[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]


 
                   THE CONGRESSIONAL BUDGET OFFICE'S
                      BUDGET AND ECONOMIC OUTLOOK

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

           HEARING HELD IN WASHINGTON, DC, FEBRUARY 10, 2011

                               __________

                            Serial No. 112-3

                               __________

           Printed for the use of the Committee on the Budget


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



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                        COMMITTEE ON THE BUDGET

                     PAUL RYAN, Wisconsin, Chairman
SCOTT GARRETT, New Jersey            CHRIS VAN HOLLEN, Maryland,
MICHAEL K. SIMPSON, Idaho              Ranking Minority Member
JOHN CAMPBELL, California            ALLYSON Y. SCHWARTZ, Pennsylvania
KEN CALVERT, California              MARCY KAPTUR, Ohio
W. TODD AKIN, Missouri               LLOYD DOGGETT, Texas
TOM COLE, Oklahoma                   EARL BLUMENAUER, Oregon
TOM PRICE, Georgia                   BETTY McCOLLUM, Minnesota
TOM McCLINTOCK, California           JOHN A. YARMUTH, Kentucky
JASON CHAFFETZ, Utah                 BILL PASCRELL, Jr., New Jersey
MARLIN A. STUTZMAN, Indiana          MICHAEL M. HONDA, California
JAMES LANKFORD, Oklahoma             TIM RYAN, Ohio
DIANE BLACK, Tennessee               DEBBIE WASSERMAN SCHULTZ, Florida
REID J. RIBBLE, Wisconsin            GWEN MOORE, Wisconsin
BILL FLORES, Texas                   KATHY CASTOR, Florida
MICK MULVANEY, South Carolina        HEATH SHULER, North Carolina
TIM HUELSKAMP, Kansas                PAUL TONKO, New York
TODD C. YOUNG, Indiana               KAREN BASS, California
JUSTIN AMASH, Michigan
TODD ROKITA, Indiana
FRANK C. GUINTA, New Hampshire
ROB WOODALL, Georgia

                           Professional Staff

                     Austin Smythe, Staff Director
                Thomas S. Kahn, Minority Staff Director


                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, February 10, 2011................     1

    Hon. Paul Ryan, Chairman, Committee on the Budget............     1
        Prepared statement of....................................     3
    Hon. Chris Van Hollen, Ranking Minority Member, Committee on 
      the Budget.................................................     3
        Prepared statement of....................................     5
    Douglas W. Elmendorf, Director, Congressional Budget Office..     5
        Prepared statement of....................................     8
        Responses to questions submitted.........................    58
    Hon. Betty McCollum, a Representative in Congress from the 
      State of Minnesota, submission for the record:
        February 9, 2011, Budget Committee hearing transcript 
          excerpts...............................................    42
    Hon. Michael M. Honda, a Representative in Congress from the 
      State of California, questions submitted for the record....    58


     THE CONGRESSIONAL BUDGET OFFICE'S BUDGET AND ECONOMIC OUTLOOK

                              ----------                              


                      THURSDAY, FEBRUARY 10, 2011

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:03 a.m., in room 
210, Cannon House Office Building, Hon. Paul Ryan [chairman of 
the committee] presiding.
    Present: Representatives Ryan of Wisconsin, Campbell, 
Calvert, Akin, McClintock, Stutzman, Ribble, Flores, Mulvaney, 
Young, Amash, Rokita, Van Hollen, Schwartz, Kaptur, Doggett, 
Blumenauer, McCollum, Honda, Ryan of Ohio, Wasserman Schultz, 
Castor, Tonko, and Bass.
    Chairman Ryan. The hearing will come to order.
    Thank you, Dr. Elmendorf, for coming before the committee 
today. It is nice to have you back and congratulations on your 
reappointment for a full term.
    I first wanted to start off by saying how tough a job we 
know that the Congressional Budget Office and its employees 
have. We are going to work you pretty hard in the year to come. 
We appreciate the professionalism, the expertise that you have 
brought to the job.
    Everybody brings to this job a background and a perspective 
and a point of view. And the best CBO Directors, whether it was 
Orszag or Holtz-Eakin, check it at the door, and you have done 
a very good job of doing that, of sticking down the middle of 
the fairway. And I just want to commend you for that.
    We will have probably differences of opinions on 
methodology and things like that from time to time. But I enjoy 
the rigor of our debate, and I enjoy the fact that we can have 
a great exchange of ideas. And I also just want to simply start 
by saying I think it is great that you do more consulting with 
outside academics and outside forecasters because we don't have 
all the wisdom here, and it is important that you do that 
consultation. So I want to commend you for that and welcome you 
to a full 4-year term.
    With that, I just got your report. We got this the other 
day. And it has deteriorated. Now our baseline is going in the 
wrong direction. And these problems that we have, let me first 
start off by saying it is not all the Democratic Party's fault 
or the Republican Party's fault. Both parties are responsible 
for where we are today. I would argue that in the most recent 
history I think our fiscal policy went in the wrong direction.
    But finger pointing doesn't solve problems. Solutions solve 
problems. And we will have a difference of opinion on how to 
solve problems. And we do disagree with how to solve problems, 
but we don't disagree on where we want to go. We want people to 
have jobs in America. We want to have prosperity. We want to 
have an opportunity society. We want to leave our kids and our 
grandkids with a country that is better off, with a higher 
standard of living.
    And what is interesting about this and previous reports 
that you have been giving us is, we know that without a shadow 
of doubt, we are giving the next generation a lower standard of 
living. What amazes me is when you do your long-run modelling, 
that your model actually ends up shutting down by the time our 
kids are in our age bracket because the CBO can't conceive a 
point in which the economy can continue because of the debt 
burdens that are being placed upon it.
    So we have a moral imperative in this committee to get this 
right, to stop pointing fingers, to stop turning reforms into 
political weapons to be used in the next campaign and to 
actually buckle down and get this. Now, what is so important 
right now is the economy, is job creation, is prosperity.
    Your latest report reminds us that between June of 2009, 
when the recession technically ended, and last December, 
payroll employment rose by a mere six one-hundredths of 1 
percent, .06 percent. You compare that to the same period of 
time following past recessions, during those recoveries, 
employment rose by an average of 4.4 percent.
    Unemployment is too high because job growth is too low. And 
job growth is too low because, in my opinion, contrary to 
conventional wisdom here in Washington, we cannot tax, borrow 
and spend our way to a prosperous future. The deficit is $1.5 
trillion. The publicly held debt is up to 69 percent of GDP. It 
was at 40 percent by the end of 2008. And if you take a look at 
the alternative fiscal scenario, which I believe and most 
people would argue is the more accurate reading of where we are 
headed, it is down right scary.
    And so we believe that the prosperity plan is real spending 
controls, spending cuts and reforms along with pro-growth 
economic policies for job creation. We can't create jobs in 
Washington. That is what the private sector does. And if we try 
to borrow and spend more money to create jobs in Washington, 
that ends up taking money from the private sector, propping up 
our debt, putting pressure on interest rates because current 
big deficits are nothing more than tomorrow's big tax 
increases. That produces more uncertainty for businesses.
    So we just respectfully will probably disagree on how to 
create jobs, on how to get to prosperity, but let's just make 
sure that we all understand we want the same objective. We want 
our constituents to work. We want our kids and our grandkids to 
do better off. You are going to be overburdened with lots of 
requests. We really appreciate the way in which you respond 
with speed to all our requests, and we hope you do so as well 
with other members. But we have to get serious about this 
problem.
    And hopefully we can do a fairly quick turnaround on the 
President's budget, which is a little late. That is because 
Jack Lew was appointed late. But hopefully you can get us a 
pretty good turnaround on the President's budget. There is one 
more thing I would simply say is, we will be asking you to do 
some more runs on interest rate simulations, and on health care 
assumption simulations.
    And with that, I just want to yield to my friend, the 
ranking member, Mr. Van Hollen.
    [The prepared statement of Chairman Paul Ryan follows:]

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

    Thank you, Dr. Elmendorf, for coming before our Committee today to 
talk about the CBO's Budget and Economic Outlook.
    Your testimony and this latest report remind us that, between June 
of 2009, when the recession technically ended, and last December, 
payroll employment rose by a mere 6 one hundredths of one percent (0.06 
percent).
    Compare that to the same period of time following past recessions. 
During those recoveries, employment rose by an average of 4.4 percent.
    Unemployment is too high because job growth is too low. And job 
growth is too low because--contrary to the conventional wisdom here in 
Washington--we cannot tax, borrow and spend our way to a prosperous 
future.
    One of the biggest threats to the economy is the rapid and 
seemingly relentless growth of government spending and debt. CBO is 
projecting a deficit of $1.5 trillion this year with the level of 
publicly-held debt rising to 69 percent of GDP by the end of the year, 
up from 40 percent at the end of 2008.
    In a few short years, the CBO projects government spending to drive 
our debt to crisis levels, overwhelming the entire economy and drowning 
the next generation in red ink.
    The President has asked us to raise the debt limit to accommodate 
all of this spending and borrowing. But the recent experience of Europe 
teaches us that we cannot keep making unaffordable promises without 
eventually hitting a real debt limit--a limit on our borrowing imposed 
by credit markets in a state of panic.
    Endless borrowing is not a strategy. Spending restraint must come 
first. Federal Reserve Chairman Bernanke counseled us yesterday that 
the Congress needs to begin taking credible steps to reduce our looming 
longer-term structural budget deficits in order to grow the economy 
today.
    We must restore the foundations of economic growth--low taxes, 
reasonable regulations, sound money, and spending restraint. We must 
apply our timeless principles to the challenges of the day.
    If we act soon, and if we act responsibly, we can gradually phase 
in reforms to our major entitlement programs to save them from 
bankruptcy and ensure that people in and near retirement will be 
protected.
    Federal health care spending is at the heart of our budget 
problems. Some have suggested that I am critical of CBO for its budget 
score of the new health care legislation. That is not correct.
    The nonpartisan professionals at CBO must score the legislative 
language that is put in front of them.
    This is not in any way a dispute with CBO. It is a dispute with the 
authors of the new health care law--and with their use of budget 
gimmicks, deceptive accounting, and highly dubious offsets.
    We cannot begin to meet our fiscal challenges unless we have an 
honest debate about health care costs. As Chairman Bernanke reminded us 
yesterday, federal health care spending is driving our unsustainable 
deficits and debt, and the new law has done nothing to significantly 
reduce the strain that exploding health care costs are putting on the 
nation's finances.
    Hiding spending to justify the creation of a new unaffordable 
entitlement doesn't get us any closer to solving the problem. We need 
to advance fiscally responsible, patient-centered reforms that actually 
reduce costs and expand coverage.
    I look forward to your testimony today, Dr. Elmendorf. I hope we 
can learn more today about the budget and economic outlook and begin to 
put in place policies that lead to a permanent increase in jobs and put 
America on path of a more prosperous future.
    With that, I will yield to Ranking Member Van Hollen for an opening 
statement.

    Mr. Van Hollen. Thank you, Chairman Ryan.
    And I want to join my friend and colleague Paul Ryan in 
congratulating you, Dr. Elmendorf, on being reappointed.
    As the chairman indicated, there are some times we like the 
CBO numbers and projections on one side or the other, sometimes 
we don't. But the reality is I think we agree that you and your 
team have been an incredibly professional organization. You 
call them as you see them. And I do believe, and I think we 
would agree on this, that when it comes to the budget process 
here in Congress, at the end of the day, we have to have some 
common measure of where we are on these different indicators 
and that if we were to throw out the CBO numbers, whether we 
sometimes agree with them or not, it would be a recipe for 
budget and fiscal chaos.
    Let me just talk about some of those numbers because, as 
the chairman indicated, we probably do have different 
perspectives on how exactly we got here, but I think we do 
share a common interest--I know we share a common interest in 
trying to find a way out towards a fiscally sustainable future 
for this country.
    But I do think it is important in light of the projections 
you have got just to remind the members of the committee that 2 
years ago, the economy was in free fall. I mean, that is what 
the facts state. We were losing--we were at a negative 6 
percent growth rate, losing 700,000 jobs a month. Yesterday in 
his testimony, Dr. Bernanke indicated that a combination of 
factors, including the recovery bill, actions by the Federal 
Reserve and efforts to rescue the financial system helped 
prevent a second great depression.
    And your own CBO numbers confirm that the Recovery Act was 
a key ingredient in stopping the free fall and was responsible 
by your numbers of creating or saving between 1.3 and 3.4 
million jobs. I think we all recognize that despite the fact 
that the economy has stabilized somewhat, the fact that 
millions of Americans remain out of work is absolutely 
unacceptable.
    And what this report makes clear is that we do have to work 
together on a bipartisan basis to put our country on a fiscally 
sustainable path. I believe that the President's bipartisan 
commission that the chairman and others served on provided a 
lot of ideas that we should discuss and debate within this 
committee. They deserve a full vetting, and I would point out 
that the commission recognized the balance between acting now 
on a long-term plan and the dangers and risks of taking 
immediate deep cuts and the impact that could have on the 
economy and back--they said and I quote, in order to avoid 
shocking the fragile economy, the commission recommends waiting 
until 2012 to begin acting programmatic and spending cuts. We 
are going to have that debate.
    And I think we should also recognize, and we do, that 
focusing on just one sliver of the budget, domestic 
discretionary cuts, will not get us out of this hole. That is 
very clear from your report, and we are going to have to look 
at all of the components of this problem.
    And I hope that we will all come to the table with a sense 
of seriousness that we do need to look at the full picture 
going forward.
    Let me just end with this because it has been much 
discussed in the news lately. We are coming up upon some key 
decision points. We have to extend the CR. And then, of course, 
there is the debt ceiling limit. I think it was very clear from 
the testimony of Dr. Bernanke yesterday that we should not be 
playing political games with the full faith and credit of the 
United States, that we should not be, in his words, using that 
as a, quote, bargaining chip, that that would risk putting the 
economy in a total tailspin and putting even more Americans out 
of work.
    With that, Mr. Chairman, thank you very much.
    [The prepared statement of Chris Van Hollen follows:]

 Prepared Statement of Hon. Chris Van Hollen, Ranking Minority Member, 
                        Committee on the Budget

    Thank you, Dr. Elmendorf, for joining us today to discuss CBO's 
latest economic and budget projections that highlight the very real 
fiscal challenges we face.
    Before we begin today's discussion on the CBO's outlook, it's 
important to remember the economic situation that President Obama 
confronted when he took office in 2009. Two years ago, we were losing 
jobs at the rate of over 700,000 a month. We have now had a year of 
continuous private sector job gains, totaling nearly 1.3 million jobs 
in 2010.
    Yesterday, Federal Reserve Chairman Ben Bernanke testified that 
President Obama's American Recovery and Reinvestment Act, as well as 
measures taken to prevent the collapse of the financial sector and 
actions by the Federal Reserve, helped save the economy from a total 
meltdown.
    CBO's own analysis confirms that the Recovery Act was a key 
ingredient in stopping the free fall, and that the legislation was 
responsible for saving and creating between 1.3 and 3.4 million jobs. 
But despite these gains, millions of Americans remain out of work and 
the unemployment rate is unacceptably high--it is clear there is more 
work to be done.
    With that in mind, we're here today to talk about the CBO's Budget 
and Economic Outlook. This report makes it clear that Democrats and 
Republicans must work together now to put our nation on a fiscally 
sustainable path, and we stand ready to do that. The President's 
Bipartisan Fiscal Commission, which was charged with reducing the 
deficit, has put many important ideas on the table that we should 
review. One thing is clear--a strong economy is essential to both 
putting more Americans back to work and reducing our deficits. That is 
why the Commission said that 'in order to avoid shocking the fragile 
economy, the Commission recommends waiting until 2012 to begin enacting 
programmatic spending cuts.'
    Immediate, deep cuts will not create a single job. A broad range of 
economists, including Mark Zandi, have determined that such cuts will 
actually hurt job growth. Additionally, Chairman Bernanke stressed that 
the most important thing we can do as a country is to put together a 
credible, long-term plan for fiscal sustainability, rather than focus 
on deep cuts in domestic discretionary spending over the next eight 
months. This long-term plan should include a discussion on reforming 
the tax system to make it more efficient--but we should not be 
extending unpaid-for tax cuts for the wealthiest 2 percent of Americans 
beyond 2012.
    Unfortunately, during its first 30 days, the new Republican 
majority has passed measures that fly in the face of promises to tackle 
the deficit. First came the vote to get rid of the responsible House 
pay-as-you-go rule and replace it with a one sided rule that pretends 
that tax cuts for the wealthy don't add to the deficit. Next came the 
vote to eliminate important patient protections by repealing the health 
care reform bill and add a staggering $1.3 trillion to the national 
debt--as estimated by CBO--over the next 20 years. Just yesterday we 
saw a whole new budget gimmick on the House floor in an effort to 
eliminate funds that don't even exist--not surprisingly, CBO indicated 
that it wouldn't save the taxpayer one dime. And now there is talk of 
gambling with the full faith and credit of the United States 
government, which Chairman Bernanke yesterday indicated would lead to 
economic chaos.
    So, Mr. Chairman, we welcome a serious debate about developing a 
credible, long-term deficit reduction plan that reflects our national 
values and priorities. We hope that our colleagues on the other side of 
the aisle will join us in a robust discussion on the best way to move 
our nation forward.

