very sobering, that the question when you look out to 2020, 
and you look at this massive amount of interest on the debt of 
$723 billion, or quick math about $2 billion per day, and when 
you look into your definition of, is that sustainable for this 
country to be able to pay $2 billion a day in interest on that 
debt?
    Mr. Elmendorf. We are a large and rich country. We can get 
away with a lot for a while. At what point we can no longer get 
away with it, as I have said, is very difficult to judge 
analytically.
    Mr. Latta. In going along, I tell my kids this all the 
time. I am not that old, but I started practicing law back in 
1981. And when I started practicing law, of course, we were 
looking at 21.5 percent interest rates in this country and what 
was going on. And we were running on land contracts because 
people couldn't even go to the bank and get a loan because 
there wasn't any money to loan.
    And when we are looking at this massive amount of interest 
that is going to have to be paid by the Federal Government, are 
we looking at what we stared at back in the late 1970s and 
early 1980s? Because, you know, a lot of businesses out there 
plan for the future. And if you are talking about jobs not 
being created, they are going to say there is absolutely no way 
I am going to buy that new machine or I am going to add more 
employees, because I am looking down the road now at what the 
Federal Government is going to be spending, and how are we 
going to go out and borrow money? Right now, I have companies 
that can't get any money right now. They actually have no debt, 
and they can't get a loan from the bank.
    Mr. Elmendorf. A few thoughts. As you know, interest rates 
were particularly elevated in the early 1980s because inflation 
was very high. So lenders demand--they want at least as much 
money back in real terms as they gave out. And then they want 
some real return on top of that. So the nominal reported 
interest rates were very high then particularly because 
inflation was very high.
    We project that interest rates on the debt, government debt 
and other interest rates in the economy, will rise over the 
next decade, not to anything like the levels that were in place 
then. That projection is uncertain, but we think it balances 
the risks. So the burden is growing of making these interest 
payments. But it is not impossible. It is just a burden. In 
this case, analogies to individuals and families actually work 
pretty well. If you borrow a lot now, when you pay it back 
later, then it is squeezing what you can do later on.
    I think on the other, businesses, the thing to say is that 
as the economy recovers and the financial system strengthens, 
the businesses you are talking about should be more able to get 
credit. Small businesses in particular are having difficulty 
getting credit now, and that is one of the restraining forces 
that we describe in our outlook on economic growth in the next 
few years.
    But the healing of the financial system is underway. There 
has been actually tremendous improvement over the past year. It 
has not yet affected a lot of small businesses. But our 
expectation, the expectation of many analysts, is that it will 
over the next few years. And I am hopeful that it will.
    Mr. Latta. And I hope, too, because the thing is that we 
try to give hope to the folks out there that are right on the 
bubble right now; hopefully they will be in business in 6 
months.
    And just real briefly, it has been sort of touched on by 
the chairman and Mr. Ryan. I look at these numbers every month 
about the amount of foreign holdings out there of our debt. We 
have gone from, I think it was $561 billion over the last year 
alone. Watching this go up now that we have almost $3.6 
trillion out there owned by someplace outside the United 
States, that is pretty sobering. And as this trend goes on, it 
is a good question. When are these other places or countries 
just going to say, you know what, we are not just going to be 
borrowing that debt and it falls back on the American taxpayer 
but also on these consumers out there and businesses? And that 
is what I worry about. When that bubble might break, we are 
going to see folks finding out that there is not--where are 
they going to borrow the money when the Federal Government had 
to up those interest rates? Then we are going to be staring at 
1981, 1982 again. That is my fear. Thank you.
    I yield back.
    Chairman Spratt. Ms. Tsongas.
    Ms. Tsongas. Thank you, Mr. Chairman.
    And thank you, Dr. Elmendorf. It is a very sobering 
testimony we are hearing today. But also to look back at a year 
ago when we were hearing, yet again, a very sobering story from 
virtually every economist who recommended that the Federal 
Government had to act. The debate I felt was largely around 
what the size of a recovery package looked like, what its 
composition should be.
    And as a new Member to Congress, I really took a lesson 
from a city I represent. It is the City of Lowell, 
Massachusetts. It is where the industrial revolution began. 
When the textile industry began to move south, it had a 
dramatic impact on the economy of the community, and government 
failed to act. And because government failed to act, it took 
decades for that city to dig itself out from under the 
challenges it faced. So that very real example really did 
motivate me and drive my decision to support the recovery 
package.
    And I think from your testimony today, we have seen how 
important it was. We can't imagine where we might have been 
without taking that very bold action and again also listening 
to the lessons from the Great Depression. So I think you would 
agree that we had to move, and we had to move aggressively.
    Mr. Elmendorf. And I cannot suggest policy. But we do 
believe that the economy would have lost more jobs and suffered 
larger declines in GDP without the stimulus package.
    Ms. Tsongas. And would have taken many more years; we would 
be looking at a far different scenario today without it in 
terms of building ourself back.
    Mr. Elmendorf. It would have taken longer.
    Ms. Tsongas. I have another question, though.
    And obviously, we all understand the long-term challenge of 
addressing the debt and deficit, and so when the President's 
budget is released, we have heard that he plans to propose a 3-
year freeze, which we have been talking about, on nondefense 
discretionary spending. And I, like my colleagues, am pleased 
that he has taken the question of deficit control seriously. 
And I recognize that we are going to have to make some very 
painful choices that include spending cuts to our priorities.
    But everything has to be on the table. Since nondefense 
spending is the smallest piece of the spending pie, even if we 
were to cut nondefense discretionary spending down to zero, we 
would still face a deficit in the hundreds of billions of 
dollars. Would you agree?
    Mr. Elmendorf. Yes, that is right.
    Ms. Tsongas. Nondefense spending is also the primary way 
the government fulfills its responsibilities to the middle 
class. Nondefense discretionary spending is really just jargon 
for public schools open to all, affordable college education, 
safe roads and bridges, poison- and toxic-free food and toys 
and so on. So as we have this very important debate, I think we 
in Congress will be sure to protect the middle class, 
understanding that we do have to address nondiscretionary 
spending as well as all other forms of spending.
    But I have another question that really has to do with the 
commission. In light of the Senate's rejection of the 
commission yesterday, do you think we are going to see a 
negative reaction from the markets?
    Mr. Elmendorf. I would rather not predict financial market 
reactions. I think, among other things, markets tend to react 
fairly quickly, and I think the set of events over the last day 
or two have not been entirely unexpected. Some of that was 
built in already. Some of the reaction has probably already 
occurred. It is difficult to predict.
    If I could go back to your previous point about 
discretionary spending. I think you are absolutely correct that 
it is a category of spending that people often object to in 
general terms, but when it comes to specific aspects of it, 
there often are very strong support for pieces. In addition to 
the ones you mentioned, it is the category that funds health 
research, a certain amount of veterans benefits, the court 
system, national parks. A lot of specific elements that I think 
many people believe are an important part of what the 
government should be doing. And that is why, in fact, over 
time, it has proven difficult to reduce that substantially as a 
share of GDP. Because, in the end, for all of the general 
objections, there are a lot of specific things that the people 
want the government to do. That is why the choices that you 
face are difficult.
    Ms. Tsongas. But I agree. We have to put everything on the 
table and then be very careful about how we move forward. And 
yet addressing the long-term challenge that we face, because it 
is obviously, as you have said, unsustainable. Thank you.
    Mr. Elmendorf. Yes.
    Thank you, Congresswoman.
    Chairman Spratt. Mr. Garrett.
    Mr. Garrett. Thank you, Director, for being here today. And 
I particularly also want to thank, you and your office, for the 
work you have done, what I think is the accurate accounting for 
the GSEs, government-sponsored enterprises, in the latest long-
term budget outlook.
    I will just spend a moment here first before asking a 
question, just laying out the history of how they came about 
and I think probably how you came to that conclusion. It was 
back in July of 2008 that Congress passed and the President 
signed the Housing and Economic Recovery Act of 2008, also 
known as Paulson's bazooka. This legislation gave the Treasury 
Secretary the power to buy an unlimited amount of securities 
from Fannie and Freddie if the Treasury Secretary determined a 
couple of things; that such actions are necessary, A, to 
provide stability to the financial markets; B, to prevent 
disruption in the availability of mortgage finance; and, C, to 
protect the taxpayer. Ultimately, they allowed the government 
to effectively take control of those companies if it deemed 
their losses to be a systemic risk to the U.S. financial 
system.
    So then, in September of 2008, when the housing market 
continued to decline, Secretary Paulson basically fired that 
bazooka. And the Federal Housing Finance Agency placed Fannie 
and Freddie into a government conservatorship. Then, the 
beginning of last year, beginning in 2009, CBO concluded that 
Fannie and Freddie should now be included--this is an important 
point--CBO concluded that Fannie and Freddie should now be 
included in the Federal budget.
    And according to a report issued by CBO in January, you 
arrived at this conclusion after considering the following 
questions: Who owns the agency? Who supplies its capital? Who 
selects its managers? And who has control over the agency's 
programs and budget? And ultimately CBO concluded the answer to 
those questions was, well, it is the Federal Government in each 
one of those.
    But since then, the Treasury has continued to purchase 
preferred shares in the GSEs as a means to provide them with 
enough capital to recover their losses. Initially, Congress put 
up $200 billion. That is $100 billion for each entity. Then, 
last year, the Treasury raised that potential commitment to 
$400 billion, and of course, on the Christmas Eve of 2009, they 
lifted that cap altogether. And now it is basically unlimited.
    In the latest quarterly report, Fannie Mae says, quote, we 
expect for the foreseeable future the earnings of the company, 
if any, will not be sufficient to pay the dividends on the 
senior preferred stock. As a result, future dividend payments 
actually will be effectively refunded from the equity drawn 
from the Treasury. Which, seems to me, is: the Treasury pours 
money in, and they take the treasuries, and they send our own 
money back to us again, as dividends.
    Now, Director, your counterparts, however, at the Office 
Management and Budget, OMB, and Treasury somehow disagree with 
you and your conclusions about Fannie. They feel that the cost 
to taxpayers only equals the cost of the actual cash infusions 
that have been pumped into the GSEs. And they do not, as you 
do, account for the risk to the taxpayer--this may be your 
point--on the losses that the GSEs have sustained or will 
continue to sustain in the coming years.
    Finally, a Wall Street Journal article said the 
administration has no plans to alter how it accounts for Fannie 
and Freddie in the Federal budget. ``I don't anticipate any 
changes,'' said Assistant Treasury Secretary Michael Barr. They 
will have the same appearance that they have had before in the 
budget books.
    So my first question is, is there any possible 
interpretation of the current relationship between the Federal 
Government and the GSEs that would allow you to change your 
opinion or, for that matter, any reasonable person to conclude 
that they should not accurately account for in our budget?
    Mr. Elmendorf. So, Congressman, as you know, we are always 
open to new information. We are not susceptible to persuasion 
apart from information.
    Our judgment at this time, as we reiterated in the report 
we released a couple of weeks ago is that Fannie and Freddie 
are, as you say, financed and controlled by the Federal 
Government in a direct enough way that we believe they should 
be viewed as parts of the government for budget purposes.
    But we do not in the end, of course, dictate the way the 
administration actually records the budget for years that are 
passed. But we are continuing, including based on discussions 
with the Budget Committees, to project the financial effects 
going forward on the basis we think makes the most sense.
    Mr. Garrett. So you concluded that, for the analysis 
reasons that you laid out, that that was a reasonable 
conclusion to place them on budget is basically what you are 
saying?
    Mr. Elmendorf. Yes, absolutely. And if the relationship 
changes over time, then, of course, we will revisit that 
conclusion.
    Mr. Garrett. But where we are right now, a reasonable 
interpretation, we place them in the budget, that a decision by 
the Treasury and the administration is contrary?
    Mr. Elmendorf. That is correct.
    Mr. Garrett. Thank you. And this is not an inconsequential 
decision as to whether it is on budget or not, is it?
    Mr. Elmendorf. Well, it mattered most for the budget 
numbers last year because, by our assessment, absorbing those 
companies then put the Federal Government on the hook for the 
risk the companies bore.
    So the biggest difference in the budgetary cost was 
actually for last year. Looking ahead this year and beyond, the 
cash infusion, the way the administration wants to record it, 
and our version of the subsidy cost are calculated differently. 
As it turns out, at least at the moment, the numerical 
differences are not that large.
    But it is potentially important beyond the baseline 
projections in how one would estimate the effects of various 
changes in what Fannie and Freddie do, or changes in their 
relationship with the Federal Government. Which is why we think 
it is very important that we continue to score them on the 
basis that we have established.
    Mr. Garrett. Right, and I guess on the last point--I know 
my time has already expired. In light of your consideration on 
how it is done and the assumptions that you make as time goes 
along, if things don't turn around over there, your number 
could go up, if you were on budget under your interpretation, 
could go up dramatically in light of the trillions of dollars 
of risk that is exposed, correct?
    Mr. Elmendorf. Yes, that is correct.
    Thank you very much.
    Chairman Spratt. Mr. Etheridge.
    Mr. Etheridge. Thank you, Mr. Chairman. Let me thank you 
for holding this hearing.
    And, Dr. Elmendorf, thank you for being here. I appreciate 
it very much. And I am glad to hear what you have had to say 
this morning, I am glad to hear that some economic indicators 
indicate that we are beginning to turn around in the economy.
    However, we all know that the job market is critical, and 
it appears that those lagging indicators are really hurting. 
And let me tell you why they are so important to me, and I 
think a lot of others, especially in my State of North 
Carolina. We just reached an all-time high of 11.2 percent in 
the month of December. And there are indications that we 
haven't topped out.
    I have introduced a bill, H.R. 4437, the Hiring Act of 
2010, to help businesses, really a tax credit for job creation, 
to help those folks who are on the fence, sort of to push them 
off.
    In your opinion, why do you think the unemployment rate 
remains high, even in the face of economic growth? You have 
touched on this some. And secondly, how does CBO estimate 
improvement on this front? How do we get there? And finally, we 
intend, through the Hiring Act and there are other bills out 
there that are similar, to increase job creation in the short 
term, and what kind of impact would that have on the projection 
numbers that you have over the long term?
    Mr. Elmendorf. Congressman, I have not examined your 
particular bill.
    But, in general, we did analyze alternative ways of 
spurring economic growth and job creation. And we think that 
one of the more effective ways are policies that are targeted 
at, basically, give money to firms in response to increases in 
their payroll.
    Mr. Etheridge. That is what this one does.
    Mr. Elmendorf. And that works in two ways really. Part of 
that is just that putting money into the spending stream, 
giving more money to workers or to firms will encourage a 
certain amount of extra spending.
    Additionally there is this incentive effect if the program 
is structured right, and there are a lot of complexities as you 
know in that, it can create this incentive effect additionally.
    If a policy like that were implemented, we would 
incorporate its effects in future--we would try to estimate the 
economic effects of it as it was being considered. And we would 
certainly incorporate its effects in our next round of baseline 
projections. But I cannot say offhand how much difference that 
makes.
    Mr. Etheridge. Good. Thank you. I understand that.
    Now, on the larger question of the economy, I agree, we 
need to have common sense and cooperation to fix the problem. 
And I wish Mr. Campbell were here, because he said, where we 
are is unsustainable. And that is true. It also was 
unsustainable last year and the year before that and the year 
before that and during the years that the previous 
administration was in charge.
    Mr. Elmendorf. Yes, that is right.
    Mr. Etheridge. And there were things done then that has 
added to the problem we are in.
    And here are some of them. Because in 2000, I came here 
early enough to work on a cooperative way to set us on the path 
to a balanced budget and a surplus that we picked up in 2000. 
Policies were put in place shortly thereafter in the first Bush 
years that made the problem even worse, because we were told 
then that we could pay off all of our debt by where we are 
today. But there were those that said, that was not important.
    As a matter of fact, Vice President Cheney said deficits 
don't matter. If he is listening, I want him to understand that 
debts do matter. And now this is the consequence of actions 
that were taken. Debts matter; they matter to our children.
    So my question is this, as we are looking to broader 
growth, we need a bipartisan approach again. We don't need the 
partisan issues that are out there. It is going to take 
everyone working together, holding hands, making tough 
decisions to replace 8 years of partisan politics. We can't go 
back to that if we want to get the job done that will make a 
difference, so the people who live in my district, whether they 
are on Main Street or on a country road, start enjoying some of 
the same benefits that the people on Wall Street are now 
enjoying.
    And we aren't getting jobs. So how do we make these things 
fit from an economic standpoint so that this economy starts to 
grow and everyone is able to sit at the table again rather than 
sit at the end of the chair and get a few crumbs?
    Mr. Elmendorf. You ask a very important and very, very 
difficult question, Congressman.
    It has not been a good period for many American families. 
And trying to adopt policies to encourage overall growth and 
also to ensure, as you would like, that that growth be shared 
in certain ways is very difficult. And it is made more 
difficult by the very large deficits and growing debt that 
exist under current policies.
    And we are--one of the areas that we plan to devote a good 
deal of effort to at CBO in this coming year, in fact, is 
working on programs in the income security and education area, 
doing the sorts of analysis that we hope will help you to make 
decisions in that area in an informed way.
    I don't have a cookbook handy with particular recipes to 
pass you. But I do think that doing that while also taking 
note, as you say correctly, that the debt matters will be a 
very great challenge.
    Mr. Etheridge. Thank you, Mr. Chairman.
    And I welcome that report.
    Thank you and I yield back.
    Chairman Spratt. Thank you, Mr. Etheridge.
    We have 7 minutes and 17 seconds. And what we can do, Mrs. 
Lummis, is let you ask your questions and then we have got to 
go vote twice. There is a 5-minute vote following this one. Let 
us take yours up, and then we will leave here--we will hold you 
to 5 minutes and leave here with 2 minutes to go.
    The floor is yours.
    Mrs. Lummis. Thank you, Mr. Chairman.
    Thanks, Mr. Elmendorf.
    So I am going to go really fast, rapid fire. If we want to 
