[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:
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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.]