    Chairman Ryan. Dr. Elmendorf, the floor is yours.

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

    Mr. Elmendorf. Thank you.
    Mr. Chairman and Congressman Van Hollen, I want to start by 
saying I am honored and delighted to have the opportunity to 
stay at CBO for 4 more years. And I appreciate both of your 
support in that.
    And on behalf of myself and all of my colleagues, I want to 
say to you and all the members of the committee that we look 
forward to working with you, providing the information, 
analysis on the country's economic and budgetary challenges 
that would help you in wrestling with those challenges.
    Indeed, the United States faces daunting economic and 
budgetary challenges. The economy, as you know, has struggled 
to recover from the recent recession. The pace of growth and 
output has been anemic compared to that during most other 
recoveries. The unemployment rate has remained quite high. The 
Federal budget deficit and debt have surged in the past 2 
years, owing to a combination of a severe drop in economic 
activity, the policies enacted in response to the financial 
crisis and recession, and an imbalance between spending and 
revenues that predated the recession.
    Unfortunately, it is likely that a return to normal 
economic conditions will take years. And even after the economy 
is fully recovered, a return to sustainable budget conditions 
will require significant changes in tax and spending policies.
    Let me discuss the economic outlook first and then turn to 
the budget outlook. CBO expects that production and employment 
will expand in the coming years, but only at a moderate pace, 
leaving the economy well below its potential for some time. We 
project that real GDP will increase about 3 percent this year 
and again next year, reflecting continued strong growth in 
business investment, improvements in both residential 
investment and net exports, and modest increases in consumer 
spending.
    But we have a long way to go on the employment front.
    Go to the first slide.
    Payroll employment, which declined by nearly 9 million 
between the end of 2007 and early 2010, has recovered by just a 
shade over 1 million since then. The recovery in employment has 
been slowed not only by the slow growth in output, but also by 
structural changes in the labor market, such as a mismatch 
again the requirements of available jobs and the skills of job 
seekers.
    We estimate that the economy will add roughly 2.5 million 
jobs per year over the 2011-2016 period, similar to the average 
pace during the late 1990s. But even so, we expect the 
unemployment rate, shown in the next slide, will be just above 
9 percent in the fourth quarter of this year and still above 8 
percent at the end of 2012. Only by 2016 in our forecast does 
the unemployment rate reach 5.25 percent, close to our estimate 
of the natural rate.
    CBO projects that inflation will remain very low in 2011 
and 2012, reflecting the large amount of unused resources in 
the economy. And it will average no more than 2 percent a year 
between 2013 and 2016.
    Economic developments and the government's responses to 
them have, of course, had a big impact on the budget. The next 
slide shows we estimate that if current laws remain unchanged, 
the budget deficit this year, the third column of that table, 
will be close to $1.5 trillion or 9.8 percent of GDP. That will 
follow deficits of 10 percent and 8.9 percent of GDP in the 
past 2 years, representing the three largest deficits since 
1945. As a result, debt held by the public will probably jump 
from 40 percent of GDP by the end of fiscal year 2008 to nearly 
70 percent at the end of this fiscal year in September.
    If current laws remain unchanged as we assume for CBO's 
baseline projections, budget deficits would drop markedly over 
the next few years as a share of output. The next slide shows 
the deficits would average 3.6 percent of GDP between 2012 and 
2021--that is the solid line--totaling nearly $7 trillion over 
the coming decade. As a result, the debt held by the public 
would keep rising, reaching 77 percent of GDP in 2021.
    However, that projection is based on the assumption that 
spending and tax policies unfold as specified in current law. 
Consequently and as the chairman noted, it understates the 
budget deficits that would occur if many policies currently in 
place were continued rather than allowed to expire as scheduled 
in current law. For example, suppose instead that three major 
aspects of current policy were continued during the coming 
decade: First, that the higher 2011 exemption amount for the 
alternative minimum tax is extended and along with the AMT tax 
brackets is indexed for inflation; second, that the other major 
provisions in the recently enacted tax legislation that 
affected individual income taxes and gift taxes and estate 
taxes were extended rather than allowed to expire in January 
2013; and third, that Medicare's payment rates for physician 
services were held constant rather than dropping sharply as 
scheduled at the end of the year under current law. All of 
those policies have recently been extended for 1 or 2 years. If 
they were extended permanently, deficits from 2012 through 2021 
would average about 6 percent of GDP, the dashed line, rather 
than 3.5 percent under current law. And cumulative deficits 
over the decade would total nearly $12 trillion.
    The next slide shows the debt held by the public in 2021 
would, under that alternative, rise to almost 100 percent of 
GDP, the highest levels since 1946.
    Beyond the 10-year projection period, further increases in 
Federal debt relative to the Nation's output almost certainly 
lie ahead if current policies remain in place. Spending on 
Social Security and the government's major mandatory health 
care programs, including Medicare, Medicaid, the children's 
health insurance program and insurance subsidies to be provided 
through exchanges, will increase from roughly 10 percent of GDP 
to about 16 percent over the next 25 years.
    To prevent debt from becoming unsupportable, the Congress 
will have to substantially restrain the growth of spending, 
raise revenues significantly above their historical share of 
GDP, or pursue some combination of those two approaches. The 
longer the necessary adjustments are delayed, the greater will 
be the negative consequences of the mounting debt, the more 
uncertain individuals and businesses will be about future 
government policies, and the more drastic the ultimate policy 
changes will need to be.
    However, changes of the magnitude that will ultimately be 
required could be disruptive. Therefore, Congress may wish to 
implement them gradually so as to avoid a sudden negative 
impact on the economy, particularly as it recovers from the 
severe recession and so as to give families, businesses and 
State and local governments time to plan and adjust. Allowing 
for such gradual implementation would mean, however, that 
remedying the Nation's fiscal imbalance would take longer and 
therefore that major policy changes would need to be enacted 
sooner to limit the further increase in Federal debt. Thank 
you. I am happy to take your questions.
    [The prepared statement of Douglas W. Elmendorf follows:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chairman Ryan. I thought you were going to go through the 
whole PowerPoint. I have about 40 pages here.
    Mr. Elmendorf. I should say all of the figures from the 
Outlook are in the collection of slides.
    Chairman Ryan. Is your whole PowerPoint that you handed us 
up?
    Jose, can you bring up Page 16 on his PowerPoint, Figure 2-
3?
    You have--I am very interested in your comparisons, 
recovery and real gross domestic product and employment, the 
current cycle and the average cycle since 1948, where you look 
at months before the trough, months after the trough.
    That, yes, there. Thank you.
    Give me an explanation as to why you think this is 
occurring? What this is showing us is our economy is not 
growing nearly as fast as it typically does coming out of a 
deep recession, and jobs are not being created anywhere close 
to what they are typically created coming out of a recession. 
If you take a look at past recessions, post-World War II, 
typically--and correct me if I am wrong--the deeper the 
recession, the bigger the bounce coming out of it. What is 
different this time? Why is this happening? What is your take 
on that?
    Mr. Elmendorf. First, a quick factual point, which is that 
there were revisions to employment data recently released since 
we completed the outlook that actually make the latest cycle 
look a little worse still on the employment front. We have not 
yet regained all of the jobs that were lost by the time----
    Chairman Ryan. But this methodology is what we have always 
been using in the past, correct?
    Mr. Elmendorf. Oh, it is the same methodology. It is just 
that they have updated the data just a bit.
    We think the principal reason why the employment recovery 
has been so weak is that the output recovery has been so weak. 
Output grew much more rapidly following the very severe 
recession in the early 1980s, for example, than it has 
following this recession.
    This pattern, although unusual for U.S. post-war history, 
is unfortunately not unusual by the standards of other 
countries that have experienced recessions following financial 
crises. Those crises tend to come from an overbuilding of some 
aspect of the economy--in our case, particularly from housing--
and have come when there have been excesses in the financial 
system that have been broken down in a way that takes time to 
rebuild. So we are watching our banks try to rebuild their 
capital. We are watching households and businesses try to 
rebuild their own balance sheets.
    Those kind of recoveries tend to be slow. And we think that 
is the principal reason why this recovery is slow, is the 
severity but also the nature of the----
    Chairman Ryan. Okay. So you are basically saying it is the 
kind of recession we had, a financial crisis driven recession, 
is why we have such lackluster recovery?
    Mr. Elmendorf. I think that is the principal reason, yes.
    Chairman Ryan. Let me ask you this, then. Do you agree with 
the general conclusions of the Reinhart-Rogoff study, which 
more or less says financial crashes, recessions result in big 
debt increases and deficit increases, which gets us in a 
vicious cycle, which once our debt starts hitting these 
troubled levels, we really start tapering off our economy? 
Would you generally agree with the takings of that?
    Mr. Elmendorf. Yes, I would. Carmen Reinhart is one of the 
members of our Panel of Economic Advisors. Of course, we read 
their work. And I think the point they have highlighted about 
how these crises lead to rapid buildups of debt is exactly what 
we are seeing right now in the United States.
    Chairman Ryan. So their rule of thumb, 90 percent of GDP 
debt, do you agree with that general rule of thumb? Once you 
start hitting 90 percent of GDP, that is when your economy 
really starts slowing down; would you more or less agree with 
that?
    Mr. Elmendorf. I want to be careful not to suggest that 
we----
    Chairman Ryan. I know there is not a magic----
    Mr. Elmendorf. There is a tipping point.
    Their study looked, first, as you know, at gross debt; for 
the United States, a larger number than debt held by the 
public.
    Chairman Ryan. We are already up at that number, then, if 
we are looking----
    Mr. Elmendorf. I think that is correct. We think for a 
variety of reasons that debt held by the public is a better 
measure of the government's current fiscal position.
    Also, they just divided countries into buckets if you will. 
They picked a point of 90 percent.
    But we don't in any sense doubt the conclusion that higher 
levels of debt lead to worse economic performance over the 
medium and long run.
    Chairman Ryan. What is the debt held by the GDP at the end 
of the 10-year window in the alternative fiscal scenario?
    Mr. Elmendorf. So that particular label we applied to the 
long-run scenario that we did, but if you take the thing we 
have done in this outlook, where we have extended this 
particular set of policies that I mentioned, debt is pushing 
100 percent of GDP by the end of the 10-year window.
    Chairman Ryan. And gross debt, I guess gross debt would 
be----
    Mr. Elmendorf. Would be significantly larger. I don't know 
the number.
    This is unfamiliar territory for the United States and also 
for other developed countries. If one looks at the set of 
countries in the OECD, developed countries, one does not find a 
lot of countries that have debt at or above 100 percent of GDP 
for any length of time. So we are definitely, especially if 
those policies are continued, moving into territory where we 
don't know what will happen exactly.
    Chairman Ryan. I want to be judicious with my time. I think 
that there is a good argument to be made that interest rates 
are not going to be low for a long time. I think there is a 
good--it is worth our while to make different interest rate 
simulations.
    You have done this for us in the past, and we have asked 
for this from you currently. What we have asked is, give us the 
blue chip average, the average of the 1990s, the average of the 
1980s. If there are other worthwhile simulations run that we 
are not thinking of, let us know.
    But also, can you carry this out in your long-run model for 
us as well? You can give us the 10-year numbers I know, and I 
know how difficult this gets, and you do your long report in 
the summer, but I think it would be extremely helpful to know 
different simulations and how it really carries out beyond the 
10-year window.
    The other question is--so that is just a request. Health 
care take-up rates in the exchanges, how many people do you 
project will be in the health care exchange within the 10-year 
window?
    Mr. Elmendorf. That is a good question. You might think I 
would remember the answer to that.
    Chairman Ryan. I think 19 million is what I have off the 
top of my head. I am not sure about that.
    Mr. Elmendorf. There are some people who are in the 
exchanges because their employers choose to get insurance 
coverage for them through the exchanges. So there are some 
different numbers depending on exactly what concept one has in 
mind. But I think you are in the right ballpark.
    Chairman Ryan. So other actuaries, private-sector 
actuaries, have made much, much different projections about the 
amount of which employers will drop health insurance for their 
employees and dump them into the exchange. I think it would be 
worth our while to have run some simulations on those 
projections as well. So how about if we shoot you projections 
from other actuaries who believe--I will give you one example. 
I have met with an employer in my district who nationwide 
employs 7,000 people. It is a privately-held company who has 
very low-margin business, who has two publicly-held traded 
competitors. Their competitors have basically said, we are 
putting our people in the exchanges as soon as we can. With a 
$2,000 penalty indexed to inflation per employee and they can 
go get health care there subsidized by the government versus 
$17,000 rising in health care costs, we are dumping them.
    And I know you have a firewall assumption that leads to low 
take-up rates. But from my experience from talking to 
employers, I don't think that is going to happen. I don't think 
that firewall is going to hold. And I think tens of millions of 
people--this is my personal opinion, but it is informed by 
anecdotal conversations with employers over the State of 
Wisconsin and outside expert actuarial witnesses that think we 
are going to have tens and tens of millions of people dumped 
into these exchanges.
    So I think it is worth our effort to run simulations to see 
what kind of fiscal hit we would get under this law with that.
    The last question is this. And that is not a question. That 
is a request. The last question is, it has been argued and was 
argued here yesterday with the chairman, that the new health 
care law will create jobs and increase labor force 
participation. But if I recall from your analysis, it was quite 
the opposite. Is that not the case?
    Mr. Elmendorf. Yes.
    Chairman Ryan. Okay. Thank you.
    Again, I could go on and on, but I will turn it over to Mr. 
Van Hollen.
    Mr. Elmendorf. I am sorry. But could I use just a minute to 
just quickly respond to a few aspects of that, Mr. Chairman?
    Chairman Ryan. Yeah. Sure.
    Mr. Elmendorf. So one thing to say is that we do show in 
the back of our outlook the effects of alternative economic 
assumptions on budget outcomes. One of the alternatives that we 
show is the effect of interest rates being 1 percentage point 
higher for the entire next decade. Under that alternative, 
extra interest costs for the Federal Government would be about 
$1.25 trillion. And if interest rates were lower by a 
percentage point, then they would be $1.25 trillion less in 
interest payments. We can certainly look at alternative----
    Chairman Ryan. Yeah, your average is less than 4 percent 
for the decade, correct? Or what is it? Between 4 and 5?
    Mr. Elmendorf. I don't remember the average. But it is 
worth noting that our interest rate projection is above the 
financial markets' reading on interest rates. Our own model 
actually has somewhat higher--predicts somewhat higher 
interest----
    Chairman Ryan. And you have just recently revised that 
upward, right?
    Mr. Elmendorf. We have moved between--I don't remember the 
revision exactly. But we put our forecast somewhere between our 
own modelling and what financial market participants are 
saying. But we can look at other scenarios, of course.
    Chairman Ryan. I just think the recent movements of the 
yield curve and some other post-cyclical indicators warrant us 
looking at different simulations and seeing what the fiscal 
effects of that would be.
    Mr. Elmendorf. On enrollment in insurance exchanges, we 
project that to be 24 million by 2019, which is the last year 
of our original cost estimate. And we predict that only 3 
million fewer people would have employer-sponsored insurance 
coverage.
    I understand that you don't think that is right. There are 
many longer explanations I could give. Let me just say quickly 
that I know four other groups that have built sophisticated 
models of the health insurance system somewhat analogous to 
ours. Those are the Office of the Actuary at CMS; those at 
RAND; at the Urban Institute; and at Lew and Associates. All 
four of those groups show the same or less employer dropping of 
health insurance coverage as a result of that legislation than 
we show.
    Now, we and they are all operating off of a very limited 
set of evidence, off of the effects of much smaller changes in 
policy than has now been enacted. And so I don't take huge 
comfort in their having similar answers. I think the range of 
true uncertainty is larger than the range of differences in our 
estimates. But our estimate is quite consistent----
    Chairman Ryan. Sure. I understand.
    Mr. Elmendorf [continuing]. With the bulk of professional 
analysis of this question.
    Chairman Ryan. I could go on.
    Labor market participation, tightness and looseness of 
labor market factors into all this stuff, competing for labor 
based on benefits.
    Mr. Elmendorf. Yes. Exactly.
    Chairman Ryan. I could go on and on and on.
    Mr. Van Hollen.
    Mr. Honda. Excuse me. Would the chairman yield for a minute 
for a point of clarification?
    Chairman Ryan. Sure.
    Mr. Honda. The term that you used, Mr. Chairman, dumping 
their employees into the exchange, is a definition of exchange 
a series of a group of insurance companies operating there or 
is it just one entity?
    Chairman Ryan. Its employers no longer offering health 
insurance to their employees and sending them into the 
exchange.
    Mr. Honda. The definition of exchanges is----
    Chairman Ryan. To an employee, they have one exchange. If I 
am in Wisconsin, I am going into the Wisconsin exchange.
    Mr. Honda. Right. But the exchange has many insurance 
companies operating within it?
    Chairman Ryan. Yeah. You have gold, silver and bronze.
    Mr. Honda. Okay. So it is not that they are dumping them 
into something that may be less than. It could be that they 
give them more choices.
    Chairman Ryan. Sure. But the taxpayer is on the hook for it 
now.
    Mr. Van Hollen. Thank you, Mr. Chairman.
    And, Dr. Elmendorf, thank you for your testimony.