address the structural deficit, which is better for the U.S. 
economy in the long run, cutting Federal Government spending or 
raising taxes?
    Mr. Elmendorf. Well, raising taxes, depending on how one 
raises them, can have important effects on people's incentives 
to work and to save. And if taxes are raised in a way that 
discourage work and saving, that would have dampening effects 
on economic growth that would offset the advantages of less 
debt.
    Similarly, government programs, on the spending side, can 
have effects on incentives to work and to save. And the ways in 
which those programs are changed can have incentive effects as 
well. So I don't think there really is a clean answer that it 
should be on one side of the budget or the other.
    It depends much more I think on adopting policies on either 
side of the budget that take account, not just of the overall 
effects on the deficit but also the effects on people's 
incentives.
    Mrs. Lummis. Who is better for the economy in the long 
term, a Federal Government employee or a private-sector 
employee?
    Mr. Elmendorf. I won't take that personally, Congresswoman.
    Look, we have to decide as a society what we want the 
public sector to do and what we want it not to do. And I don't 
think there is a simple answer to that question. Both employees 
will spend money. They will buy things that will help create 
jobs for other people.
    It is really a matter of judgment about what one wants the 
economy to be like and how much we want to be in the public 
sector versus the private sector, as the debate which is taking 
place around health care to some extent. But there isn't a 
simple economic answer to that question.
    Mrs. Lummis. Does the private-sector employees' taxes help 
pay for the position of the public-sector employee?
    Mr. Elmendorf. Yes.
    Mrs. Lummis. Okay. Thank you.
    Which is worse in the long run, crowding out private 
investment with government borrowing or higher taxes that slow 
private growth?
    Mr. Elmendorf. I think it depends critically on the nature 
of the taxes and how much they slow private growth. And as you 
understand very well, not every tax increase is the same. Not 
every spending cut is the same, and it matters very much what 
specifically you would do in policy terms.
    Mrs. Lummis. In this economy, if you had to raise taxes, 
what tax would you raise first that you believe would have a 
positive effect or a less negative effect on the economy?
    Mr. Elmendorf. I am sorry, Congresswoman. And I am not 
trying to be difficult. I have not really thought carefully 
about ranking possible tax increases in that way.
    Mrs. Lummis. Okay. I want to talk a little bit about the 
PAYGO rules. You mentioned earlier that the PAYGO rules of the 
1990s helped. And I have heard that, too.
    But I have also heard that the PAYGO rules that we passed 
last year had so many loopholes and exemptions that they 
weren't the same as the PAYGO rules that were in effect in the 
1990s. Is that true?
    Mr. Elmendorf. So the PAYGO rules--yes, the PAYGO rules 
that you passed last year exempt significant amounts of 
prospective tax cuts and some spending increases from the PAYGO 
requirements.
    Mrs. Lummis. So would it be more meaningful if we went back 
to the PAYGO rules that were in effect in the 1990s, in terms 
of trying to address the structural deficit in the long term?
    Mr. Elmendorf. Yes. So if you adopted a PAYGO rule that did 
not exempt any prospective policy actions, that would have a 
sharper effect on holding down budget deficits.
    Mrs. Lummis. Okay. What if we froze the top line of 
Medicare, Medicaid, Social Security and the very same 
discretionary spending that the President announced for 
tonight's speech for the same time period, how much would that 
save?
    Mr. Elmendorf. I cannot think of the calculation offhand, 
but it would certainly save a great deal of money. I think the 
policy challenge is to decide, if one puts a top line cap on 
Medicare spending, what does that mean to Medicare 
beneficiaries? Who is it that won't get paid the amount they 
would have been paid without that cap?
    Mrs. Lummis. Let's say that you reduce the benefits to 
wealthy Americans, who did pay that money into Social Security, 
means tested the payouts and did it that way?
    Mr. Elmendorf. On the Social Security side, where one is 
picking a sort of dollar amount up front, it is easier to 
change those rules. And one could do the sort of thing you 
suggest. Exactly how much you would save depends on just what 
thresholds you picked and how the testing worked.
    Mrs. Lummis. Mr. Chairman, thanks a million.
    Thanks, Mr. Elmendorf.
    Mr. Elmendorf. Thank you Congresswoman.
    Chairman Spratt. I am going to yield the gavel to Mr. 
Edwards from Texas. And he is going to ask some questions. He 
will have the power to recess if he needs to get to the floor 
himself. I am going to go cast two votes, and I will be back.
    Mr. Elmendorf. Thank you, Mr. Chairman.
    Mr. Edwards [presiding]. Thank you, Mr. Chairman.
    Dr. Elmendorf, thank you for being here.
    I applaud President Obama for taking a significant first 
step toward getting this deficit under control, and I applaud 
those Republicans, such as, I believe, Senator McCain and 
others, who have said they will support it. It is somewhat 
disappointing to me that some of my Republican colleagues on 
this committee who had the majority for 12 years and helped, 
through their partisan budgets--passed into law without 
Democratic support--lead us from the largest surpluses to the 
largest deficits in American history.
    And perhaps it is insight into why we have the deficit 
problem that we have today when some of my colleagues would 
suggest it is not significant that we are going to, through 
this 3-year freeze, be able to reduce the deficit by $250 
billion more than it otherwise would be.
    I am still hopeful we can build some bipartisan support for 
deficit reduction programs, short term and long term, because I 
don't think either party has the political will or the 
political ability to make the tough choices to get us where we 
need to be.
    But I do want to go back and not focus on the past, but I 
do want to be sure we understand how we got into this ditch so 
we can figure out how to not drive the car into the ditch 
again.
    And I would like to begin with this question. In 2001, when 
President Bush took office, what was CBO's projected national 
debt for the year 2010, approximately?
    Mr. Elmendorf. I don't know, Congressman. We don't have 
that number with us. I am sorry.
    Mr. Edwards. Wasn't it close to zero national debt?
    Mr. Elmendorf. That seems plausible.
    Mr. Edwards. So if you could get that for me, I would 
appreciate it. But as I recall in 2001, the CBO, when President 
Bush took office, the CBO was projecting--at that time, we had 
about a $5 trillion national debt and there was a projection of 
about $5.5 trillion of surplus. So my math tells me that would 
have been a projection of having the national debt paid off by 
the year 2010. And if you could verify those numbers, I would 
appreciate that.
    Mr. Elmendorf. Yes, we will check that.
    Mr. Edwards. What is the national debt today?
    Mr. Elmendorf. Debt held by the public by the end of this 
fiscal year we think will be about $8.8 trillion.
    Mr. Edwards. And the total national debt today.
    Mr. Elmendorf. Well, if you mean the gross--there are a lot 
of measures of debt. Gross debt is on the order of $12 
trillion. That includes, as you know, debt held by the public 
and also debt held by other parts of the government.
    Mr. Edwards. So instead of the projected situation where we 
would have no national debt, gross debt, by the year 2010, 
projected when President Bush came into office, in fact we have 
a gross debt of about $12 trillion. So approximately a $12 
trillion turnaround from what was projected with the policies 
in place in 2001. Is that approximately correct?
    Mr. Elmendorf. I think, Congressman, that the numbers you 
are thinking about for the 2000 projection would have referred 
to debt held by the public. It was not gross debt that would 
have gone to zero because there would have been bonds held in 
the Social Security and Medicare trust funds that would have 
been part of gross debt. So I think it is debt held by the 
public that you started with and that you are correctly focused 
on because that is what really measures the government's effect 
on the economy. And that is a number that we think again this 
year will be about $8.8 trillion, and that would have been, we 
think, in the neighborhood of zero. We will check to be sure.
    Mr. Edwards. Wasn't there a projection that there would be 
about a $5.5 trillion surplus over a 10-year period if you go 
back to CBO's projections in 2001?
    Mr. Elmendorf. That may well be, Congressman. I just don't 
have a personal recollection of that. We will check for you.
    Mr. Edwards. So instead of--at the very minimum, instead of 
having zero public debt in the year 2010, we have about $8 
trillion?
    Mr. Elmendorf. Yes, more than $8 trillion----
    Mr. Edwards. In public debt. The gross debt is actually 
worse than that, $12 trillion. So an incredible turnaround.
    During--I just want to get this for the record. During the 
12 years that the Republicans had a majority on this Budget 
Committee and passed the budget resolution without Democratic 
votes, did they ever pass through this committee or in the 
House or through the Congress a 3-year freeze on nondefense 
discretionary spending?
    Mr. Elmendorf. Not that I am aware of, Congressman, no.
    Mr. Edwards. During those 12 years that the Republicans had 
the majority on this committee and passed every budget 
resolution they passed out of this committee on a partisan 
basis, did they ever pass on the floor of the House or into law 
a long-term reform proposal to reduce the cost of entitlement 
spending?
    Mr. Elmendorf. Not that I am aware of, no, Congressman.
    Mr. Edwards. In fact, the reality is that, without 
Democratic votes, under the leadership and push of Tom DeLay in 
the wee hours of the morning, isn't it correct that the 
Congress under Republican leadership passed the largest 
increase in Medicare funding since Medicare was created, the 
Medicare Part D prescription program? Was that the largest 
increase in Medicare entitlement spending since Medicare had 
been created?
    Mr. Elmendorf. Yes, I think that was the largest increase--
obviously the numbers have increased over time based on the 
cost of providing benefits already written into law. In terms 
of the expansion of benefits, that was a very significant 
expansion, and it was enacted without any particular means of 
paying for it being identified.
    Mr. Edwards. So, in fact, it was passed without being paid 
for at all; is that correct?
    Mr. Elmendorf. Yes, Congressman.
    Mr. Edwards. All of that money was borrowed in effect?
    Mr. Elmendorf. Right.
    Mr. Edwards. What does CBO project the 10-year cost of the 
Medicare Part D prescription program to be?
    Mr. Elmendorf. That is a good question which I should know 
the answer to, but I don't offhand.
    Mr. Edwards. Can somebody give me a ballpark? Or 10 years 
from the time it was passed. What was the 10-year cost?
    Mr. Elmendorf. So I am not sure, Congressman. The actual 
cost is coming below CBO's estimate, even further below the 
estimate of the Office of the Actuary at the Centers for 
Medicare and Medicaid Services, but still, obviously, a very 
substantial amount of money. I don't know what the 10-year 
number would be corresponding to the initial 10-year estimate.
    Mr. Edwards. I have heard between $500 billion and $700 
billion over a 10-year period. Do you think that is the 
approximate range of costs--the 10-year costs--of the Medicare 
expansion program that was passed without being paid for and 
passed by Republicans when they controlled the Congress?
    Mr. Elmendorf. Those numbers sound a little high to me for 
the decade beginning with enactment. But we will check for you, 
Congressman, and respond to that question.
    Mr. Edwards. Okay. I think it is somewhere in at least the 
half a trillion dollar range, none of which was paid for.
    Can you tell me, Dr. Elmendorf, how much the 2001 and 2003 
tax cuts have increased the national debt as of today?
    Mr. Elmendorf. I think I am 0 for 3 with you Congressman. I 
don't have an assessment of cost of that over the past decade.
    A related fact which may be interesting to you is that, in 
the deterioration in the budget outcomes over the last decade 
relative to the projection that we made 10 years ago, about 
two-thirds of that deterioration has come from legislative 
changes in our estimation, and about a third has come from 
economic and technical factors that were less favorable than we 
expected.
    Mr. Edwards. Do you have a ballpark? Did the Bush tax cuts 
of 2001 and 2003 on a 10-year basis add more or less than a 
trillion dollars to the national debt?
    Mr. Elmendorf. I believe a good deal more than the trillion 
dollars, Congressman.
    Mr. Edwards. More than $2 trillion perhaps?
    Mr. Elmendorf. So there we go. So we think over the 10-
year--the appropriate 10-year window, which in this case would 
be the 2002 to 2011 fiscal years, that the cost of the 2001 and 
2003 tax cuts is about $1.5 trillion, not including the extra 
debt service that has resulted from it.
    Mr. Edwards. Okay. Do you know what the number is with the 
extra debt service?
    Mr. Elmendorf. No, I don't think we have done that 
calculation of the debt service. As you know, we estimate the 
effects of debt as a whole. We can do a partial estimate for 
this piece, but we have not done that.
    Mr. Edwards. But when you increase the deficit, debt 
service is a real cost of increasing that deficit; is that 
correct?
    Mr. Elmendorf. Yes.
    Mr. Edwards. So a minimum of $1.5 trillion has been added 
to the national debt as a result of the 2001 and 2003 tax cuts. 
And if you add in interest, it could be over $2 trillion 
perhaps. Okay.
    Some of my colleagues in Congress, just a few weeks ago, 
were proposing a complete repeal of the estate tax. In fact 
some of my colleagues who, in this committee, talk a great deal 
on a regular basis at every opportunity about the importance of 
not adding debt to the next generation and our moral obligation 
to our children. Some of those same members who voted for the 
budgets that led to the largest deficits in American history 
after they inherited the largest surpluses, also supported 
repealing the estate tax completely. Do you have a 10-year 
estimate of the cost of the complete repeal of the estate tax?
    Mr. Elmendorf. We may. I don't know offhand. Just a moment.
    Mr. Edwards. I realize you are not the director of the Ways 
and Means Committee. So I understand you are not having exact 
numbers on all of these questions. I would welcome the follow 
up. But some approximate number?
    Mr. Elmendorf. I think we don't know. We will have to get 
back to you on that. As you say, this is the Ways and Means 
Committee; on a staff level, the staff of the Joint Committee 
on Taxation does those estimates. And we can check on what the 
numbers are.
    Mr. Edwards. These certainly have a direct budget 
implication. That is why I would appreciate the answers to 
these questions in writing if you could.
    I have heard numbers as high as $700 billion being added to 
the national debt if we had a complete repeal of the estate 
tax. Does that sound like ballpark costs in terms of extra 
national debt to you?
    Mr. Elmendorf. I am sorry, Congressman. We just don't know. 
We bring a lot of numbers in our heads and a lot of numbers in 
our notebooks, but not every number, and we have not aligned 
with your questions very well I am afraid. But we will send 
that to you in writing.
    Mr. Edwards. I believe that might be the ballpark number. 
If we did what some members of this committee who talk about 
reducing the deficit on a regular basis, if we did what they 
wanted to do, I think that would add somewhere between a half a 
trillion to an extra $700 billion to the national debt over a 
period of time.
    Could I just--why don't we do this then, could I just ask 
you for the record, in addition to answering the questions I 
have asked, if you would also answer the questions of what the 
10-year cost would be of other tax proposals that have been 
made. One of them has been reducing the corporate tax rate by 
perhaps 5 percent. I would like to know what the increase to 
the national debt would be if we reduce the capital gains tax 
by 5 percent. And would you happen to know off the top of your 
head what the AMT fix, a complete AMT permanent tax fix would 
cost--how much that would add to the national debt over 10 
years?
    Mr. Elmendorf. For that we actually do have an approximate 
number reported in our outlook. Over the next decade, indexing 
the AMT for inflation, a particular version of what one might 
mean by a fix, would reduce revenue by $558 billion and would 
also have a debt service cost beyond that over the next decade 
of $125 billion.
    Mr. Edwards. You know, we will be able to tell more 
specifically when you get the numbers, but the bottom line is, 
by my math, if you were to pass some of these tax proposals 
that some of the folks who give a lot of deficit hawk speeches 
but turn into deficit doves when it comes to the tough 
decisions to balance the budget--if they were to pass all the 
tax cut proposals that they have recommended, you could not 
only freeze the nondefense discretionary budget, you could 
eliminate the entire discretionary budget, probably including 
the national defense budget, and still not balance the budget.
    Am I clear in response to Mr. Doggett's questions, you said 
that if we were to extend all of the 2001 and 2003 tax cuts 
that were passed on a temporary basis under the guise of being 
able to do that fiscally responsibly, for those who want to 
extend all of those permanently, did I understand that was a 
$4\1/2\ trillion cost over 10 years, or was there a different 
number there?
    Mr. Elmendorf. So if one were to extend the expiring tax 
provisions that you say from 2001 to 2003 and also index the 
AMT for inflation, those set of policies together would add 
about $4\1/2\ trillion to deficits over the next 10 years, 
including the debt service that would result from the changes.
    Mr. Edwards. Dr. Elmendorf, you said earlier it is your 
opinion that no single step, either on the entitlement side or 
the discretionary side of spending or on the tax side, no 
single step is going to bring us back into a balanced budget; 
is that correct?
    Mr. Elmendorf. I think it is very unlikely that a single 
step would do that, because the magnitude of the gap between 
spending and revenues is so large that to try to close that 
gap, if that were your goal, only through one component of 
spending or of revenues would require radical changes in that 
component.
    Mr. Edwards. Would you agree that the proposal that was not 
ever made or passed under Republican leadership in the Congress 
over the last decade or so, the proposal that President Obama 
has put forward now to have a 3-year spending freeze on 
nondefense, nonsecurity discretionary spending, that that--
would you agree that that is a significant, substantive step 
forward toward reducing the national deficit?
    Mr. Elmendorf. As I have said before, it is a step in the 
direction of reducing the deficit. According to the newspaper 
accounts, it is a small step relative to the overall deficit 
that we project over the next 10 years. But beyond that we just 
need to wait to see the actual proposal and to do our analysis 
of it.
    Mr. Edwards. Do you think it could also--I think it is a 
very significant step forward. I can understand you in your 
position being hesitant to add adjectives to these steps 
because you are in your position on a nonpartisan basis, and I 
respect that. But don't you think there is some benefit to 
the--there could be some significant benefits to the private 
markets and the capital markets if they were to begin to see 
Congress taking--and the President--together on a bipartisan 
basis taking significant steps, real steps, meaningful steps to 
get the deficit under control?
    Mr. Elmendorf. I certainly think that bipartisan steps that 
would change the trajectory of the Federal deficit could have a 
very positive effect on financial markets' concerns about where 
that deficit is headed.
    Mr. Edwards. I want to thank you for answering my 
questions. And the other questions I would just look forward to 
in writing. In fact, if your staff could look at any of the 
major tax cut proposals that have been proposed by Democrats or 
Republicans over the last 6 to 8 months, if you could put a 10-
year cost on those and include that in your answer, I would 
welcome that.
    Mr. Elmendorf. We will provide as many answers as we can as 
quickly as we can, Congressman.
    Mr. Edwards. Thank you, Dr. Elmendorf.
    And at this time I would like to have the committee recess 
subject to the call of the Chair. Thank you.
    [Recess.]
    Mr. Becerra [presiding]. The committee will reconvene and 
be called to order.
    Dr. Elmendorf, we will continue with the question-and-
answer period. And I would now like to turn to my colleague 
from Virginia Mr. Scott for his questions.
    Mr. Scott. Thank you, Dr. Elmendorf. Thank you.
    I would like to call up the first chart. It is this one you 
are looking at. As you can see, this is a chart of the deficit 
going back to 1980, and you will notice the blue bar shows the 
deficit, a significant deficit, was inherited, eliminated, and 
we went up to surplus. The projected 10-year surplus after the 
year starting in 2001, 10-year surplus was about $5\1/2\ 
trillion. What happened in 1993 to create that chart, the blue 
part of the chart?



