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





                   THE CONGRESSIONAL BUDGET OFFICE'S
                        LONG-TERM BUDGET OUTLOOK

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

             HEARING HELD IN WASHINGTON, DC, JUNE 23, 2011

                               __________

                           Serial No. 112-10

                               __________

           Printed for the use of the Committee on the Budget












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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, June 23, 2011....................     1

    Hon. Paul Ryan, Chairman, Committee on the Budget............     1
        Prepared statement of....................................     2
    Hon. Allyson Y. Schwartz, a representative in Congress from 
      the State of Pennsylvania..................................     3
        Prepared statement of....................................     6
    Douglas W. Elmendorf, Director, Congressional Budget Office..     7
        Prepared statement of....................................     9

 
       THE CONGRESSIONAL BUDGET OFFICE'S LONG-TERM BUDGET OUTLOOK

                              ----------                              


                        THURSDAY, JUNE 23, 2011

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:00 a.m., in room 
210, Cannon House Office Building, Hon. Paul Ryan, [Chairman of 
the Committee] presiding.
    Present: Representatives Ryan, Garrett, Price, Stutzman, 
Black, Ribble, Flores, Huelskamp, Amash, Woodall, Schwartz, 
Doggett, Blumenauer, Yarmuth, Pascrell, Wasserman Schultz, 
Tonko, Bass.
    Chairman Ryan. Welcome all to this very important hearing. 
The purpose of our hearing today is to discuss what can be done 
to avoid a debt-fueled economic collapse in this country. Our 
witness today is Doug Elmendorf, Director of the Congressional 
Budget Office. I want to thank you Doug for your 
professionalism and your hard work and those of our associates 
at CBO, and for appearing before our committee yet again today.
    Yesterday the CBO released its long-term budget outlook. 
This report throws harsh light on the challenges we face and it 
sounds an alarm that too many in Washington have been ignoring 
for far too long. The federal government will race across a 
dangerous tipping point this year. According to CBO, total U.S. 
debt will reach 100 percent of GDP. Our debt will have eclipsed 
the size of our entire economy.
    Economists who have studied sovereign debt tell us that 
letting total debt rise above 90 percent of GDP creates a drag 
on economic growth and intensifies the risk of a debt-fueled 
economic crisis. The CBO is candid about the increasing 
likelihood of this crisis and the report quotes, ``Such a 
crisis would confront policy makers with extremely difficult 
choices and probably have a very significant negative impact on 
the country.''
    This quote demonstrates CBO's flair for the understatement. 
A sudden fiscal crisis would be a complete catastrophe for this 
country. Families and businesses would bear the full brunt of 
the painful consequences. If the nation ultimately experienced 
a panic run on its debt, policy makers would be forced to make 
the immediate and painful fiscal adjustments, like the 
Austerity Programs that have stoked the riots in Greece. This 
would mean massive tax increases on working families and steep 
benefit cuts that hit our most vulnerable citizens the hardest.
    The CBO is a non-partisan agency, so it does not take a 
position on what would be required to prevent this crisis; but 
we can draw our own conclusions on the evidence in this report. 
For one thing, this report makes clear that exploding 
government spending, not insufficient revenue, is driving us 
toward this crisis point.
    If we simply keep revenues at their historic revenue, or 
average as a share of GDP, then government spending driven by 
an aging population and rising health care cost will cause 
federal debt to grow to unsustainable levels. Yet again CBO 
makes it clear that Medicare and government health care 
programs are driving the debt; and driving these programs 
themselves into bankruptcy. Attacking solutions to save these 
programs threatens both the health security and economic 
security of the American people. If we try to chase ever higher 
spending with ever higher taxes, the CBO is very clear about 
the consequences. It estimates that GNP will be 2 percent lower 
in 2035 than it would be otherwise. That number represents 
hundreds of billions in dollars of lost income for American 
families and businesses on top of much higher taxes they would 
have to pay.
    The House Republicans have passed a budget, the Path to 
Prosperity; which answers CBO's warnings and averts the crisis 
before us. The House passed budget tackles the explosive growth 
in spending. It saves critical programs like Medicare and puts 
our budget on a path to balance without resorting to job 
destroying tax hikes. Meanwhile, the president has not put 
forward a credible plan; a credible budget and it is been 785 
days, let me say that again, it has been 785 days since the 
Senate passed any budget at all.
    We have a leadership deficit in Washington, and our window 
for solutions is closing quickly. Instead of tuning out CBO and 
others who are working to inform us of this danger, let's work 
together now before it is too late to put America's budget on a 
sustainable path, grow the economy, and leave the next 
generation with a better country than the one we inherited.
    Thank you, and with that I would like to yield to Vice 
Ranking Member, Ms. Schwartz.
    [The prepared statement of Chairman Paul Ryan follows:]