    Let me just start out where I know we agree, which is the 
levels of debt that are projected in the CBO report in the 
outyears are unacceptable and unsustainable. Whether you are 
drawing the line at 80 percent or 90 percent or 100 percent and 
above, the fact remains that we cannot afford as a country to 
get into that kind of territory.
    There is, however, I think a very important debate as you 
indicate in your testimony about how you get there. And I 
couldn't agree more with your statement that the sooner we make 
a decision to put in place a plan to deal with the debt in the 
outyears, the less painful it would be and that if you do too 
much in the very short term, it could be disruptive to the 
economy.
    And, again, as I indicated in my opening statement, the 
bipartisan commission that was tasked with the job of 
identifying ways to reduce the deficit and the debt, warned 
that you don't want to have a negative impact on the economy 
and growth in the short term because we all would agree, would 
we not, that to the extent the economy were to slow down, that 
would obviously contribute in a negative way to our debt, 
correct?
    Mr. Elmendorf. Yes, that is right.
    Mr. Van Hollen. Now, it is true, isn't it, that if you were 
to make immediate deep cuts, that would have a--that would be a 
drag, at least in some measure, on the economy and the jobs in 
the short term; is that right?
    Mr. Elmendorf. Yes, Congressman. A year or so ago, we 
analyzed a set of policies being considered as ways to boost 
output and employment. And we looked at a variety of reductions 
in taxes, including the payroll tax that was enacted. We looked 
at some increases in government spending. Our analysis then was 
that under the current economic circumstances and the current 
posture of monetary policy, that increases in government 
spending would in the short run increase output in employment. 
And the logic works in reverse, that decreases in spending 
would decrease output in employment in the short run. Of 
course, as you understand, over the median run and long run, 
the extra debt that is accumulated worsens the economic 
situation. But there is some tradeoff there for you and your 
colleagues in deciding what pace to move in putting fiscal 
policy on a sustainable path.
    Mr. Van Hollen. Right. And the President indicated in his 
State of the Union address that he will impose in his budget, 
that will arrive Monday, a 5-year freeze on non-security 
domestic discretionary spending, which, by his account, comes 
to about $400 billion in savings over a period of time.
    I would just, Mr. Chairman, like to enter into the record 
an example of the impact of just one of the cuts that was 
identified by the Appropriations Committee yesterday. That is 
the cut to the Drinking Water State Revolving Fund of about--a 
cut of $1.15 billion. That is a matching fund. So States and 
localities have to match it. And a very respected consulting 
firm, RTI International out of North Carolina, has done an 
analysis of the impact of that cut on the economy. I mean, this 
is one of those kind of investments that we have talked about; 
this is a public investment, transportation, water 
infrastructure. And by their account, that cut will result in 
between 36,800 and 50,600 fewer engineering and construction 
jobs. So these decisions to withdraw investments in public 
infrastructure have an immediate impact on jobs in the economy.
    Let me just ask you to turn quickly to the question of the 
different components of the challenge as we approach deficit 
reduction. Because one of the first actions that was taken in 
this House was to eliminate the PAYGO rule and replace it with 
a rule that was more one-sided. In other words, the rule said, 
well, yes, we have to take into account and pay for cuts, but 
not with respect to certain revenues, spending cuts. Isn't it 
the case that if you reduce revenues, you increase the deficit?
    Mr. Elmendorf. Yes, Congressman. That is correct.
    Mr. Van Hollen. Well, no, but the math--I will tell you--I 
thank you, Dr. Elmendorf. I am not referring to the chairman 
here, but there have been a lot of people making statements 
around here suggesting that there is not a correlation there.
    So as we approach this issue, it seems to me we should have 
rules that recognize the deficit is increased not just by 
actions on one side of the equation.
    Let me just turn last to the health care question. And I 
want to ask you about the deficit impact. But before I do that, 
as I recall, one of the reasons you argue that--you said with 
respect to the labor market would have maybe some small 
impacts, but one of the impacts you said was that there would 
be some individuals who, because they can get their health care 
through the exchange and no longer have to get health care 
through their employer, would choose, would now have the 
freedom to choose to not get a job simply because they needed 
the health care; isn't that correct?
    Mr. Elmendorf. Yes, that is right. But on balance, as you 
mentioned, we think that the enactment of the legislation 
reduced by a small amount, roughly half a percent, the amount 
of labor that workers would supply and would be demanded and 
would be used in the economy over--by the end of the decade 
when the law was fully phased in.
    Mr. Van Hollen. And finally, Dr. Elmendorf, with respect to 
the CBO projections on the impact of the deficit going forward, 
as you know, one of the first actions taken by the new Congress 
was to repeal the health care reform law. You wrote to the 
Speaker of the House on January 6th of this year indicating 
that your assessment would be that that would add $230 billion 
to the deficit over the next 10 years and approximately $1.4 
trillion over 20, based on your projections of GDP growth; is 
that correct?
    Mr. Elmendorf. So the former number is correct, and we 
noted carefully in the estimate that this was pending our 
complete evaluation using our new economic and technical 
assumptions. We also emphasized that that number assumed that 
the law would otherwise have unfolded as enacted without 
changes. And as we have said for a number of years now and as 
you have seen yourself, important changes in policy are often 
followed by further changes in policy. It is not clear that 
everything will unfold as enacted, but that is our job, is to 
score legislation as it was--as it is written.
    The second number you did for the 20 years we did not use. 
We have carefully referred to longer-term budgetary effects as 
shares of GDP. It is not just a semantic issue. We think it 
appropriately signals the greater uncertainty that attends to 
those longer-term estimates and also appropriately adjusts for 
the fact that the economy is growing; there will be some 
inflation, that pure dollar numbers from 2025 don't mean very 
much to most people.
    But we did estimate originally and then repeated in this 
letter, to which you refer, that again if the law had otherwise 
unfolded as enacted, that repealing it would increase deficits 
in the second 10 years, as well as in the first decade.
    Mr. Van Hollen. If I could just--one follow up. Thank you, 
Mr. Chairman.
    But just to be clear on the second decade, as you 
indicated, you expressed your estimate in terms of GDP, and you 
did say that you believed that repealing the health care reform 
law would increase Federal deficits in the decade after 2019 by 
an amount that is in a broad range around one-half percent of 
GDP, correct?
    Mr. Elmendorf. Yes. That is right.
    Mr. Van Hollen. And CBO has done estimates of what it 
projects GDP to be during that period, right?
    Mr. Elmendorf. Yes.
    Mr. Van Hollen. And so that is how we got the figure, 1.4, 
was we took CBO's estimates of what GDP being would be during 
that year and applied the percent savings you indicated.
    Thank you, Mr. Chairman.
    Chairman Ryan. Something tells me this conversation is 
going to continue.
    Mr. Campbell.
    Mr. Campbell. Thank you, Mr. Chairman and Dr. Elmendorf.
    And we will continue this conversation right now. First, on 
health care, before I get to broader issues, you just mentioned 
that you believe or that in your estimates, that the health 
care law would reduce the labor used in the economy by about 
one-half of 1 percent. Given that I believe you say there is 
160 million full-time people working in 2021, that means that 
in your estimation, the health care law would reduce employment 
by 800,000 in 2021; is that correct?
    Mr. Elmendorf. Yes. The way I would put it is that we do 
estimate, as you said, that the household employment will be 
about 160 million by the end of the decade. Half a percent of 
that is 800,000. That means that if the reduction in the labor 
used was workers working the average number of hours in the 
economy and earning the average wage, that there would be a 
reduction of 800,000 workers.
    In fact, as we mentioned in our analysis last summer, the 
legislation also creates some incentives that might affect the 
number of hours people work. It might affect the propensity to 
work of lower- and higher-income people. We haven't tried to 
quantify those things, but the impact is that the 800,000 might 
not be exactly the number.
    Mr. Campbell. Sure.
    Mr. Elmendorf. The equivalent of withdrawing 800,000.
    Mr. Campbell. Sure. But that is your best estimate at this 
point.
    You just pointed out that the health care law also beyond 
10 years increases the deficit. And prior to 10 years, there is 
this whole issue about the cuts and payment rates for providers 
of services for Medicare programs. Can the same dollar of 
Medicare savings both improve the long-term solvency of the 
Medicare program and fund a new entitlement? Can the same 
dollar be used for both those functions?
    Mr. Elmendorf. So, as you understand, Congressman, the way 
the budget works is that if a dollar less is spent out of the 
Hospital Insurance Trust Fund, Part A of Medicare, that is a 
dollar less of overall government outlay; it improves the 
deficit by a dollar. It also means that the Medicare Part A 
trust fund, the HI Trust Fund, ends up with an extra dollar's 
worth of government securities that is holds.
    And as we have written before, those bonds in the trust 
fund for Medicare and for Social Security have important legal 
meaning. They are real government debt, backed by the full 
faith and credit of the government, but they don't have much 
economic meaning, because as you are suggesting, if one saves a 
dollar by not spending it in someplace and one then spends the 
dollar in some other place, one has not improved the ability of 
the government to ultimately meet future Medicare or Social 
Security obligations. And thus the total increment to the HI 
Trust Fund from the health legislation enacted last year was 
much larger than the increment that we estimate to government 
saving. And that excess is real bonds for the trust fund but 
does not reflect an improvement in the government's ability to 
meet those later Medicare objections.
    Mr. Campbell. And if you don't double count this, it does 
change the numbers or the computations for the first 10 years, 
does it not?
    Mr. Elmendorf. I want to be careful. We do not double 
count. We kept track of every piece of legislation and its 
effect on the budget once and only once. But our estimates 
refer, as all of our estimates do, to the effects on the 
unified--the overall government budget. So there is no double 
counting that we have done. I think the issue you are raising 
is whether--is how many benefits of the legislation one can 
claim credit for at the same time. But that is not my end of 
the business.
    Mr. Campbell. Okay, well, unfortunately, I now have just 
slightly over a minute to get to what I wanted to get to.
    But, other than this, but suffice it to say on the health 
care plan, you think it is going to reduce employment over 10 
years. It certainly increases the deficit after 10 years. And 
there clearly is debate about what it does within 10 years. So 
how that is good for what we are talking about here in the 
Budget Committee, I don't know.
    But in my remaining minute, I just wanted to mention real 
quick, first of all, I share the chairman's accolades as far as 
CBO and yourself and what you all do and that you have a very 
difficult job. You have to predict not only the vicissitudes of 
interest rates and the marketplace and GDP, but the 
vicissitudes of Congress as well and what we are going to do 
and what we are not going to do.
    And when I look at the baseline projection versus your 
alternative, when the baseline includes tax increases, which 
nobody currently is advocating, including the President, 
including Democrats in Congress, including Republicans in 
Congress--what it includes, cuts to Medicare--or to the so-
called doc-fix providers that none of us have as of yet have 
been willing to do and so forth. I look at the alternative 
scenario as a much more likely scenario based on what is going 
on. And I can go through other things. I mean, your interest 
rate projections, even though you moved them up, still you have 
the 10-year Treasury bond below anything it was at during all 
the 1980s and the 1990s and through much of the 1970s, I 
believe if I have your figure, 2.7, right. So anyway--now my 
time is up. But the whole point is that this 100 percent of GDP 
debt in 2021 is a realistic possibility and not some pie in the 
sky number?
    Mr. Elmendorf. So, Congressman, we are not trying to 
predict what you and your colleagues will do. We are trying to 
illustrate the effects of alternative policy paths. It is up to 
you all to judge what you think is likely. But we do say in the 
report that with more and more large pieces of policy being set 
on a explicitly temporary basis, with many Members talking 
about their interest in extending those, we think that the 
current law baseline is--has become less useful in showing the 
thrust of current policies and that is why we are trying to 
illustrate some alternatives for you.
    Mr. Campbell. Thank you.
    Chairman Ryan. Ms. Schwartz.
    Ms. Schwartz. Thanks. Ms. Schwartz is hard to say. I 
recognize that.
    I will not ask you to repeat it because you have been 
absolutely very clear in the answers to the previous questions 
that the health law that is law of the land now reduces 
deficits over 10 years and over 20 years? And you have not 
double counted anything?
    Mr. Elmendorf. That is correct, Congresswoman.
    Ms. Schwartz. Thank you.
    I am sure we will be saying that over and over again. But 
you keep saying it. Everybody else says it. It is--and we keep 
hearing that it is not understood by the other side.
    What I want to do is try and just focus on a couple of 
statements you have made, but I wanted to just reiterate some 
of them and be clear about where we are on the budget deficit 
and where we are going.
    We all agree that the deficit is a problem and the national 
debt is a problem and that we want to reduce the deficit. Lots 
of ideas out there about how to do it.
    But in the short term, the Republican majority has made--I 
will try to ask the questions in a short way and ask you to 
answer them in a short way. They have changed the rules of the 
way we count spending and what adds to the deficit in this new 
Congress. We went from PAYGO rules to CUTGO.
    Mr. Elmendorf. The House Rules have changed. We count the 
deficit the same way. We add up all the----
    Ms. Schwartz. That is what I want to make sure about. That 
is what I wanted you to answer about. The new rules actually 
say that they have to find a way to--if they are going to do 
spending cuts--no, that is going to--they have to offset any 
spending changes, but they don't have to offset or really count 
in their rules--you will have to do it generally--count any 
changes in tax policy, tax cuts in particular.
    So just to relate this to a family budget, it is like 
saying, all right, if things are tight, we are going to cut 
back on going out to dinner or going to the movies or 
entertainment for our kids. We just can't afford to do it. But 
in fact, if you get laid off from work and you have no more 
salary, we are not counting that and maybe our checking account 
won't notice. Isn't that kind of what they are doing? You can't 
do it, but that is what they are saying they are going to do? 
We are not going to notice there is less money coming in?
    Mr. Elmendorf. Well, Congresswoman, we keep track of all 
the changes in spending and revenues. And reductions in 
revenues increase the deficit, just as increases in spending 
increase the deficit.
    Ms. Schwartz. So you will help us keep on track? We can go 
to CBO; you will actually be able to tell us that this could 
and will add to the deficit if, in fact, there are tax cuts, 
for example, that they don't want to pay for.
    Mr. Elmendorf. The structure of our cost estimates is not 
altered by this change in the House Rules.
    Ms. Schwartz. We are going to look towards you to actually 
help us with that and help the public understand that that is 
adding to the deficit, not helping us fix the deficit.
    Second, they also are looking at the budget as only 
cutting--they only want to cut spending in one piece of the 
budget. They are only looking at cutting proposals for spending 
in nondefense discretionary. Now the average American, what 
does that mean? So I am going to ask you, what percentage of 
the budget is that? They are looking for all the spending cuts, 
particularly the early ones, to come out of one part of the 
budget. Is that the biggest part of the budget? What part of 
the budget is it?
    Mr. Elmendorf. No, it is not. So, as you know, the 
government spends much more on the mandatory programs, 
entitlement programs, than it does in discretionary spending.
    Ms. Schwartz. And defense? What about defense?
    Mr. Elmendorf. So I have in hand in front of me the numbers 
for 2021, if one looks at the end of the decade, at which 
Social Security would be 21 percent of government spending; the 
major health programs would be 27 percent; defense would be 15 
percent; net interest payments, 17 percent; and other--all 
other spending 20 percent, one-fifth. That is under the 
assumption that certain policies are extended.
    Ms. Schwartz. Can we get to deficit reduction if the only--
at least for the short term, the only issue on the table is 18 
to 20 percent of our budget, and they are going to take all of 
these cuts, pretty dramatic ones in some cases, from one part 
of that budget? Most economists, most advisors have said you 
have got to look at everything. Everything has got to be on the 
table, both tax revenue, tax policy, spending in all 
categories, in order to actually get to serious deficit 
reduction. So that between the rules of the way they are going 
to do any of the work they are going to do going forward, 
ignore the big piece that is tax cuts, and they are also now 
looking for all of the spending cuts to come out of really just 
one piece of the pie, under 20 percent.
    Mr. Elmendorf. So, Congresswoman, the policy choices are 
yours and your colleagues. It is certainly true that the piece 
of the pie represented by nondefense discretionary spending is 
not a very large piece of the government's total spending. 
Trying to--one can reduce the deficit with any given piece. But 
if one wants to achieve a goal of stabilizing the debt-to-GDP 
ratio or a more ambitious goal of balancing the budget, then 
just as a matter of arithmetic, that is very hard to do 
focusing on just one-fifth of the budget.
    Ms. Schwartz. Thank you.
    Chairman Ryan. Thank you. I would just simply say we are 
here in a CR because the majority last year didn't pass a 
budget at all, nothing. They passed a CR that goes until March 
4. So here is where we are. Discretionary spending is what is 
on the table right now because the last majority didn't pass a 
budget. I just want to ask you one quick question. Can you 
count class-act revenues both to go to the CLASS act and to pay 
for a new entitlement?
    Mr. Elmendorf. If revenues are collected----
    Chairman Ryan. Can you use class-act revenues to go to 
CLASS act and a new entitlement? Can you use Social Security 
revenues to go to Social Security and a new entitlement? Can 
you use Medicare cuts to go to Medicare solvency and pay for a 
new entitlement? Can you use both those dollars for both 
purposes?
    Mr. Elmendorf. One can't use a single dollar to pay a 
dollar of benefits here and a dollar of benefits some other 
place.
    Chairman Ryan. Thank you.
    Mr. Van Hollen. Mr. Chairman, if I could just briefly on 
that.