    Mr. Elmendorf. As you know, Congressman, during the 1990s, 
there were significant policy actions taken to narrow the 
deficit. There was also an economic recovery and boom that 
increased revenues and reduced spending, which further narrowed 
the deficit.
    Mr. Scott. Votes were taken in 1993 that--did the votes in 
1993 help create that chart?
    Mr. Elmendorf. Yes, they did, Congressman.
    Mr. Scott. And what happened in 2001?
    Mr. Elmendorf. Well, so as you know, the economy was in 
recession, and also there were legislative actions taken that 
widened the deficit.
    Mr. Scott. Wait a minute. In 2001?
    Mr. Elmendorf. Excuse me.
    Mr. Scott. When did the recession in 2001 start?
    Mr. Elmendorf. Well, I actually have that. The recession 
started in March of 2001 and ended in November of 2001. That is 
a calendar-year basis. These are probably fiscal year.
    Mr. Scott. Okay. After the Bush administration came in, 
then the recession started. The Bush administration did not, 
quote, inherit a recession; is that right?
    Mr. Elmendorf. The National Bureau of Economic Research 
dates business cycles. They dated the recession as being in 
March. I think analysts would agree that the----
    Mr. Scott. And instead of a 10-year, $5\1/2\ trillion 
surplus, we ended up with, what, a $3\1/2\ trillion dollar 
deficit for those--debt for those--additional debt for those 
years of about $9 trillion?
    Mr. Elmendorf. I don't have the numbers at hand. As you 
know, and as the picture shows, there were very significant 
deficits during this decade.
    Mr. Scott. And notwithstanding the fact that the Bush 
administration overspent the budget $9 trillion--can you 
present the next chart--the jobs created under the Bush 
administration were about the worst since when?