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

    Welcome all, to this important hearing. The purpose of today's 
hearing is to discuss what can be done to avoid a debt-fueled economic 
collapse in this country.
    Our witness today is Doug Elmendorf, director of the Congressional 
Budget Office. I thank you Doug for your professionalism and hard work 
at the CBO, and for appearing before this committee today.
    Yesterday, the CBO released its Long-Term Budget Outlook. This 
report throws harsh light on the challenges we face, and sounds an 
alarm that too many in Washington have been ignoring for far too long.
    The federal government will race across a dangerous tipping point 
this year: According to the CBO, total U.S. debt will reach 100 percent 
of GDP. Our debt will have eclipsed the size of our entire economy.
    Economists who have studied sovereign debt tell us that letting 
total debt rise above 90 percent of GDP creates a drag on economic 
growth and intensifies the risk of a debt-fueled economic crisis.
    The CBO is candid about the increasing likelihood of this crisis, 
and the report states: ``Such a crisis would confront policymakers with 
extremely difficult choices and probably have a very significant 
negative impact on the country.''
    This quote demonstrates the CBO's flair for understatement. A 
sudden fiscal crisis would be a complete catastrophe for this country. 
Families and businesses would bear the full brunt of the painful 
consequences.
    If the nation ultimately experienced a panicked run on its debt, 
policymakers would be forced to make immediate and painful fiscal 
adjustments, like the austerity program that has provoked riots in 
Greece. This would mean massive tax increases on working families and 
steep benefit cuts that hit our most vulnerable citizens the hardest.
    The CBO is a non-partisan agency, so it does not take a position on 
what will be required to prevent this crisis.
    But we can draw our own conclusions from the evidence in this 
report.
    For one thing, this report makes clear that exploding government 
spending, not insufficient tax revenue, is driving us toward this 
crisis point.
    If we simply keep revenues at their historical average as a share 
of GDP, then government spending--driven by an aging population and 
rapidly rising health care costs--will cause federal debt to grow to 
unsustainable levels.
    Yet again, CBO makes clear that Medicare and government health care 
programs are driving the debt--and driving these programs themselves 
into bankruptcy. Offering empty promises and false attacks instead of 
real solutions threatens the health and economic security of the 
American people.
    If we try to chase ever-higher spending with ever-higher taxes, the 
CBO is clear about the consequences: It estimates that GNP would be 2 
percent lower in 2035 than it would be otherwise.
    That number represents hundreds of billions of dollars in lost 
income for American families and businesses, on top of the much higher 
taxes they would all have to pay.
    The House of Representatives has passed a budget, The Path to 
Prosperity, which answers the CBO's warning and averts the crisis 
before us. The House-passed budget tackles the explosive growth of 
spending, saves critical programs such as Medicare, and puts our budget 
on a path to balance--without resorting to job-destroying tax hikes.
    Meanwhile, the President still hasn't put forward a credible 
budget, and it has been 785 days since the Senate passed any budget at 
all.
    We have a leadership deficit in Washington, and our window for 
solutions is closing quickly.
    Instead of tuning out CBO and others who are working to inform us 
of the danger, let's work together now, before it's too late, to put 
America's budget on a sustainable path, grow the economy, and leave the 
next generation with a better country than the one we inherited.
    Thank you, and with that, I yield to the Ranking Member, Mr. Van 
Hollen.