    Chairman Ryan. I indulged, so I will let you indulge.
    Mr. Van Hollen. Let me just say with respect to the point 
on the budget resolution.
    Number one, we did pass the budget enforcement resolution, 
which applied for one year, one year, this current fiscal year 
2011, I would point out that that budget enforcement resolution 
was less than the budget numbers submitted by the President. We 
then enacted a continuing resolution.
    Chairman Ryan. So March 4.
    Mr. Van Hollen. Till March 4th, which, of course, was even 
below the budget resolution act that we have had. And now we 
are talking about reducing that further. So the reality is that 
we did have a 1-year budget resolution for this fiscal year.
    Chairman Ryan. Well, we can go back and forth, but I am 
trying to challenge the presumption that we are suggesting we 
can balance the entire budget on this narrow slice of the 
budget. No, we are not making that assumption. We are in 
discretionary because a CR is expiring March 4. With that, I 
will go to Mr. Calvert.
    Mr. Calvert. Thank you, Mr. Chairman.
    Doctor, in your testimony, you say to prevent the debt from 
becoming unsupportable, policymakers must cut spending, raise 
taxes or adopt some combination of these. But your own report 
states that raising taxes have consequences as well. In part, 
on page 25, it states that if growing interest costs were 
financed by raising taxes, quote, those rates could discourage 
work and savings and further reduce output. Could you describe 
further how raising taxes negatively affects work and saving?
    Mr. Elmendorf. So the reward that people get from working 
and saving is the amount that they take home from their job or 
the amount that they can take out of their bank account for 
investments later, and that depends both on what the employer 
is paying or the investment is yielding and also on the tax 
payments they need to make on that to the government. Increases 
in marginal tax rates, which are the rates you pay on the 
additional dollar of income, will tend to discourage work and 
saving.
    Mr. Calvert. It sounds like the old Laffer curve.
    Mr. Elmendorf. Well, the Laffer curve is a particular 
extreme version of that. I was going to say, there is a lot of 
debate, a lot of research and a lot of debate among economists 
about how sensitive work and saving are to those tax rates. The 
Laffer curve, which as Professor Laffer noted this morning in 
an article newspaper, is a concept that predates him by 
probably centuries, says that there is a point at which making 
tax rates even higher tends to reduce revenue, that you lose 
more than you gain.
    Mr. Calvert. I think it would be an accurate statement that 
if you tax someone 100 percent of their revenue, there is no 
inducement to work.
    Mr. Elmendorf. That is right. I think a very wide spectrum 
of economists think that most tax rates in the United States 
today are not at or beyond that peak of the Laffer curve. But 
as I said, there is disagreement about just where that peak is 
and how large the disincentive effects are.
    Mr. Calvert. As customary, your baseline revenue estimates 
are based on current law. As such, the figures for 2013 and 
beyond assume increases in marginal tax rates, expansion of 
alternative minimum tax; various other tax hikes are scheduled 
to occur under current law, as you know. Based on the table of 
selective policy alternatives, the scheduled tax law would 
amount to a total tax increase of about $3.8 trillion through 
2021, and revenue would rise to about 20 percent of GDP. Even 
with that significant tax boost--if, in fact, that was 
accurate--would revenues ever even come close to catching up 
with spending with what is going on today?
    Mr. Elmendorf. Well, revenues get closer, but that is not 
sufficient. As you say, our baseline projections include the 
expiration of those provisions in the tax law, and we show 
deficits continuing----
    Mr. Calvert. And even looking beyond the 10-year window, 
isn't it fair to say that spending under the current policy 
would continue to outpace revenue even if the tax revenues were 
built into the baseline projection?
    Mr. Elmendorf. Yes, that is right, Congressman.
    Mr. Calvert. Thank you, Mr. Chairman.
    Chairman Ryan. Mr. Doggett.
    Mr. Doggett. Thank you very much, Mr. Chairman.
    I want to agree with the expression of concern that 
Chairman Ryan has made concerning the growth of our debt and as 
well to agree with the need for us to ferret out every 
inefficiency in spending we can find and indeed to make some 
cuts in spending even of programs that are performing well 
because of the size of that debt.
    The concern that I have--and I am not asking you to take 
sides with reference to that concern--is the overly narrow 
focus of the chairman's approach to our debt problem. And let 
me ask you if it is not true that unpaid-for direct 
expenditures and unpaid-for tax expenditures have the very same 
effect on the size of our national debt.
    Mr. Elmendorf. Certainly, Congressman, the dollar of extra 
spending and a dollar----
    Mr. Doggett. A dollar of lost revenue?
    Mr. Elmendorf. Just as a dollar of lost revenue widens the 
deficit by a dollar.
    Mr. Doggett. And indeed, in terms of the size of what has 
been left off the table by the chairman, the size of total tax 
expenditures each year most observers have estimated rival the 
total amount of direct discretionary expenditures; isn't that 
correct?
    Mr. Elmendorf. I think that is right. Estimating the total 
effect of tax expenditures is difficult because of interactions 
among other things.
    Mr. Doggett. Exactly. But both are big.
    Mr. Elmendorf. I have seen it suggested that it is a very 
large number, yes.
    Mr. Doggett. So, really, when we make decisions about how 
we are going to deal with this debt, one of the things we can 
do is to cut direct spending. We can say families are just 
going to have to fend for themselves; we are going to cut the 
budget of law enforcement with regard to the Wall Street banks, 
with regard to the Wall Street security companies, with regard 
to the health insurance monopolies. We would like to do 
something about that, a little bit, but we just can't afford to 
do it any more. And we can't afford clean air and clean water. 
We don't want as much environmental law enforcement as we have 
had. Let's cut that by $4 billion a year, and that might be one 
way to address the deficit, but can't we achieve the very same 
thing if we conclude that a provision in our tax laws that 
allows Wall Street financial enterprises to enjoy preferential 
treatment on some of their financing operations abroad and 
takes $4 billion a year by closing that tax loophole, wouldn't 
it have the same effect on the deficit?
    Mr. Elmendorf. Dollar per dollar----
    Mr. Doggett. Dollar per dollar. And the same thing with 
reference to cancer research, with reference to scientific 
research that might spur additional job growth. If we cut that 
by $500 million a year, that will help us solve the deficit but 
perhaps with some very negative effects.
    Or we could eliminate the $500 million a year in what is 
called the look-through rule that advantages some 
multinationals in their interest, rents and royalties that they 
earn abroad, and it will have the same effect on the deficit. 
It is a choice that we need to make.
    Would we rather continue to advantage these foreign 
operations, some of which may actually encourage the export of 
American jobs overseas, or do we think it is better to cut 
cancer research and cut scientific research? That is really the 
choice the committee has to make rather than you, right?
    Mr. Elmendorf. Yes, Congressman.
    Mr. Doggett. And that is the problem with the narrow focus 
that the chairman and the Republican majority have brought to 
this hearing today.
    They only want to look at half the problem. And I believe 
we need to look at all of the expenditures and especially the 
many tax advantages, tax preferences, exemptions that powerful 
lobbyists with their string of limousines up here have been 
able to get into our Tax Code.
    And that is not being done by this hyper narrow focus that 
the majority has in this budget process.
    Now, let me ask you about another aspect, and that is your 
estimates on job creation. You analyzed last year what would be 
the most effective ways to encourage job growth in our 
policies. And isn't it correct that one of the least efficient 
ways to encourage job growth is to extend permanently the Bush-
Cheney tax breaks for the wealthiest people in our society?
    Mr. Elmendorf. Congressman, we did estimate that extending 
the across-the-board extension of the 2001/2003 tax cuts would 
have a low bang for the buck, affecting the economy per dollar 
with wider deficits.
    Mr. Doggett. Right. Your conclusions were the same as 
almost every expert who has ever come before this committee, 
Republican or Democrat, that those tax cuts won't pay for 
themselves, that they will add significantly to the deficit, 
that they are an inefficient way to create job growth. If the 
objective is to encourage more job growth than what you have 
predicted, extending the Bush tax cuts permanently for the 
wealthiest in our society is the wrong way to go.
    Thank you.
    Mr. McClintock [presiding]. The chair recognizes me.
    Dr. Elmendorf, thank you for coming. My first question is 
spending. Under George Bush, would you say that spending grew 
faster or slower than it did under Bill Clinton?
    Mr. Elmendorf. Total Federal spending?
    Mr. McClintock. As a percentage of GDP.
    Mr. Elmendorf. I am sorry, I don't know the answer to that 
question. So total Federal outlays in fiscal year 2008 were 
about 2.5 percentage points of GDP above where they were in 
2000. And in 2000, they were about 4 percentage points of GDP 
below where they were in 1992.
    Mr. McClintock. So spending grew much faster under George 
Bush than it did under Bill Clinton?
    Mr. Elmendorf. Relative to the growth of the economy, yes, 
Congressman.
    Mr. McClintock. How about deficits under George Bush, would 
you say they were bigger or smaller than they were under Bill 
Clinton?
    Mr. Elmendorf. They were a good deal bigger, Congressman.
    Mr. McClintock. Tell us, didn't we have a big stimulus 
program in February 2008 under George Bush where we all got 
$600 checks to stimulate the economy?
    Mr. Elmendorf. There was, yes. I don't remember the total 
size of that legislation, but yes, those checks were issued.
    Mr. McClintock. Well, if higher and higher spending and 
bigger and bigger deficits and massive government stimulus 
spending was the root to prosperity, I would have thought that 
the George Bush administration would have ended with a new 
golden era for the American economy. I wonder how that 
happened. I guess that is a rhetorical question. I will move 
on.
    Mr. Van Hollen warned us earlier today that the deep cuts 
would be a drag on the economy. I was wondering if you could 
tell us about the great depression of 1946.
    Mr. Elmendorf. Congressman, as you know, there was not a 
great depression of 1946.
    Mr. McClintock. There wasn't a great depression in 1946? 
Well, how could that possibly be? In 1945, Harry Truman 
abolished the excess profits tax. He slashed Federal income tax 
rates. In 1946, Harry Truman cut Federal spending from $85 
billion down to $30 billion in a single year. He fired 10 
million Federal employees. It was called war demobilization. 
How would you characterize the post-war economy under Harry 
Truman?
    Mr. Elmendorf. The economy performed well in the wake of 
the Second World War. It actually was a surprise to macro-
economic forecasters at the time. It is an interesting episode 
in the period of economic thought.
    Mr. McClintock. Yes. The Keynesians at the time, as I 
recall, were predicting a 25 percent unemployment rate, a 
second great depression. And instead, we had the post-war 
economic boom. That is very interesting. Maybe we stumbled upon 
something here.
    Mr. Elmendorf. In fact, economists changed their models 
ever since that point to reflect some of the things that they 
learned during that episode.
    Mr. McClintock. Apparently they haven't changed those 
models enough in the current administration.
    Mr. Elmendorf. I am not sure what you are suggesting. I 
think that the models that CBO uses for this and other sorts of 
analysis are at the cutting edge of the models that economists 
in universities and the private sector use for the questions 
that we analyze.
    Mr. McClintock. I am glad to hear that. Are there any other 
periods in our Nation's history when our debt to GDP was 
comparable to what it is now?
    Mr. Elmendorf. Well, during World War II, as you know, the 
debt ran up to a point above 100 percent of GDP and then fell 
from that point during the 1950s, 1960s, and 1970s relative to 
GDP.
    Mr. McClintock. Right. And any other times?
    Mr. Elmendorf. I wrote a paper once, but I forget, 
Congressman, the nature of debt in the----
    Mr. McClintock. The Revolutionary War debt, I believe, 
brought us to about that same height, as I recall.
    How were those debts discharged?
    Mr. Elmendorf. Well, so in the wake of the Second World 
War, what happened was the government's budget ran small 
deficits mostly, but was close to being in balance, so there 
was a nominal amount of government debt. It didn't change very 
much, and the economy grew. So, as a burden on the economy, 
debt fell relatively.
    Mr. McClintock. So Harry Truman slashed taxes, slashed 
spending, slashed Federal employees, and the economy grew out 
of a debt comparable to the one we have now?
    Mr. Elmendorf. That is right, Congressman.
    As you understand, of course, the path of the budget and 
the debt depends not just on the policies that you and your 
colleagues enact, but also on the economic circumstances. And 
your policies have some effect on those, but also there are 
many other influences and economic circumstances.
    One of the things that we take seriously in our----
    Mr. McClintock. If I could, my time is fleeting, so if I 
can move on to a final question here.
    Mr. Van Hollen earlier today said that we must not 
jeopardize the full faith and credit of the United States 
Government, and we all agree with that.
    Tell me, would the full faith and credit of the United 
States Government be strengthened by requiring first call on 
revenues to go for debt service as most other States already 
require?
    Mr. Elmendorf. To be honest, Congressman, I think that is 
unclear. The government has a range of obligations. It might be 
the case that protecting certain obligations and not others 
would then strengthen confidence in the government's commitment 
to paying those obligations.
    On the other hand, it might be the case that the government 
not honoring all of its obligations would then cast doubt on 
its commitment to honoring any of those obligations.
    I think most analysts with whom I have talked, and I have 
talked with a fair number, think that were the government to 
default on any of its obligations, those to debt holders and 
also to those people with regular contracts with the government 
and so on, that would represent a rolling of the dice about 
investors' perception of the safety of U.S. securities. I don't 
know any analysts who think that the government should roll 
those dice and see what happens.
    Mr. McClintock. Funny, other States do it all the time.
    Ms. McCollum is next.
    Mr. Elmendorf. Other States pay higher interest rates than 
the U.S. Treasury does, Congressman.
    Mr. McClintock. Ms. McCollum.
    Ms. McCollum. Thank you, Mr. Chairman.
    I would like to start my comments with a reflection on a 
misstatement made during the hearing yesterday. After I left 
yesterday's hearing, the gentleman from Missouri, Mr. Akin, 
referenced my statement, twisted my words into something I 
neither said nor implied, and I am sorry he is not here. He was 
here earlier.
    I hope the gentleman's misrepresentation of my comments 
does not reflect the manner in which this committee will 
conduct itself in the future.
    As Mr. Akin is from the Show Me State, I brought the 
transcript of yesterday's hearing with me, and I would like to 
enter that in the record, but right now I would like to read 
from the transcript.
    ``Mr. Akin. The comment was made earlier I thought which 
was an amazing quotation from Ms. McCollum that the budget 
deficit is not a spending problem. I found that amazing because 
it seems to me that it sure is a big spending problem. So we 
must be on different planets, I suppose.''
    Mr. Chairman, I don't know what planet Mr. Akin lives on, 
but in the real world, I pride myself in conducting myself with 
respect and civility with my colleagues.
    For the record, I wanted to restate my comments from the 
hearing transcript.
    ``Ms. McCollum. I am going to paraphrase a popular Tea 
Party slogan that goes something like this, quote, the Federal 
Government doesn't have a revenue problem, it had as a spending 
problem.''
    I went on to say, ``Chairman Bernanke, it seems clear to me 
that the deficit is not just a spending problem.''
    Nowhere in my statement did I say the budget deficit is not 
a spending problem.
    For new Tea Party members here on the committee, this is a 
good moment for a little bit of history. Mr. Akin and I both 
entered Congress in 2001.
    Mr. Elmendorf, am I correct remembering back in 2001, there 
was a projected 10-year budget surplus of $5.6 trillion?
    Mr. Elmendorf. It was a large positive number, 
Congresswoman. I am sorry, I don't remember the exact figure.
    Ms. McCollum. At the time, Mr. Akin's party, the Republican 
Party, before the addition of the Tea Party, controlled the 
House here and the White House. The surplus that President 
Clinton left the American people quickly vanished after 
President Bush and Mr. Akin entered Congress, as was pointed 
out by the gentleman in the chair right now.
    Mr. Elmendorf, am I correct, or correct me if I am wrong, 
that in 2001 and 2003, the Bush tax cuts, which I voted against 
and Mr. Akin voted for and favored, contributed to the growth 
of the deficit by trillions of dollars?
    Mr. Elmendorf. Yes, that is correct, Congresswoman.
    Ms. McCollum. Again, Mr. Elmendorf, correct me if I am 
wrong, but the war in Iraq, which I opposed and Mr. Akin voted 
in favor for, added to the Federal deficit by nearly a trillion 
dollars?
    Mr. Elmendorf. Yes, Congresswoman. It may be over a 
trillion dollars; I am not exactly sure. It is a big number, 
though, as well.
    Ms. McCollum. Mr. Elmendorf, I also believe it is correct 
to say that the December vote to extend the Bush tax cuts added 
$858 billion to the Federal budget deficit; is that not 
correct?
    Mr. Elmendorf. Yes, that is correct, Congresswoman.
    Ms. McCollum. I raise this because this is another example 
of where Mr. Akin and I disagree. He voted to add $858 billion 
to the deficit by voting for tax cuts. Included in that were 
NASCAR's racetrack owners, tax breaks for Caribbean rum 
manufacturers, along with extra tax cuts for millionaires and 
billionaires. And I voted against the deficit-busting bill.
    So Mr. Akin is very concerned about spending. His record to 
me would indicate that he has voted to add trillions of dollars 
to the national debt.
    Now, Mr. Elmendorf, what would be the effect on future 
deficits if Congress were allowed to let the Bush tax cuts 
expire in 2012? And did not the economic growth we saw under 
President Clinton include a tough vote, in which no Republican 
helped Democrats' vote, that included a tax increase?
    Mr. Elmendorf. So, Congresswoman, as you know, our baseline 
projections, which follow current law, assume that the tax cuts 
now scheduled to expire, expire. As we show one of the policy 
alternatives in the report, if one instead, if you and your 
colleagues instead voted to extend those expiring tax 
provisions, that would add trillions of dollars to the deficit 
over the next decade and thus to the accumulated level of debt 
by the end of the decade.
    You are also right, Congresswoman, of course, that in the 
1990s, a number of votes were taken to change policies in ways 
that reduced the deficit, and those actions, together with the 
strong economy, led to budget surpluses at the end of the 
1990s.
    Ms. McCollum. Just to clarify, because the clarification 
was that tax cuts were part of that decision under the Clinton 
administration, to remove the tax----
    Mr. Elmendorf. A change in tax policy is part of what 
happened, yes.
    [The information follows:]