    Mr. Elmendorf. I don't have those facts. But it is, I 
believe, true that net job creation over the past decade has 
now been essentially zero.
    Mr. Scott. And that is the worst since the Great Depression 
or in an 8-year period.
    Mr. Elmendorf. That may well be. I am not sure, 
Congressman.
    Mr. Scott. We obviously are in a very challenging situation 
where we are trying to create jobs. What impact does the fact 
that over the last 8 years we have overspent the budget a 
trillion dollars? In addition States are cutting back 
significantly. What does that do to the challenge we have in 
trying to stimulate the economy to create jobs?
    Mr. Elmendorf. It makes it harder. There is no doubt that 
in the late 1990s, there was a discussion about the importance 
of budget surpluses, partly because they put the country in a 
better position to deal with future needs. And by coming into 
this financial crisis and recession with a budget that was 
already in deficit with a substantial amount of outstanding 
debt, we were not in as good a position to deal with the needs 
that people felt then as we would have been if there had been 
less debt accumulated in the preceding years.
    Mr. Scott. And if we spend--part of the stimulus package 
was several hundred billion dollars of aids to the States. In 
addition to that, they have cut back. Is it true that we would 
almost have to spend $500 billion just to offset what the 
States have cut back in just to get back up to zero?
    Mr. Elmendorf. I don't have a specific number, Congressman, 
but certainly estimates have been that the States, the budget 
shortfalls of the States during this period of several years 
would be in the hundreds of billions of dollars. Just for 2010 
alone, the National Association of State Budget Officers 
reports that States made changes in their budgets, took budget-
tightening efforts exceeding $100 billion just in that fiscal 
year.
    Mr. Scott. So the first $100 billion would just get us back 
up to zero in terms of stimulus?
    Mr. Elmendorf. So what happens in recessions, as you know, 
is that government revenues decline. Spending on certain 
programs tends to move up. That widens budget deficits, as 
happened at the Federal level. At the State level, because of 
balanced budget rules, they can't persist in that way, and they 
take actions to offset that. So essentially they are forced to 
take legislative actions that offset a good deal of the 
automatic stabilizers that would otherwise arise from their 
budgets, and thus their net stimulative effect is really quite 
small.
    The Federal Government does not have those restrictions; it 
can run larger deficits. And we think one of the channels 
through which the stimulus package strengthened the economic 
activity was by providing funds to States that then reduced 
their need to raise other taxes or cut other spending.
    Mr. Scott. And that is part of the challenge, because we 
are shooting at a moving target. Every time we spend some more 
money, the States are cutting money. And one of the challenges 
that we have, we are trying to get ahead of the curve so we are 
actually stimulating the economy, not just maintaining the bad 
economy we have.
    Mr. Elmendorf. It is--yes, I mean, it is true that the 
economy has--despite the stimulus, and despite what we think 
are the positive effects of the stimulus, the unemployment rate 
has risen higher than we expected it to. We think that is a 
reflection of the depth of the underlying economic problem, and 
that is what the efforts to stimulate economic growth and 
stimulate job creation are trying to push against.
    Mr. Scott. Thank you, Mr. Chairman.
    Mr. Becerra. Thank you, Mr. Scott.
    Dr. Elmendorf, a few questions for you. I have an 
interesting statistic I would like to share with you. And your 
level of knowledge and your acuity with numbers is renowned, 
but I think I am going to stump you on this one.
    Mr. Elmendorf. As we have seen, Congressman, it is all too 
easy to stump me.
    Mr. Becerra. You have a moving train, I think pretty 
average size of about 150 freight cars on this train traveling 
at a pretty average speed of about 50 miles an hour. How long 
does that train travel from the point where the engineer pumps 
the brakes and says, we need to do an emergency stop of this 
50-mile-an-hour moving train.
    Mr. Elmendorf. You have stumped me, Congressman, but I 
think it would take some distance.
    Mr. Becerra. And by ``some distance,'' do you have a sense 
of measurement?
    Mr. Elmendorf. I wanted to be a train engineer when I was a 
kid, but I never got to the point of figuring out how good the 
brakes were.
    As you are saying, Congressman, the U.S. Government and the 
U.S. economy have a substantial amount of momentum in what they 
do and how they perform. And to use policy decisions to turn 
the government or to turn the economy is very difficult because 
of the size and the momentum that they have.
    Mr. Becerra. And so the reality is that in good times we 
could actually make a few mistakes and still be in pretty good 
shape, because the economy as a robust engine will drive that 
train at 50 miles an hour whether we want to brake it or if we 
happen to enact policies that would actually take it in the 
wrong direction?
    Mr. Elmendorf. Yes, that is right.
    Mr. Becerra. Would it surprise you to know that it takes 
about a mile and a half to stop that 50-mile-an-hour traveling 
train that has about 150 cars loaded on it?
    Mr. Elmendorf. I didn't know it was that far.
    Mr. Becerra. A mile and a half.
    Mr. Elmendorf. Interesting.
    Mr. Becerra. And so if that 50-mile-an-hour train that we 
call the U.S. economy is doing very well, as it was in the 
1990s when we were creating 22 million jobs, even some mistakes 
done by policymakers, that economy could absorb. And so in the 
year 2000, at the end of the year 2000, had you been sitting as 
the Director of the Congressional Budget Office, you would have 
been telling us we are looking at budget surpluses for as far 
as the eye can see totaling something over $5 trillion, 
correct?
    Mr. Elmendorf. Yes, I think that is right.
    Mr. Becerra. And so with the inauguration of a new 
President in 2001, you would have been advising that President, 
Mr. President, you are looking at a $5.6 trillion deficit over 
the next 10 years?
    Mr. Elmendorf. Surplus, yes.
    Mr. Becerra. And that is the train that is moving in that 
direction.
    Unfortunately, you were not the Budget Director in the year 
2001, you are the Budget Director in 2010, and rather than 
looking at a budget surplus, you are advising this Congress and 
a President that we are all looking at massive budget deficits. 
But those deficits that are massive weren't created last night 
or even last year, correct?
    Mr. Elmendorf. That is right. As I said in my remarks, 
there is an effect of the financial crisis and a recession and 
recent policies that is also a very important effect of the 
underlying policies built over a period of many years.
    Mr. Becerra. And so this fast-moving train is now moving in 
the wrong direction on the economy and deficits. But somehow we 
went from a train 8 years ago that was heading in the right 
direction with $5.6 trillion in surpluses for 10 years to 
budgets that are looking at deficits that are close to a 
trillion and a half strong in a year, and somehow that train 
turned with some bad policies and obviously bad economic 
conditions along the way.
    Do you think we are beginning to brake that downfall, the 
``stuck in the ditch'' situation that we have been in in the 
economy for the last several years?
    Mr. Elmendorf. Certainly we think that the economy has 
begun to grow again. The data for the second half of last year 
show an expansion of production. As I said, we think that 
expansion will be slow, and that traditionally employment lags, 
and we think that will mean a particularly weak performance of 
the labor market for some time. But the direction, we believe, 
of economic activity is up, and we expect that at some point 
this year that the unemployment rate will start to turn down, 
that employment, number of jobs, will turn up.
    Mr. Becerra. And when you talk about the labor market, 
which should concern us perhaps more than anything else if we 
are serious economists--obviously we all talk about interest 
rates and GDP, but the most important thing beyond interest 
rates, GDP should be J-O-B, and that is what an American wants 
to know is that he or she has a job that will bring us in 
revenues, tax payments so we could have a robust budget.
    If I could have chart 6 put on the screens.
    