         February 9, 2011, Budget Committee Hearing Transcript
                   Excerpts Submitted by Ms. McCollum

        *        *        *        *        *        *        *

                       [remarks by rep. mccollum]

    Ms. McCollum. Thank you, Mr. Chairman. Chairman Bernanke, thank you 
for being here. I believe that we have a lot of work ahead of us, and I 
want to thank you for the work that you did in stabilizing our economy 
in the past, and I look forward to hearing some of your advice, 
suggestions, and ideas on how we move forward with getting out of the 
Great Recession. And I want to be part of the solution, and we hear a 
lot of talk here in Congress about spending, but I'm also concerned 
about a lot of the tax perks that lobbyists have been very successful 
in getting for special interests in our tax code, and I think that we 
need to put everything on the table.
    But having said that, today, we've focused on spending quite a bit, 
as some of the questions have come through. And in fact, I'm going to 
paraphrase a popular Tea Party slogan; it goes something like, quote, 
``The federal government doesn't have a revenue problem, it has a 
spending problem.''
    Now last week, Chairman Ryan put forward his best effort to reduce 
the deficit with spending target cuts, that is $41 billion from the 
fiscal year 2011 budget. The Republican target reduces the fiscal year 
2011 projected deficit by about 2.5 percent. That leaves 97.5 percent 
of the deficit intact.
    Now, in an extreme scenario, if all 176 Republican Study Committee 
members were able to have their way and take control, they would be 
allowed to cut four times what Chairman Ryan's best effort is. But that 
would only then still only represent 10 percent of the federal budget 
deficit for fiscal year 2011, still leaving more than 1.3 trillion.
    Chairman Bernanke, it seems clear to me that the deficit is not 
just a spending problem. Is it possible to reduce the federal deficit 
to responsible levels without capping or cutting defense spending and 
without looking at the tax perks that many corporations and lobbyists 
have been successful in getting?
    And my second question is: With the type of cuts that are being 
discussed, do you think that we need to be insightful when making these 
spending decisions on what to cut, on the impact of jobs as well as 
U.S. competitiveness, and the global economy? I think we need to be 
careful of gutting domestic investments in education, infrastructure, 
and R&D in the next decade, because we might see reverses that would 
put us at a competitive disadvantage.
    Mr. Bernanke. Well, on your second question, I'm hoping to, 
obviously, it is very important that the deficits be brought under 
control, but it is not just a matter of total spending and total 
revenues, it is also how smart is the spending and how are we using it? 
And the tax code, are we doing it in a way that is constructive for 
growth and for competitiveness?
    So, I would urge the Congress not only to talk about total budget 
numbers, but also to think hard about the various programs and tax 
provisions to make sure that they are growth friendly, and that is a 
very important part of your job.
    In particular, you mentioned perks, et cetera. I think one 
direction that at least should be considered would be, in the corporate 
tax code, for example, to reduce a lot of loopholes, to broaden the 
base, and therefore be able to lower the tax rate, which is now soon 
going to be the highest in the industrial world so that the decisions 
made by corporations are based, you know, not on tax distortions, but 
rather on the economics of where, for example, they should locate their 
plants, and so on.
    So, I do think that growth friendliness is a very important part of 
this and that lower rates and broader base is something that most 
economists would agree is a good direction to go in the tax code.
    On short-run versus long-run, I, again, I understand there's a lot 
of focus on this year's budget. Without commenting directly on that, I 
do think that in order to be credible, given that the budgetary 
problems get worse over time, that is as the baby boomers retire, as 
health care costs rise, and so on, given that the prospective deficits 
are rising over a long period of time, I would hope that a good bit of 
your discussion will be about the long-term over the 10, 15, 20 year 
horizon and to the extent that you can change programs that will have 
long-term effects on spending and revenues. That will be a more 
effective and credible program than one that focuses only on the 
current fiscal year.
    Ms. McCollum. Thank you, Mr. Chairman. As you know, we are setting 
the budget. We're setting the spending and Ways and Means does its 
issues with the tax code and addressing what I hope will be any tax 
perks. But I can't make a decision in isolation, so I look to all of us 
to put everything on the table so that we make a well-rounded decision 
as we move forward with the budget. So, Mr. Chairman, I'll be looking 
to see what your comment is.
    Chairman Ryan. Thank you, Ms. McCollum, and I can only say what we 
are doing right now is our best; it is our first effort at getting 
fiscal control under this place. Mr. Ribble.

        *        *        *        *        *        *        *

                         [remarks by rep. akin]

    Mr. Akin. Thank you, Mr. Chairman. It seems like when we talk about 
dealing with the budget deficit, it reminds me a little bit about these 
all kinds of imaginative weight-loss programs, you know? It seems like 
when you get down to the bottom line, you can either eat less or you 
can exercise more. You're only given two alternatives. It seems like we 
are in the same way, we can try and sugar-coat it, but the problem is 
that either we are spending too much or we've got to tax a whole lot 
more. The comment was made earlier, which I thought was an amazing 
quotation from Ms. McCollum, ``The budget deficit is not a spending 
problem.'' I found that amazing, because it seemed like to me it sure 
is a big spending problems. We're just on different planets, I suppose, 
but let's just assume, instead of you are going to cut spending, that 
you are going to try to increase taxes.
    Now, my understanding is, I take a look at historic data, our tax 
revenues run somewhere in that 18 percent range. My understanding is if 
we were to double the tax rate on everything across the board, we 
couldn't assume that we are going to get double in revenue, federal 
revenue.
    In fact, we may well do what you are saying, crash the economy and 
get even less. I do recall, we did dividends, capital gains, and death 
text in May 2003, and the Congressional Budget Office said, ``Well, now 
you are going to have less revenue,'' but in fact, there was more 
revenue because the economy kind of got going.
    So, my question is, when I take a look at this overall problem that 
we are, you know, too heavy, in terms of like a weight loss thing, it 
is pretty spooky to me because you add all of the entitlements, the 
main ones, Medicare, Medicaid, Social Security, and then the other 
kinds of entitlements, and add debt service to that, and it seems, when 
I looked at the numbers, it was looking like about 2.3, roughly, 
trillion. And our revenue is about the same thing. So that says you get 
zero defense, zero discretionary non-defense, and you are right now 
just a parody. So, I don't understand. I guess my question to you is, 
first of all, don't we have to, essentially, deal with the 
entitlements, just by definition, or can you actually make it up by 
just doubling taxes and hope there's going to be a ton more revenue?
    Mr. Bernanke. Well, I think that, as you point out, I mean, that in 
the long run, the way we are going, entitlements plus interest would 
basically be the entire government budget, and so, unless you raise 
taxes considerably. Now it is up to Congress to find the right balance 
between taxes, and cuts, and so on, of course. But I think you need to 
look seriously, particularly at the health care costs, which is of 
course, part of what has been going on the last couple of years here in 
Congress, but I think a focus on the cost side is important.
    And, it would be difficult, I think. I'm very loath to prescribe 
exactly how to address these issues; I do think that it would be very 
difficult to leave health care programs untouched and still achieve 
budgetary balance in the next 15 years.
    Mr. Akin. Thank you. I think what I heard you saying is, is you 
really got a deal with that rate of spending, and particularly, in the 
entitlement, the health care piece is such a big part of that, that has 
to be dealt with. And that raising taxes, just to finish the question.
    Mr. McClintock. I am sorry, we are out of time.
    Mr. Akin. Thank you.

        *        *        *        *        *        *        *

    Mr. McClintock. Mr. Stutzman.
    Mr. Stutzman. Thank you, Mr. Chairman.
    Thank you, Doctor, for being here today.
    I want to go back to what Mr. Calvert was talking about a 
little earlier with the tax rates and where we are at with our 
current tax rates and specifically the corporate tax rate.
    The President in his State of the Union Address: closing 
loopholes and lowering the corporate tax rate. My question is, 
would you agree with that, and how might that be accomplished? 
We have seen that other countries around the world are starting 
to adjust. Is the corporate tax rate maybe over the crest of a 
good Laffer curve, and are we starting to see job loss because 
of higher taxes and, obviously, I would say, more regulation?
    Mr. Elmendorf. So we have not done analysis to identify the 
peak of the corporate Laffer--tax Laffer curve. But I think 
there is widespread agreement among analysts that lower tax 
rates applied to broader bases are a much more efficient way to 
raise any given amount of revenue that the Congress wants to 
raise.
    And we have some work underway that we hope to release soon 
that looks at our treatment of international aspects of the 
corporate business and how that is taxed and compared with the 
way other countries address those issues, and we hope that will 
be helpful to you and your colleagues in thinking about this 
question.
    Mr. Stutzman. So you will be taking a look at other 
countries around the world that have adjusted their corporate 
tax rates?
    Mr. Elmendorf. It is a comparison. The study looks at how 
adopting different sorts of systems or the sorts of that exist 
in some other countries might affect incentives for U.S. 
companies to engage in various kinds of behavior.
    Mr. Stutzman. Okay. We all talk about simplicity and 
simplifying the Tax Code, and would you agree that we have a 
very complex Tax Code and that it and should be simplified?
    Mr. Elmendorf. No doubt. Again, I think it is a very 
widespread view that a simpler Tax Code would be more efficient 
in terms of people and companies spending less time filling out 
forms and would also be perceived probably as being fairer than 
the complicated tax system that we have now.
    Mr. Stutzman. I think that the American people obviously 
want both sides to fix the problems in Washington. And you 
know, we can sit here and point fingers at each other all day 
long, but that is not going to fix the problems. I think they 
want simplicity. I think they want fairness and equitable 
taxation. The proposal has been thrown out with a flat tax or 
the fair tax. Could you comment on one of those? I mean, is 
that part of a solution?
    Mr. Elmendorf. So we haven't studied those proposals 
specifically. You know, in order to reduce the deficit, one has 
to either spend less or raise more revenue. It is, again, I 
think a widespread view among analysts that if one wants to 
raise more revenue than some benchmark, that it is more 
efficient to do so if one has a better tax system in the sense 
of having a broader base and lower tax rates.
    The discouraging effect on work and savings, as I discussed 
earlier with one of your colleagues, come really from the level 
of tax rates. One can, as we did as a country in 1986, 
restructure the tax system in a way that can bring down tax 
rates while broadening the base. But again, if one wants to 
reduce the deficit through this action, one has to ultimately 
raise more revenue than under some alternative.
    Mr. Stutzman. But raising more revenue is obviously through 
growing the economy, not just raising taxes?
    Mr. Elmendorf. That is right. But as Chairman Bernanke said 
yesterday, and as many people have said, the size of the 
current imbalance between spending and revenue in the United 
States is not something that can be closed through any 
conceivable feasible growth rate.
    Mr. Stutzman. Do you have any idea, how do we compare, as 
far as our regulatory measures in this country, compared to 
around the world? We know some countries are already adjusting 
corporate tax rates. Are they also adjusting and correcting 
their regulatory systems as well?
    Mr. Elmendorf. So there are certainly changes going on in 
lots of places. In a lot of other developed countries, in 
Europe, where they are feeling fiscal stress, there are 
changes, important changes in policy, that are meant to help 
those economies grow faster, as you said, and to make other 
changes in budget.
    We need to remember, of course, that most other developed 
countries are starting from levels of revenue relative to GDP 
that are a good deal higher than the levels in the United 
States. So if they bring those down, they are bringing them 
towards us, for the most part, not beyond where we are.
    And, of course, a number of countries are raising tax 
rates. The government in Britain, for example, is raising taxes 
as well as cutting spending. They are working on both sides of 
the ledger in an effort to reduce very large budget deficits.
    So different countries are doing different things, 
hopefully an appropriate response in their situations, but that 
is not always clear.
    Mr. McClintock. Mr. Honda.
    Mr. Honda. Thank you, Mr. Chairman.
    Good morning, Dr. Elmendorf.
    We all agree that the trajectories of our national deficit 
and debt are unsustainable and that they place our Nation's 
future in great peril, and that it is this committee's 
responsibility to make this right for the American people.
    Relative to Afghanistan and other things, the only way we 
can make it right is if we are honest about what has placed us 
in this predicament. Republicans have placed the blame entirely 
on Social Security, Medicare, discretionary spending, which 
provides for our working families and our parents in their old 
age. They want us to ignore that two policies of the Republican 
Party, the Bush tax cuts and the wars in Iraq and Afghanistan, 
accounted for over $500 billion of the 2009 deficit and, 
including interest, will account for almost $7 trillion over 
the next decade.
    So my question to you is this, would the savings that 
resulted from ending combat operations in Iraq and Afghanistan 
and allowing the Bush tax cuts for the wealthy to expire reduce 
projected deficits?
    Mr. Elmendorf. Yes, Congressman. Relative to the 
alternatives, yes.
    But I want to emphasize that our baseline projections 
include the expiration of the Bush tax cuts. So the baseline 
projection of deficits of $7 trillion include that expiration. 
They do not include a more rapid drawdown of troops overseas. 
We offer an alternative in our outlook that picks a particular 
scenario in which that reduction would reduce deficits by an 
additional $1.25 trillion. It still leaves deficits in excess 
of $5 trillion over the coming decade.
    Mr. Honda. And the technique that we use with a war on 
terror or Afghanistan and Iraq, if you will, the supplemental, 
is that something that is directly attributable to the deficits 
that we are experiencing and a growing national debt, in the 
way it is being done now?
    Mr. Elmendorf. Any form of spending, additional spending, 
or tax reduction, will widen the deficit. So whether you enact 
that spending through a regular appropriation or supplemental--
--
    Mr. Honda. Is that a ``yes'' to that question?
    Mr. Elmendorf. Well, I am not sure that I understand you. 
It doesn't matter for the ultimate effect on the deficit 
whether you enact something in a supplemental appropriation or 
a regular appropriation. It is just a matter of your 
authorizing the government to spend money.
    Mr. Honda. And obligate.
    Mr. Elmendorf. Yes.
    Mr. Honda. And create a deficit that is not balancing the 
budget that would be financed from somebody that would be added 
to our national debt.
    Mr. Elmendorf. Yes, that is right, Congressman.
    Mr. Honda. Thank you.
    The other one is investing in education and infrastructure. 
In your testimony, you highlighted the jobs crisis that 
continues to confront working and middle-class families. You 
cited two culprits, the anemic growth rate and structural 
changes in the labor market.
    In regards to growth, past CBO reports have recommended 
investments in transportation and infrastructure, while your 
observations regarding the changing labor market and the need 
to equip our workforce with 21st century skills, and to do this 
implies a need for investment in education. So can you explain 
to this committee how public investments in education, 
transportation, and infrastructure promotes economic growth?
    Mr. Elmendorf. Yes, first, to clarify, we have not 
recommended any policies. That is not in our charter. We have 
analyzed the effects of policies.
    Mr. Honda. Right.
    Mr. Elmendorf. And we have said that--for example, we 
released a report at the end of last year about the 
transportation and water infrastructure of the United States. 
We in this case cited analysis by other people, other 
organizations, that there are additional highway spending, if 
used on the projects with greatest economic return, would have 
economic return that exceeded their costs. That doesn't--and 
other sorts of investments, like education, can again, if 
effective, can enhance future economic output.
    I think the key, and this is a big issue as you know in the 
infrastructure discussion, is how to direct the money to a 
place, to certain sorts of projects that have high returns.
    Mr. Honda. One of the high returns is not only job creation 
but public safety, and we can see what happened in Minnesota 
when we don't keep up with our obligations.
    So it appears to me that the return on our investment is 
high and would be positive to our economic growth.
    Thank you.
    Mr. McClintock. Mr. Flores.
    Mr. Flores. Thank you, Mr. Chairman.
    Dr. Elmendorf, thank you for joining us today. You and your 
team have the unenviable task of taking the projected policy 
impact on human behavior and organizational behavior and trying 
to convert that to numbers. So I appreciate your efforts to try 
to do that.
    But with that said, I think we can all agree that it is 
somewhat, even though you do your best, it can be somewhat 
subjective.
    And with that, one of the things that I am going to ask you 
to keep in mind as we go forward is that we are marching off in 
uncharted territory as a country with high debt levels, and so 
the old models may not apply as we go forward. I am sure there 
will be times when we will talk about that as we go forward.
    My first question, how much has the Federal debt grown in 
the last three fiscal year? It is over $4 trillion, right?
    Mr. Elmendorf. Yes.
    Mr. Flores. There has been some commentary during this 
hearing extolling the virtues of PAYGO. In my view, growing our 
debt by $4 trillion while PAYGO was in operation would indicate 
that PAYGO has been an abject failure.
    The next thing I want to talk about is, you said earlier in 
your testimony, not only today but earlier, that you don't get 
a good bang for the buck in terms of reducing taxes on the 
economy. Where do you get the bang for the buck?
    Mr. Elmendorf. Actually, I don't think that is a fair 
characterization of what we said.
    Mr. Flores. Maybe I heard it wrong. I want to make sure I 
heard it correctly.
    Mr. Elmendorf. The short term stimulative effect on the 
economy in a weak economy, like ours is today, depends very 
importantly on the nature of a spending or tax change. So, in 
fact, in our analysis, the highest bang for the buck was 
increasing aid to the unemployed. But the next three options 
ranked on our list were different ways of reducing employers' 
payroll taxes.
    So the methodology that we use does not have an intrinsic 
tax-versus-spending hierarchy. It is the nature of the policy. 
The payroll tax we think would be more effective than an 
across-the-board tax cut of the sort I was asked about earlier 
because more of the money is directed at people who have less 
savings and are likely to spend the larger share of the extra 
income that they receive.
    Mr. Flores. Okay, well, that is helpful, because the way I 
heard it originally, it was in contravention with what 
Christina Romer, who is the former chair of the President's 
economic team, who said at one time that the best economic--the 
best bang in terms of economic--the best bang for the buck in 
terms of increased economic activity was due to reducing taxes.
    How many jobs did the CBO estimate were created under 
stimulus spending?
    Mr. Elmendorf. So we estimated--I have it here. Our latest 
estimate is that employment in 2010 was between 1and a quarter 
and 3 and a quarter million higher than it would have been in 
the absence of that legislation.
    Mr. Flores. So that would indicate we spent, for every job 
created, you assume we spend $800 billion, that it cost $6 
billion a job; is that correct?
    Mr. Elmendorf. No, no. The mid point in this range I 
describe was 2 and a quarter million jobs.
    Mr. Flores. So a little less than $4 million a job is what 
it cost? Did I do my math right; $400,000 a job?
    Mr. Elmendorf. I am sorry, I don't know that number.
    Mr. Flores. We ought to calculate it. I think the bottom 
line is that stimulus spending is not a very efficient way to 
create jobs. If we run the math, whether it is $400,000 or $4 
million, and I may have my math wrong, too, but that is a very 
inefficient way to create jobs. I think that the economic 
models will show that changes in tax policy have a much bigger 
impact on economic growth than do changes in Federal spending.
    Thank you.
    Mr. McClintock. Ms. Wasserman Schultz.
    Ms. Wasserman Schultz. Thank you so much.
    Mr. Elmendorf, I want to ask you some questions. It 
actually is a perfect counterpoint to Mr. Flores's comments 
because I think he is exactly wrong in terms of both his 
explanation related to the Recovery Act and its impact as well 
as what are the policies that provide us with the biggest bang 
for our buck.
    Tax cuts certainly provide a certain bang for the buck, but 
my understanding in just reading a lot about how to recover 
from the recession and the best economic policies is that among 
the biggest bang for our buck is not so much tax cuts but 
providing additional funds directly into the hands of low-
income households; things like that, like unemployment 
compensation and other policies that put money directly into 
the hands of people who really need to use that money and can't 
really afford to sit on it. Am I right?
    Mr. Elmendorf. You are right, Congresswoman. In terms of 
the short-term stimulative effect of a policy, what matters 
most is whether the money gets spent. And giving it to lower-
income people tends to lead to a larger share of the money 
being spent. Whether that is done on the spending side or the 
tax side is less important than who the money goes to.
    Ms. Wasserman Schultz. Just by way of comparison, would you 
say that unemployment compensation, a payroll tax holiday, 
other kinds of policies that put money directly into the hands 
of lower-income individuals, would provide more bang for the 
buck for the economy than let's say tax cuts for the wealthiest 
individuals?
    Mr. Elmendorf. In terms of the short-run economic stimulus, 
yes, Congresswoman.
    Ms. Wasserman Schultz. Thank you.
    And just on the Recovery Act itself, according to CBO's 
models, my understanding is that the Recovery Act increased 
employment in 2010 by somewhere between--and I think this is 
CBO's estimate--1.3 million and 3.3 million people. Is that 
right?
    Mr. Elmendorf. That is right.
    Ms. Wasserman Schultz. Yesterday, Chairman Bernanke was 
here, and he testified on the state of the economy. He has 
previously observed that with the remainder of the Recovery Act 
funds set to expire--or not expire but to be spent this year 
and then no longer be available to State and local governments, 
the expiration, for lack of a better term, of the stimulus 
funds is obviously going to worsen the outlook--my State is 
facing a $3.6 billion deficit, will no longer have the stimulus 
funds available after the end of this year--and that would 
present a headwinds for the overall economy. Can you give us a 
sense of whether you agree with his assessment?
    Mr. Elmendorf. Yes, I think that is right, that the waning 
effects of the Recovery Act represent a drag on economic growth 
over the next year or so.
    Ms. Wasserman Schultz. So that fact, coupled with draconian 
cuts proposed, for example, in Chairman Ryan's plan, which is 
like an anti-Recovery Act, would you give us a sense whether 
you think large spending cuts like that right away would be an 
additional drain on economic growth, especially when compounded 
with the expiration of the Recovery Act funds?
    Mr. Elmendorf. So our analysis, yes, implies that cutbacks 
in government spending under current economic conditions tend 
to reduce output employment in the short term. And the issue 
that you and your colleagues face is how to balance that 
against the other problems that arise from the burgeoning 
national debt.
    Ms. Wasserman Schultz. So potentially if we cut too much 
too quick and we have the expiration of the Recovery Act funds, 
with the State and local governments facing significant 
deficits to start with, couldn't we endanger the recovery?
    Mr. Elmendorf. Well, it could slow the recovery. 
Endangering I think depends on the overall scale of the 
activity.
    Ms. Wasserman Schultz. Let me rephrase. Obviously, the 
recovery has not been as quick as we would like. Isn't it 
likely that the combination of all of those things would result 
in the recovery slowing as opposed to quickening?
    Mr. Elmendorf. Yes. I mean, our forecast, of course, builds 
in the things that are in current law. And additional cuts in 
spending in the near term we think would have some dampening 
effect on output and employment, and the magnitude depends on 
the magnitude of the cuts.
    Ms. Wasserman Schultz. Thank you very much.
    Chairman Ryan [presiding]. Mr. Mulvaney.
    Mr. Mulvaney. Thank you, Mr. Chairman.
    Dr. Elmendorf, I apologize. I am going to move very quickly 
because I have an additional topic I want to talk to you about. 
If I could bring the first draft up, that would be fantastic.
    A quick question, can you have a deficit without spending? 
You can't, can you?
    Mr. Elmendorf. No, Congressman. You can't.
    Mr. Mulvaney. This is a graph of the historical revenues 
and spending levels as a percent of GDP going back to 1960. I 
have heard some discussion today that suggests that we don't 
have a spending problem, that we have a spending problem and a 
revenue problem. It looks like historical revenues have 
averaged about 18 percent of GDP over the course of the last 40 
years, and spending has been about 20.
    Take a look, Doctor, back in the 1960s, it looks like we 
were taking in about 18 percent in terms of revenues, percent 
of GDP. Do you remember what the top marginal rate was back 
then?
    Mr. Elmendorf. It was quite high.
    Mr. Mulvaney. So even then, and I think it was above 90 at 
that point, even then we weren't able to squeeze more than 18 
percent of GDP out in terms of revenue. So we are were soaking 
it to the rich pretty good. But we couldn't get much above 18. 
In fact, the only time we have gone above 20 was during the 
dot-com boom of the late 1990s, early 2000s.
    Now it looks like, according to your projections, because 
these are your projections, we do get revenues back at 
historically high levels in the next 10 years, that we get 
revenues back to 20 percent of GDP, and we still have a 
dramatic deficit in those years, don't we, sir?
    Mr. Elmendorf. Yes. That is right, Congressman.
    Mr. Mulvaney. And that is because our spending is way above 
our historical average of 20 percent, correct?
    Mr. Elmendorf. That is right, Congressman.
    Mr. Mulvaney. If I can bring up the second graph.
    I asked my staff to come up with something that has been 
bugging me since I have been here. This is my own personal idea 
of what a tipping point is. I asked them to graph the 
projections using your numbers of the total revenues that the 
government expects to take in versus the interest payment 
obligations. Now the top graph is I think what you call your 
extended baseline, but the bottom one is the alternative fiscal 
that I think folks around here tell me is what we use 
traditionally. Do you see what I see, Doctor?
    Mr. Elmendorf. I am not sure what you see, Congressman.