    
    We were seeing massive job loss. A year ago we were 
receiving word from you and others that we were going to be 
losing jobs. We found out it was close to 750,000 or so jobs 
that we lost in a month. That is about 24,000 jobs a day that 
we Americans were losing in this country. We are still losing 
some jobs. We actually had some job growth in November of this 
past year, a couple months ago, but still on the whole we are 
still losing, but nowhere near that number. And as the chart 
reflects, we are beginning to see the end of this trough that 
we were in, this massive ditch that we were in, which is good. 
But we still must do--we still have to generate more economic 
activity to really see us break into the plus when it comes to 
jobs, when it comes to our budgets and their deficits to turn 
into surpluses. So it is going to take some time for us to get 
out of that ditch; is it not?
    Mr. Elmendorf. I think that is right. And the crucial point 
is that getting back to zero is not enough, because there is a 
very large pool of people who are currently unemployed, and 
other people who are not measured as unemployed because they 
have given up on looking for work right now and are not counted 
in the labor force. And it will take a tremendous amount of job 
creation to put everyone back to work who is looking, who would 
like to have a job.
    Mr. Becerra. And to sort of put graphically what you have 
just said, if we take a look at the chart, essentially we saw 
how things were just going deeper and deeper into a ditch. The 
President takes office; 741,000 jobs lost. Enough has been done 
probably by this big economic engine we call the economy, 
whether with or without policy initiatives, to start to turn 
around on its own, but hopefully some policy initiatives have 
begun to help to turn that around.
    But whether you are liking the blue bars that are leading 
to less job loss, and hopefully at some point job gain, those 
are still jobs lost. So you have to add every single bar, red 
and blue, together to calculate the number of Americans who are 
out of work or who have lost a job. And it is not until we pass 
that zero line and start to break that zero line that we can 
actually say we have offset one of those Americans that 
represents part of that--any of those bars before we can say we 
are putting people back to work net.
    Mr. Elmendorf. I think that is exactly right. The official 
statistics show that more than 7 million people have lost jobs. 
The Bureau of Labor Statistics has already announced there will 
be a--they call a benchmark revision--that will add more loss 
so that shortly it will measure 8 million lost jobs. And 
normally in a growing economy with a growing population, the 
number of jobs increases over time. So the shortfall relative 
to what would have occurred without this recession is more than 
8 million lost. It is maybe 10 or 11 million is the shortfall 
that will need to be made up.
    Mr. Becerra. So we essentially are applying the brakes on 
that economic train that was taking us further and further down 
into that ditch. We have begun to see those policies break that 
fall, but it is going to take a mile and a half to stop that 
train. It is not going to happen in 1 day, in 1 year or in 100 
yards. It is going to take a mile and a half to stop that 
economic engine we call the U.S. economy that was traveling 50 
miles an hour with 150 cars on it straight to the bottom.
    Now, if I could get chart 4 up.
    
    
    We are seeing the changes; we see the job numbers getting 
better, and we see the economic numbers getting better for the 
GDP. Now let us talk macroeconomics, the economists' numbers, 
not the American workers' numbers and letters.
    The GDP is getting better, which simply means that we are 
seeing more economic activity, which then means that there are 
more companies in America or businesses who are willing to hire 
because I am selling more, I need to produce more. If we 
continue to see the blue bars showing economic growth, at some 
point we are going to start to break that line where we are 
losing jobs and actually start creating jobs, correct?
    Mr. Elmendorf. Yes, that is right. We think that might 
happen soon.
    Mr. Becerra. How soon? And again, it is based on an 
estimate.
    Mr. Elmendorf. I think within a few months one might see 
some positive numbers. As you noted, November has been actually 
revised to be a very small positive change in employment, so I 
think it is possible in a few months.
    Mr. Becerra. And so there are some breaks in the cloud, 
reasons to be hopeful. Obviously if you are an American who has 
lost a job, you are not going to be hopeful until you have 
something in front of you. But given the numbers, the acronyms 
that we use up here, that economists use, GDP, interest rates, 
really we can start talking pretty positively about jobs, J-O-
B, jobs in the future if we can continue in the right direction 
and get us out of that ditch, brake that train that was going 
fast downward, and start to see the economy, which has its own 
locomotion despite what--apart from what any Congress does or 
any President does, and just let the engine of our business 
community, our business men and women and the hard work and 
productivity of our American workers take hold?
    Mr. Elmendorf. We think the direction is for improvement. 
The concerns that I have expressed, and I think they are shared 
by many analysts, are that the pace of improvement may be slow 
enough that many people who will be looking for work will still 
be looking for work for some time. But the direction, certainly 
to us, seems to be positive at this point.
    Mr. Becerra. Can I have chart 8 as my last chart, and I 
will conclude with this. To me, there is reason for us to try 
to do whatever we can policywise to try to move us in the right 
direction. The last thing we need to do is bicker over what 
happened in the past. We need to remember what happened in the 
past; it informs what we do into the future. And certainly if 
that train hadn't been moving at 50 miles an hour with 150 cars 
on it, it wouldn't have taken a mile and a half to brake that 
downfall into that economic ditch that we were on.