    Mr. Mulvaney. In 2055, more than 100 percent of the 
expected revenues, using CBO numbers, will go to only interest 
payments. Now, I will tell you that we put this together using 
your staff, and I would ask you to the extent that a freshman 
has the opportunity to ask you to do this kind of stuff, to 
make sure those numbers are right. We worked very closely using 
your assumptions, and I am confident that they are, but I would 
be curious if you folks would also take a look at them as well.
    This comes back to the original point that I made yesterday 
with Chairman Bernanke regarding your assumptions on interest 
rates. If you take a look at the baseline, your all's 
assumptions for this year on the 10-year treasury, for example, 
just so we get apples to apples, is 3.4 percent. Last week it 
traded at 3.5. Yesterday, while Mr. Bernanke was testifying, it 
traded at 3.7. At what point, sir, would you think it is 
reasonable for you to go back in and readjust your numbers to 
take in some more real world considerations on interest rates?
    Mr. Elmendorf. We update our forecasts several times a 
year, Congressman.
    I would emphasize the time that we set this path for 
interest rates, we set a path that was above the path in 
financial markets. And we did that because our own modeling 
suggested that rates seemed to us that they should be higher.
    On the other hand, there are a lot of people betting very 
large sums of money on what is happening in the financial 
markets, and we thought it was appropriate for us to give 
weight exactly to the real world considerations that you are 
highlighting.
    Mr. Mulvaney. Clearly, I am not suggesting that your 
methodology was wrong. I don't think anybody expected a 100 
basis point rise in the 10-year Treasury since October, but it 
certainly is the real world. And I suggest to you, Doctor, am I 
wrong when I say that higher interest rates will move that red 
line in the bottom curve further to the left, bringing closer 
the date at which our debt obligations will exceed our 
revenues?
    Mr. Elmendorf. That is right, Congressman, and we do show 
in the appendix to the outlook the effect of alternative 
assumptions about interest rates, as well as GDP growth and 
inflation and so on, on the Federal budget.
    Mr. Mulvaney. I appreciate that. That was one of the best 
pieces of the thing that I read, where you all actually went 
down section by section and said, look, here are our 
assumptions on GDP; here are our assumptions on interest rates; 
if they are off by a percent or a 10th of a percent, here is 
the output.
    By the way, the result, if we have an interest rate that is 
1 percentage point higher than your assumptions, we are looking 
at an additional $1.3 trillion in debt over the course of the 
next decade.
    I am going to ask you to do one last thing. Do you have 
your report in front of you, sir?
    Mr. Elmendorf. Yes, I do.
    Mr. Mulvaney. Would you turn to page 118, please?
    Mr. Elmendorf. Okay.
    Mr. Mulvaney. I ask you to read the last sentence beginning 
``in January,'' above the title that begins ``higher 
inflation.'' So it is the last section of the previous section.
    Mr. Elmendorf. ``In January 2008, under the laws in effect 
at that time, CBO projected that debt held by the public would 
total about $5 trillion by the end of 2018. In CBO's current 
projections, debt held by the public is close to $16 trillion 
by the end of 2018 and exceeds $18 trillion by the end of 
2021.''
    Mr. Mulvaney. Thank you, Doctor.
    Thank you, Mr. Chairman.
    Chairman Ryan. Mr. Tonko.
    Mr. Tonko. Thank you, Mr. Chairman.
    Dr. Elmendorf, thank you for providing your insights to the 
committee. I appreciate it.
    In January of 2010, did you write a letter to Chairman Ryan 
concerning the analysis of Chairman Ryan's roadmap?
    Mr. Elmendorf. Yes, we did, Congressman.
    Mr. Tonko. And was that letter a formal cost estimate?
    Mr. Elmendorf. No, it was not.
    Mr. Tonko. Now with the Ryan roadmap, in addition to 
restructuring several spending programs, it also puts forward a 
plan to dramatically restructure our tax system. As I 
understand it, according to a widely cited analysis by the 
nonpartisan Tax Policy Center, this plan would cut in half 
taxes on the richest 1 percent of Americans.
    We all know that tax cuts don't pay for themselves, so 
under this plan, the burden of this high-income tax cuts is 
then shifted to low- and middle-income families. In fact, 
according to the Tax Policy Center's analysis, about three-
quarters of Americans would see their taxes increase.
    I find that drastic middle class tax hike would be 
insufficient to put the Federal budget on a sustainable path in 
the next several decades and, in addition, is accompanied by 
provisions that threaten the health care for seniors and the 
health care for our most vulnerable populations and plans to 
gamble Social Security checks on a stock market that we know 
has not been a friend to retirement accounts in the last few 
years.
    So did your letter do a specific analysis of the tax 
provisions of this roadmap?
    Mr. Elmendorf. No, Congressman. Because the Joint Tax 
Committee staff does the estimates in the 10-year window for 
changes in the Internal Revenue Code, our longer-term modeling 
focuses on the spending side of the budget. We haven't built 
the tax side of the budget. So we were unable to analyze the 
tax provisions. That is why you don't find that in our letter.
    Mr. Tonko. So you did nothing on the tax provisions. So, 
for the purposes of your analysis, you used an assumption that 
the overall level of revenues collected would remain the same 
as they are under current policies through 2030 and would equal 
some 19 percent of GDP in the later years. Who provided you 
with that assumption?
    Mr. Elmendorf. We followed the specification from Chairman 
Ryan and his staff.
    Mr. Tonko. So was it the Joint Committee on Taxation that 
provided that information?
    Mr. Elmendorf. No, they didn't do that analysis.
    Mr. Tonko. So all of that assumption and all the guidelines 
were done by the Chairman?
    Chairman Ryan. Would the gentleman yield?
    Mr. Tonko, I can answer your question if you would like. 
You are asking the wrong guy.
    Mr. Elmendorf. So, Congressman, we didn't have the capacity 
to model that part of the roadmap.
    In order to take the parts that we could model on the 
spending side and show how the pieces fit together, we followed 
and were very explicit in the letter that we just followed the 
policy as it was described to us by the Chairman.
    Chairman Ryan. If the gentleman would yield, where we got 
our revenue estimates from were the Office of Tax Analysis at 
the Treasury Department. Joint Tax could not give us estimates, 
so we went to the next best source using the same model that 
Joint Tax uses to try and hit our revenue targets, which were 
to get to historic revenue levels.
    So our tax reform levels were set at what Joint Tax--at 
what OTA told us would hit us at revenue target levels. And 
that is how we got that level.
    Mr. Tonko. And it is why Dr. Elmendorf then said that it 
was you, Mr. Chairman, and your staff that provided that 
information?
    Chairman Ryan. Yes.
    Mr. Tonko. Now, the Tax Policy Center analysis, 
unsurprisingly, finds that with a radical restructuring of our 
tax system comes a radical change in the amount of revenues 
collected.
    We have heard many claims circulating this year that the 
bottom 50 percent of Americans don't pay their fair share of 
taxes under our current system.
    Well, as of 2007, the bottom 50 percent of households in 
America, I am informed, hold just 2.5 percent of this Nation's 
wealth. And according to the claims of my Republican 
colleagues, they pay 3 percent of the taxes. That sounds to me 
like they are paying more than their fair share. And I would 
like your response to that.
    Mr. Elmendorf. I don't have wealth numbers at hand.
    We did testimony before the Senate Finance Committee in 
December that presented information on the evolution of 
marginal tax rates over time, as was mentioned earlier, and on 
the distribution of the tax burden.
    The Federal tax burden is higher as a share of income on 
higher-income people. Thus, the after-tax distribution of 
income is slightly less unequal than the before-tax 
distribution of income, but it is still----
    Mr. Tonko. A burden.
    Mr. Elmendorf. Quite unequal. If it is the right burden is 
up to you and your colleagues.
    Mr. Tonko. Thank you very much.
    Chairman Ryan. Mr. Ribble.
    Mr. Ribble. Dr. Elmendorf, thank you for being here today. 
I have enjoyed listening to the conversation quite a bit, and I 
have especially enjoyed your testimony today.
    Mr. Elmendorf. Thank you.
    Mr. Ribble. I can tell you, I have only been here a little 
over a month, and I have heard quite a bit just this morning 
that the Democrats did this and the Republicans did that, and 
it is their fault, and it is our fault, and it is everybody's 
fault. I have to tell you something, my grandkids don't care 
much about that. They care about what the future looks like.
    Do you believe when my grandson hits 20 in 2021, that $18 
trillion debt makes his future more bright or less bright than 
a debt that would be lower than that?
    Mr. Elmendorf. It makes his future less bright, 
Congressman.
    Mr. Ribble. Okay, that is what I thought. That is why I am 
here.
    I have also heard that our debt and our deficit and our 
spending is on an unsustainable trajectory. I have heard that 
probably a hundred times since I have been here. You used the 
word ``unsupportable.'' What level of debt and deficit spending 
would you consider supportable?
    Mr. Elmendorf. Well, as we have said in this report and 
other places, we don't know if there is a tipping point. And we 
don't know where that tipping point might be. It depends not 
just on the level of outstanding debt but also on people's 
perceptions of where the debt is heading, what current policies 
will lead to in the future, and on the willingness of you and 
your colleagues to make changes in policy. So I don't want to 
pick a particular number.
    One criterion, though, for sustainable policy is that debt 
cannot continue to increase relative to the size of the 
economy. So the upward trajectory that we show, especially 
under this continuation of current policy scenario, is not 
sustainable because debt cannot continue to rise indefinitely 
relative to GDP.
    Mr. Ribble. So, your words, I think these were your words, 
maybe I am paraphrasing here, that delaying our efforts to fix 
this problem would be bad?
    Mr. Elmendorf. Delaying--we don't make policy 
recommendations, Congressman.
    What we have said very clearly is that delay increases the 
costs of the burgeoning debt, and it increases the drain on the 
future incomes, like your grandchildren.
    It increases the ultimate spending cuts or tax increases 
that will be needed to put the budget on a sustainable path. It 
reduces the flexibility that you and your colleagues have in 
dealing with unexpected problems in this country or overseas, 
and it raises the risk of a fiscal crisis.
    Mr. Ribble. So the longer we wait, the more difficult the 
fix is going to become in terms of how harshly we must cut or 
draw back?
    Mr. Elmendorf. That is right, Congressman.
    We have a study we released in the fall about the cost of 
waiting, the impact of delaying efforts to address the fiscal 
imbalance.
    Mr. Ribble. And then, along with that, and I realize you 
don't make policy suggestions here, but I am assuming that at 
some point, this Congress, I would hope it would be this 
Congress or some very soon future Congress, is going to have to 
address the issue of entitlement spending, aren't we, that we 
can't find a place without that?
    Mr. Elmendorf. ``Can't'' is a strong word for me, 
Congressman.
    There are countries--there are functioning economies with 
fairly high standards of living that have government programs 
much more expansive than ours and tax burdens that are higher. 
They give something up through having made that set of choices. 
But I don't want to presume, as the Chairman noted, it is not 
my place to invoke my policy preferences. That is for you and 
your colleagues.
    Mr. Ribble. Sure.
    Very good. Thank you, Doctor.
    Mr. Elmendorf. Thank you, Congressman.
    Chairman Ryan. Ms. Bass.
    Ms. Bass. Thank you, Mr. Chairman.
    You might have addressed this while I was running to 
another hearing, but just in case you didn't, if you could talk 
about the implications with States, especially if we don't 
raise the debt ceiling, what is the forecast as to what would 
happen there, and then how would the States be able to meet 
their obligations? Would we still be able to send States 
monies? How would we be able to deal with that?
    Mr. Elmendorf. So if the debt ceiling is not raised before 
the government runs out of money, then not all of the 
government's obligations would get paid. I don't know which 
ones might or might not get paid.
    Ms. Bass. You don't know how it would be prioritized?
    Mr. Elmendorf. I don't know how it would be prioritized. 
Naturally, whoever it is who would not be receiving the checks 
they would otherwise be receiving will feel that effect. And 
that could be bondholders. It could be State and local 
governments. It could be households waiting for benefits, 
depending on what checks go out and what checks don't. For all 
of the people who are waiting, it will be a burden. And for 
some governments or businesses or people perhaps an 
unsupportable problem.
    But it is hard for us to analyze that not knowing what the 
priorities would be and also not ever having seen this event 
occur in modern U.S. history.
    Ms. Bass. In terms of the cuts and knowing that we do have 
to cut back spending and knowing that we also have to figure 
out what we do with raising the debt ceiling, where are ways 
that we can cut that won't hurt the economy and especially hurt 
jobs?
    Mr. Elmendorf. So, I think, Congresswoman, there aren't a 
lot of easy ways for you to do this or you and your colleagues 
who worry about the rising debt would have done those things 
already.
    I think from an economic point of view, what is beneficial 
for the economy is lower debt accumulation over time, and what 
can be beneficial now is greater confidence that policies are 
being changed in ways that will reduce the growth and level of 
debt.
    At the same time, cutting back spending now, raising taxes 
now will by itself, as I said in response to a number of 
questions, tend to slow the economy.
    So you and your colleagues face a difficult trade-off 
there, and that is one of the major problems that we and others 
have discussed in connection with rising debt is that it 
reduces the flexibility that you have to make policy 
adjustments that you want.
    Countries that get forced--end up in fiscal crises have to 
make often very stark changes in spending and revenues, often 
under bad economic circumstances.
    Early action by you and your colleagues can help to 
forestall that possibility in this country. But again, the 
immediate direct effect of cuts in spending or increases in 
taxes would be to slow the economy, in our estimation.
    Ms. Bass. Thank you.
    Chairman Ryan. Ms. Castor.
    Ms. Castor. Thank you, Mr. Chairman.
    And welcome, Director Elmendorf.
    You can see policymakers and budget writers have a real 
balancing act. We have a real balancing act on our hands, and I 
think both sides of the aisle agree that we have to have a very 
bold plan on reducing the debt and deficit. We agree that 
government must live within its means.
    Then, on the other hand, I think we all agree that we have 
got to continue to foster job growth. And when you look at the 
public surveys, any public survey from across the country, job 
growth and jobs continues to be the number one priority from 
the American people. It certainly is in my home State of 
Florida, in my community, where we still have a double digit 
unemployment rate.
    So I appreciate your expert analysis and guidance on how we 
walk that tightrope and effect a balancing act, but it appears 
that a consensus is building for our way forward here. I want 
to see if you agree with some of the statements that have made 
by a number of groups that have studied the issue of debt 
reduction and job creation as well.
    The President's bipartisan fiscal commission has 
recommended that when we are developing our debt reduction 
plan, that budget cuts should start gradually so they don't 
interfere with the ongoing economic recovery because growth is 
essential to restoring fiscal strength and balance. Do you 
agree with that general approach?
    Mr. Elmendorf. So, Congresswoman, as you know, we don't 
make recommendations. So sentences that involved the word 
``should'' are sentences that we stay away from, for a good 
reason.
    As you say, you and your colleagues face a trade-off here. 
Delay in changing the path of fiscal policy has a collection of 
very serious negative consequences for the economy. At the same 
time, sharp changes in policy, as I said in my opening remarks, 
could be disruptive, and there is a case for giving households 
and businesses and State and local governments time to plan and 
adjust. And those sets of ideas are in some conflict, that they 
push desirable policy in different directions, and we are just 
not in a position to judge those trade-offs.
    I think one thing to emphasize, though, is I don't think 
there is much of a case for delaying the enactment of policy 
changes.
    Ms. Castor. Right. Clearly, we have to get started.
    Mr. Elmendorf. The issue here is the actual collection of 
more revenue and reduction in spending.
    Enactment of changes doesn't cause a near-term 
contractionary effect and can be supportive of spending if 
households and businesses gain confidence in seeing the Federal 
budget on a more sustainable trajectory.
    There is really no case that I know of, an economic case, 
for waiting for you and your colleagues to make decisions. 
There is an economic case with trade-offs for the pace at which 
those decisions affect policy.
    Ms. Castor. I think we agree. I think too often in 
Washington we focus on where we differ. But I think there is 
great consensus building that we have got to act now. We have 
to focus on debt reduction and job creation, and we are going 
to have this very robust debate about how we get there.
    Now yesterday, Chairman Bernanke said the largest drivers 
of the debt and deficit are health care costs of government and 
the aging population. Do you agree with that?
    Mr. Elmendorf. Yes, that is right.
    Ms. Castor. Well, what I hope is, we are starting to see 
some appropriations cuts coming out from the other side, and I 
would just caution my colleagues that if the biggest drivers of 
the debt and deficit are health care costs of government and 
the aging population, some of the cuts that I am seeing coming 
out from the Appropriations Committee are not targeted toward 
the real drivers of the debt and deficit. We have got to work 
together to get to that point where we are tackling the real 
problem and not harming job growth.
    Another well known economist has said, has recommended to 
us that you can't do it all right up front. You can't--that it 
really would push unemployment back to double digits if you try 
to have trillion dollar cuts in your first 2 years when the 
better approach is to have a long-term deficit and debt 
reduction plan. What is your opinion on that?
    Mr. Elmendorf. Again, I think from an economic perspective, 
the crucial factor for building confidence among American 
households and businesses and among purchasers of our debt is 
to have a plan in place, to have a set of policies enacted by 
the Congress and signed by the President that put the country 
on a sustainable fiscal trajectory. So I can come up with a 
report like this that doesn't show debt rising relative to GDP 
as far as the eye can see. And again, the pace at which those 
changes are put in place in terms of the unfolding of the 
policies involves a more complicated trade-off.
    Ms. Castor. Thank you very much.
    Chairman Ryan. Dr. Elmendorf, thank you for spending your 
morning with us. We appreciate it. We look forward to many more 
times with you. Thank you.
    This hearing is adjourned.
    Mr. Elmendorf. Thank you, Mr. Chairman.
    [Questions submitted for the record and their responses 
follow:]