    But it is important for us to be fiscally responsible as we 
make policies for the economy and for Americans who wish to 
work. When you inherit a $1.2 trillion deficit, that is what 
President Barack Obama received when he got the keys to the 
White House, when you are sworn in in January 2009 and are told 
that 741,000 Americans will lose their job or have lost their 
job in that month of January 2009, when Americans saw $2.7 
trillion of their retirement savings erased, when we saw the 
debt, national debt, more than double in 8 years, we really 
were talking about the great recession of the 21st century. And 
we are now trying to pull ourselves out of that ditch which is 
the great recession of the 21st century. Had we not had some of 
those safety net provisions in place that Franklin Delano 
Roosevelt helped institute, we might have been in a great 
recession or a great depression of the 21st century.
    And so, Dr. Elmendorf, I think we are going to be looking 
for your wise counsel over the next several months as we try to 
formulate the next budget for 2011 for this country, and we 
look forward to working with you. I appreciate your patience in 
responding to some of my questions.
    And I see that the gentleman from Virginia Mr. Connolly is 
here, and so I will turn to him for his questions.
    Mr. Elmendorf. Thank you, Congressman.
    Mr. Connolly. Thank you, Mr. Chairman.
    And sorry I am late, Mr. Elmendorf. I was at the Oversight 
and Government Reform Committee hearing listening to Secretary 
Geithner, and you should be glad you are here, not there.
    I am going to ask just a series of questions real quickly, 
if I can. First of all, I worked in the Senate from 1979 to 
1989 for a committee, and those were the Gramm-Rudman-Hollings 
days because we were so concerned about the growing debt. In 
retrospect, in your opinion, is there empirical evidence that 
Gramm-Rudman-Hollings ultimately led to a balanced budget?
    Mr. Elmendorf. I actually did a little work on that, 
Congressman, when I was a researcher in economics. I think the 
evidence is mixed. I mean, I think there is a--as you know, of 
course, the particular numerical targets that were chosen 
proved to be unreachable as a political matter. So the 
particular targets, not just the first version, but the second 
version, were not actually adhered to.
    On the other hand, I think many analysts would say that 
that experience did focus people's attention on the issue. It 
kept it on the front burner of the political discussion. In the 
end the larger steps were taken in 1990 and 1993 and later. But 
I wouldn't want to--but I do think most analysts would say 
there was value in focusing attention on the issue even though 
it wasn't followed exactly.
    Mr. Connolly. PAYGO was adopted around, I think, 1998, 
PAYGO legislation, and allowed to lapse in 2002.
    Mr. Elmendorf. The original PAYGO legislation was adopted 
as part of the 1990 budget agreement. And that, as I mentioned 
earlier, when you were interrogating Secretary Geithner, is 
viewed by analysts as having helped prevent fiscal actions that 
would have made the budget situation worse.
    Mr. Connolly. Well, let me ask the same question about 
PAYGO of you that I just asked about Gramm-Rudman-Hollings. Is 
there empirical evidence that PAYGO, in fact, was efficacious, 
that it made a difference?
    Mr. Elmendorf. I think it is a judgment call. It is not 
quite a number you can look up or calculate, which would be the 
best kind of empirical evidence. But I think most people's 
assessment, and this is a position taken by a number of my 
predecessors of CBO Directors in testimony, is that it did help 
to restrain policy actions that might have worsened the deficit 
during the period when people were very focused on deficits. At 
the end of the 1990s, as the economy was booming and the 
deficits turned into surpluses, then those constraints were 
widely ignored. But during the period of concern and attention 
on that problem, most analysts believe that the PAYGO rules did 
help to restrain policy actions.
    Mr. Connolly. A bipartisan commission with some enforcement 
mechanism to make decisions or recommendations stick, do you 
think it could make a difference, and do you believe--I know 
this is dicey--do you believe this body has the--historically, 
looking at it from an historical point of view--the discipline 
to abide by it?
    Mr. Elmendorf. I really can't and shouldn't speculate on 
the actions that you and your colleagues would take, 
Congressman.
    Mr. Connolly. You are no fun at all, Mr. Elmendorf.
    Mr. Elmendorf. I am in other contexts, but I don't think 
hearings are quite the place to display that side of me. You 
know, I think having a commission does not avoid the need for 
difficult decisions that ultimately you and your colleagues 
will have to make. The question that--I think the crucial 
question is whether it creates an environment that encourages 
such decisions to be put before you and to be made.
    Mr. Connolly. And could such a commission again be 
efficacious in affecting positively the debt, the long-term 
debt, only focused on the spending side?
    Mr. Elmendorf. It is harder to make changes that--it is 
harder to fix this fundamental disconnect between the level of 
spending that we are becoming accustomed to and the level of 
taxes that we are paying if one focuses on only one piece of 
the budget, because the magnitude of the gap that we see ahead 
is so large that to close that through one piece of the budget 
alone would require very radical changes in that particular 
piece. But again, it is not our place to say whether--what the 
combination of changes should be, and there is no economic 
reason why one can't focus on one piece or another. I just 
think it is a common judgment that the changes that would be 
required in a particular piece alone would be very, very 
dramatic.
    Mr. Connolly. Now, we had a hearing here last week with a 
panel on the long-term debt and what to do about it. And three 
out of the four witnesses for sure felt you couldn't just do 
one side of the ledger and not the other; you had to do both if 
you were going to have any kind of meaningful reduction in the 
long-term debt.
    I thank you so much, Mr. Elmendorf.
    And thank you, Mr. Chairman, for your indulgence.
    Mr. Becerra. I thank the gentleman for his questions.
    Dr. Elmendorf, you have been gracious as usual with the 
time. We appreciate that. We will look to you in the future for 
further testimony and guidance. We look forward to hearing from 
you. And unless you wish to add anything for the record, we 
will close this hearing.
    Mr. Elmendorf. Thank you very much, Congressman.
    Mr. Becerra. I am being reminded I want to make sure that 
we provide for any Members who were here or did not have an 
opportunity to attend who did wish to ask you some questions 
the opportunity to do so. So without objection, Members who did 
not have the opportunity to ask questions of Dr. Elmendorf will 
be given 7 days to submit questions for the record.
    [Questions submitted by Mr. Langevin and their responses 
follow:]