            Questions Submitted for the Record by Mr. Honda

                         FRAMING THE QUESTIONS

    We all agree that the trajectories of our national deficit and debt 
are unsustainable, that they place our nation's future in grave peril 
and that it is this committee's responsibility to make this right for 
the American people.

                       1. AFGHANISTAN & TAX CUTS

    The only way we can do this is if we are honest about what has 
placed us in this predicament. Republicans place the blame entirely on 
Social Security, Medicare and discretionary spending which provide for 
our working families and their parents in their old age.
    They want us to ignore that two policies of the Republican Party--
the Bush Tax Cuts and the wars in Iraq and Afghanistan--accounted for 
over 500 billion dollars of the 2009 deficit and including interest 
will account for almost 7 trillion dollar over the next decade.
    So my question for you is this:
    Would the savings that resulted from ending combat operations in 
Iraq and Afghanistan and allowing the Bush Tax Cuts for the wealthy to 
expire reduce projected deficits?

              2. INVESTING IN EDUCATION AND INFRASTRUCTURE

    In your testimony you highlighted the jobs crisis that continues to 
confront working and middle class families. You cited two culprits: the 
anemic growth rate and structural changes in the labor market.
    In regards to growth, past CBO reports have recommended investments 
in transportation and infrastructure; while your observations regarding 
the changing labor market, and the need to equip our workforce with 
21st century skills, implies the need for investment in education.
    Can you explain for the Committee how public investments in 
education, transportation and infrastructure promote economic growth?

           Dr. Elmendorf's Responses to Mr. Honda's Questions

    This is the response of the Congressional Budget Office to 
questions for the record asked by the Honorable Michael Honda after a 
hearing by the House Budget Committee on February 10, 2011.

    Q: Would the savings that resulted from ending combat operations in 
Iraq and Afghanistan and allowing the Bush Tax Cuts for the wealthy to 
expire reduce projected deficits?
           a: spending for operations in afghanistan and iraq
    The Congressional Budget Office's (CBO) projections of 
discretionary spending for the next 10 years include outlays for 
operations in Afghanistan and Iraq and other potential overseas 
contingency operations. Specifically, the outlays projected in the 
baseline come from budget authority provided for those purposes in 2010 
and earlier years; the budget authority provided for 2011 under the 
Continuing Appropriations and Surface Transportation Extensions Act, 
2011 (P.L. 111-322) at an annual rate of $159 billion; and the $1.8 
trillion in appropriations projected for the 2012-2021 period (under 
the assumption that annual funding is set at $159 billion plus 
adjustments for anticipated inflation, in accordance with the rules 
that govern CBO's baseline projections).
    In coming years, the funding required for war-related activities 
could be smaller than the amounts in the baseline if the number of 
deployed troops and the pace of operations diminish. To illustrate the 
potential impact on discretionary outlays that would result from such a 
decline, CBO formulated a budget scenario that assumes a reduction in 
the deployment of U.S. forces abroad for military actions. In 2010, CBO 
estimates, the number of U.S. active-duty, reserve, and National Guard 
personnel deployed for war-related activities averaged about 215,000. 
Under the alternative scenario, the average number of military 
personnel deployed for war-related purposes would decline over five 
years: from 180,000 in 2011 to 130,000 in 2012, 100,000 in 2013, 65,000 
in 2014, and 45,000 in 2015 and thereafter. (Those numbers could 
represent various allocations among Afghanistan, Iraq, and other 
countries.) Under that scenario, total discretionary budget authority 
for the period from 2012 through 2021 would be $1.3 trillion less than 
the amount in CBO's current baseline. Assuming that funding is not 
spent for other purposes, outlays would be lower by $1.1 trillion over 
that same period.
    Many other scenarios and estimated savings in discretionary 
spending are possible depending on the pace of decline in the number of 
military personnel deployed for war-related purposes.

               REVENUE IMPLICATIONS OF EXTENDING TAX CUTS

    CBO's projection of revenues for the next 10 years is intended to 
show what would happen to revenues if current law remains unchanged. 
Thus, under the rules that govern CBO's baseline, all provisions of the 
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation 
Act of 2010 (the 2010 tax act) are assumed to expire as scheduled over 
the next two years.
    If the tax provisions of the 2010 tax act that were originally 
enacted in 2001, 2003, and 2009, were extended, total revenues would be 
$2.5 trillion lower than total revenues in CBO's baseline projection 
over the 2012-2021 period, according to preliminary estimates by CBO 
and the staff of the Joint Committee on Taxation. That estimates 
includes increases in outlays for refundable tax credits.
    If only the tax provisions of the 2010 tax act that were originally 
enacted in 2001, 2003, and 2009, and that applied to married couples 
with income below $250,000 and singles with income below $200,000 were 
extended--as the President has proposed--the revenue reduction would be 
smaller. While neither the Joint Committee nor CBO has estimated the 
cost of partial extension (for all but high-income taxpayers) of those 
tax provisions of the 2010 tax act over the 2012-2021 period, past 
estimates of that option suggest that it would reduce revenues by about 
$700 billion less over ten years than full extension.

    Q: Can you explain for the Committee how public investments in 
education, transportation and infrastructure promote economic growth?

    A: Spending by the federal government and state and local 
governments on education, transportation, and other infrastructure can 
promote economic growth by increasing the amount of productive physical 
and human capital in the economy. Public spending on education promotes 
growth when it raises the skill level of the nation's workforce because 
workers with higher skills are better able to perform their tasks, to 
solve problems, and to embrace the latest production techniques. Public 
spending on transportation and other infrastructure can increase 
economic output by raising the stock of physical capital in the 
economy, thereby increasing the productivity of labor and other factors 
of production in the private sector. For example, increasing the amount 
of transportation infrastructure makes it easier to get materials and 
labor to production facilities and finished goods to consumers. 
Consequently, workers can produce and deliver more in a given time and 
at a given transportation cost. Even so, funds spent for those purposes 
cannot be spent elsewhere in the economy; leaving more money in the 
hands of the private sector by instead reducing borrowing or lowering 
taxes can also promote growth.
    The roles of the federal government and state and local governments 
vary widely in spending for education, transportation, and other types 
of infrastructure. In particular:
     In federal fiscal year 2007, the most recent year for 
which data on combined spending by the federal government and by state 
and local governments are available, total public spending for 
education was approximately $852 billion (in 2009 dollars). (That 
figure excludes spending for formal and informal training programs that 
are not school-based.) Spending by state and local governments accounts 
for over 90 percent of that total; the $63 billion spent by the federal 
government accounts for the remaining share of public spending. In 
addition to that public total, the private sector spends hundreds of 
billions of dollars per year on private colleges and universities and 
on private primary and secondary education.
     In federal fiscal year 2007, the most recent year for 
which data on combined spending by the federal government and by state 
and local governments are available, total public spending for 
transportation infrastructure was approximately $247 billion (in 2009 
dollars). (The private sector plays a small role in the provision of 
transportation infrastructure and those expenditures are essentially 
confined to spending on freight rail and aviation.) The federal 
government accounts for over one-quarter of public spending on 
transportation infrastructure with state and local governments 
accounting for the rest. Spending on highways amounted to almost two-
thirds of public spending on transportation infrastructure; virtually 
all federal outlays went to highway construction while state and local 
expenditures went to both construction and maintenance.
     Total public spending on water infrastructure, defined as 
water resources (such as dams and levees), water supply systems, and 
wastewater treatment plants, was $110 billion in 2007. Spending for 
water supply and wastewater treatment was $101 billion, or over nine-
tenths of public spending on water infrastructure. State and local 
governments accounted for almost all of that spending; about one-third 
of the expenditures by those governments was for building new 
infrastructure and two-thirds was for the operation and maintenance of 
that existing infrastructure. Data on spending by state and local 
governments for water resources are not available.
    The effect of spending for education, transportation, and other 
infrastructure on economic growth is imprecisely measured and is not 
easily generalized. The impact of public investments in education on 
economic growth depends both on the nature of those investments and on 
the production technologies and levels of capital (both physical and 
human) that currently exist in the economy. For example, investments 
aimed at helping young adults complete college may produce returns 
fairly quickly, but which are ultimately less than the longer-term 
benefits from investments to improve the learning abilities of pre-
school or elementary-school aged children. Further, raising the skills 
of the least able workers may have different effects on economic growth 
than raising the skills of more skilled workers, and those effects may 
depend on the technology and physical capital in use at the time (i.e., 
training skilled workers to use sophisticated equipment will have only 
a small payoff if there are only few such machines available). Finally, 
it is difficult to accurately measure the level of and changes in the 
productive skill-level of the workforce--the most common measure, years 
of schooling, is useful but only an approximate measure of skill. 
Ultimately, public investments in education that raise the skills of 
the workforce should contribute to economic growth, but the returns to 
those investments cannot be forecast with any confidence. The economic 
research on the payoff to transportation and other infrastructure 
spending generally shows that such investment yields positive returns; 
however, there is significant variation in the average return both 
across different periods of time (especially for highways) and across 
individual projects at a given moment in time. As a result, identifying 
economically justifiable projects--those with benefits to society that 
are expected to outweigh costs--is crucial for realizing the potential 
gains from public spending for infrastructure.

    [Whereupon, at 11:58 a.m., the committee was adjourned.]

                                  
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