     Questions for the Record Submitted by Congressman Langevin and
                     Director Elmendorf's Responses

    Yesterday's CBO forecasts put our economic and fiscal challenges in 
clear focus. While our budget projections have improved slightly, we 
remain on an unsustainable fiscal path with a projected deficit of $1.3 
trillion in 2010 and an exploding debt that could reach 67 percent of 
our total economic output by 2020. These figures aren't just 
unsustainable, they are completely unacceptable. We must chart a clear 
course forward to get out of this fiscal mess. And in order to do that, 
we need to how we got here so we do not repeat the same mistakes.

    1. Many factors contributed to our current deficit. How much has 
the impact of the recession and the corresponding increased federal 
spending, like the Recovery Act, contributed to the current deficit 
compared to the enactment of previously unpaid federal policies, like 
the 2001 and 2003 tax cuts?

    Response: The Joint Committee on Taxation estimates that the tax 
provisions enacted in 2001 and 2003 increased the cumulative deficit 
between 2002 and 2011 by more than $1.6 trillion (excluding the cost of 
additional borrowing). CBO estimates that the cost of American Recovery 
and Reinvestment Act of 2009 will total nearly $850 billion (excluding 
the cost of additional borrowing) over the period from 2009 to 2019. 
The effect of the recession on the budget has also reduced revenues 
(and increased outlays to a lesser extent) by several hundred billion 
dollars both last year and this year.

    2. Unemployment remains high, especially in my home state of Rhode 
Island where it stands at 12.9 percent, and families everywhere are 
still feeling the effects of the recession. When does CBO estimate that 
the unemployment rate will start to come down?

    Response: The unemployment rate, which peaked at 10.1 percent in 
October and averaged 10 percent during the fourth quarter of 2009, has 
now posted three consecutive months through March at 9.7 percent. This 
is somewhat lower than CBO's forecast, in its January outlook, that the 
unemployment rate would average slightly above 10 percent during the 
first half of 2010 before turning down in the second half of the year. 
CBO expects that the U.S. economy will continue to grow through 2010, 
but at a moderate pace. Employment growth has begun to follow the 
recovery in spending, but, with discouraged and other marginally 
attached workers returning to the labor force, CBO continues to expect 
that increased hiring is unlikely to drive the unemployment rate down 
appreciably until the second half of the year.
    The household survey, from which the unemployment rate is 
calculated, displays considerable month-to-month sample volatility. 
Hence, while the reduction in the unemployment rate to 9.7 percent was 
welcome, it may have partly reflected statistical factors rather than a 
greater-than-expected improvement in underlying labor market 
conditions. The household measure of employment has nevertheless shown 
solid growth over the past four months, and some analysts believe that, 
despite its volatility, the household measure may be capturing a 
nascent upturn in hiring better than the more widely used payroll 
survey-based measure of employment. For the time being, CBO's view 
follows more closely the payroll data, which is telling a rather weaker 
story than the household survey. After correcting for adverse weather 
effects, for census hiring, and for the re-benchmarking of the survey, 
payroll growth in the first quarter of 2010 appears to have been in 
line with CBO's January forecast for a weak recovery in employment in 
the first half of the year.
    The unemployment rate rose unusually fast during 2009 relative to 
the slowdown in economic activity as firms shed workers in the face of 
uncertainty about economic prospects faster than they have typically 
done before, resulting in unusually high productivity growth in 2009. 
Going forward, CBO expects the growth of employment to follow its 
traditional relationship with the growth of output. Based on a wide 
range of economic indicators, CBO still foresees slow growth in output 
and employment over the next few years compared with the recoveries 
from past deep recessions. It is the slow growth of spending that 
drives CBO's forecast of only a gradual improvement in the unemployment 
rate.

    3. Given the current state of the economy, what are the potential 
negative consequences to implementing deficit reduction too rapidly?

    Response: Following the financial panic, private spending in the 
economy fell sharply as consumer and firms had to--or chose to--reduce 
their borrowing and indebtedness. As spending collapsed, factories and 
businesses were shuttered and unemployment soared. While the state of 
both financial markets and the economy have since improved, and while a 
sharp turn in the inventory cycle boosted the growth of real output in 
the fourth quarter of 2009, CBO projects that the underlying growth of 
demand in the U.S. economy is significantly weaker than in recoveries 
from past deep recessions. The modest rebound projected for 2010 and 
the next couple of years reflects a number of factors: the private 
sector is still seeking to consolidate its balance sheets; moreover, 
with short-term interest rates already close to zero, the Federal 
Reserve's ability to stimulate private sector spending through interest 
rate reductions--and perhaps through other unconventional means of 
monetary policy--remains limited. In the current economic environment, 
expansionary fiscal policy--through both increased government spending 
and reduced taxation-has been contributing to the recovery in economic 
activity, though its contribution is set to fade in the second half of 
2010 and on into 2011.
    A sharp, immediate withdrawal of fiscal stimulus from the U.S. 
economy would likely weaken aggregate demand. With private spending 
still restrained, the output of goods and services in the economy would 
fall. Weaker employment growth and higher unemployment would likely 
follow, while inflation and interest rates would be held down.
    CBO's forecast of real economic growth illustrates this concern, 
for it must incorporate the tightening of fiscal policy built into 
current law in 2011. Current law implies that a range of tax rates will 
rise at the end of 2010. In addition, increased tax payments will come 
due during 2011 on liabilities resulting from the end of temporary AMT 
relief in 2009. The resultant rise in tax revenues amounts to a sudden 
deficit reduction of about 3 percentage points of GDP, and this is 
built into CBO's projections. The result of these tax hikes is to slow 
the growth of real GDP in CBO's forecast slightly in 2010, by about 1.4 
percentage points in 2011, with a partial rebound of 0.6 percentage 
points during 2012. In addition to the tax changes assumed in current 
law, various provisions of the American Recovery and Relief Act phase 
down between 2010 and 2011 CBO estimates that the phase-down of those 
measures between 2010 and 2011 will subtract somewhere in the range of 
1 to 2 percentage points from the growth of real GDP.
    Of course the deleterious long-term implications for the economy of 
larger deficits and debt remain. The consequences of higher deficits 
and debt will manifest themselves over time in terms of a lower capital 
stock, productivity, wages and living standards. The difficult 
challenge for policymakers is to steer the appropriate course between 
the consequences of weakening demand too fast today and the price to be 
paid tomorrow for higher debt and deficits.

    4. How much savings could we achieve through a discretionary 
spending freeze over the next three years? Can we fix our budgetary 
problem by spending cuts alone; and if so, what amount of spending cuts 
would we have to achieve to bring the budget into balance over the next 
ten years?

    Response: A freeze on discretionary spending could save nearly $80 
billion over the next three years, relative to CBO's baseline (which 
assumes that current appropriations grow at the rate of inflation). The 
amount of spending cuts required to balance the budget depends on when 
those cuts start. Beginning them earlier in the period would generate 
more interest savings (and therefore require fewer programmatic 
reductions) than waiting until later in the decade. We would be happy 
to work with your staff if you have some scenarios that you would like 
to explore.

    Mr. Becerra. With that, Director Elmendorf, we appreciate 
your testimony, and we will close the hearing. So this 
committee now stands adjourned, and we will be looking forward 
to seeing you in the future.
    [Whereupon, at 12:55 p.m., the committee was adjourned.]

                                  
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