    Ms. Schwartz. Thank you Mr. Chairman, and I look forward to 
this hearing, and not because it will be easy to hear or 
because it is new, but because it is a reality of what our 
nation is facing and demands our attention. I did want to say 
that Ranking Member Mr. Van Hollen is at the White House. He 
apologizes to Dr. Elmendorf for not being here, but he is 
working, of course, with the vice president, the White House, 
the Senate and the Republicans here in the House on the issue 
of the debt ceiling, which I know we may talk some more about 
and see if they cannot come to some agreement about a balanced 
approach of spending cuts and revenue increases to be able to 
move forward. We will see. We do not know. We will see.
    I appreciate the opportunity to just make a few comments 
about where we stand, what we will hear today and about how we 
move forward.
    For me, and I think many of you know this, I have been on 
the Budget Committee for some time; the federal budget is a 
statement of our priorities and our values as a nation. It is 
about three things: it is about being fiscally responsible and 
reducing our debt; meeting our obligations to our seniors, our 
families, and our future; and making target investments to grow 
our economy. To put our country back on a strong financial 
footing we need a balanced approach, and that includes spending 
cuts from every aspect of the budget, smart investments to 
ensure our economic competitiveness, and fair tax reform that 
will increase revenue. We do not need just political rhetoric 
or strict ideology. Everything must be on the table and 
compromise is critical; finding that common ground is very 
important.
    Democrats are committed to deficit reduction. I feel like I 
should repeat that, but Democrats are committed to deficit 
reduction. The CBO's fiscal outlook reinforces the need for 
action. The question is not, if we reduce the deficit, because 
we must; it is how?
    We need to reduce the deficit, reach primary balance, and 
begin to repay our debt; and to do so we must do so in a way 
that does not endanger our current, fragile economic recovery. 
The consequences of inaction are clear; higher levels of debt, 
higher interest payments on that debt, drastic tax increases, 
severe reductions in spending, and economic stagnation or 
worse.
    CBO forecast has surged in the public debt this year that 
will rise to 69 percent of GDP by the end of fiscal year 2011. 
This short-term deficit was made worse by the deep economic 
recession we have just been through and our necessary response 
to it, as well as reduced revenues from the Bush tax cuts and 
increased costs of two unfinanced wars and unpaid-for spending 
in Medicare Part D.
    In the long-term, the deficit is made worse by dramatic 
changes in demographics in this country; I believe the CBO is 
going to point this out in particular. Our population is aging 
50 million more Americans over 65 years in the next decade. The 
ratio of workers to retirees moved from three to one, to two to 
one in the next 40 years, meaning fewer wage earners to support 
cost of government and the cost of retirees.
    Debt is projected by CBO to rise to 84 percent or as much 
as 187 percent of GDP by 2035. This is simply unsustainable. A 
long-term balanced deficit reduction plan is absolutely 
necessary. The president's Fiscal Commission, Erskine Bowles-
Alan Simpson Commission, as it is referred to, and the 
Bipartisan Policy Center, the Domenici-Rivlin which it is often 
referred to, both strongly acknowledge the need to do both 
cutting spending and raising revenue. And the Democrats' 
proposed budget for fiscal 2012 tackles the deficit responsibly 
by both spending cuts and revenue increases. These include 
reductions from elimination of duplicative spending, fraud, 
waste, and abuse; streamlining government to make it more 
efficient; and eliminating or reducing programs that do not 
work while protecting those that are vital to the nation. It 
includes the implementation of health care reform to save $1.2 
trillion in health costs over 20 years; and it increases 
revenue by ending tax cuts for the very wealthiest Americans, 
saving $800 billion over the years; and ending corporate tax 
breaks that bring in billions more.
    And the Democratic budget makes smart, strategic 
investments in education, innovation, infrastructure, and 
research and development; which will strengthen our economic 
competitiveness and promote private sector job growth and 
expand our economy. This is balanced, fair and responsible 
approach and it is a clear contrast to the Republican budget.
    The Republican budget takes a sledgehammer to non-defense 
discretionary spending with careless cuts that do not 
acknowledge the impact on Americans or our recovering economy. 
The Republican budget jeopardizes food safety, highway 
expansion; it undermines education and scientific research; and 
reduces our best hopes for a future prosperity.
    Second, the Republican budget ignores defense spending. It 
is imperative that we meet our commitment to our troops, our 
military preparedness, and our security as a nation, but the 
growth in DOD spending has got to be taken into account. It is 
after all 20 percent of our spending. In the years between 
fiscal year 2008 and fiscal year 2012 we will spend more on 
defense than any period in the last 60 years. This includes the 
Reagan Cold War build-up in the 1980s, Vietnam and Korean wars. 
As we ask our government agencies to become more efficient, so 
must the Department of Defense.
    Third, the Republican budget undermines our promise to 
America's seniors. Make no mistake; the Republican budget will 
end Medicare for seniors. It will not reduce costs by turning 
Medicare into a voucher program; it will simply shift that 
burden on to our seniors, and again, I believe we will talk 
more about that as we go along. The fact is that a Republican 
plan will actually increase the costs of seniors' health care, 
and that increase will be an increase borne by individual 
seniors not by all of us.
    CBO estimates the Republican budget will cost a 65-year-old 
an additional $6,000 in out-of-pocket costs, and by 2030, it 
could be as high as $12,000. And if Republicans continue their 
assault on health reform, the cost burden for seniors will not 
only increase, but it will also reduce coverage and benefits. 
Going back on the promise that we made to our seniors and 
disabled in America is wrong. It is not only morally 
reprehensible, it is fiscally irresponsible.
    Finally, fifth, our Republican colleagues refuse to address 
the need to raise revenue, which is essential to balancing our 
budget. Just as we cut unnecessary federal spending, we must 
also cut special tax provisions that add to our deficit. Tax 
expenditures add over $1 trillion to our deficit annually. Yet, 
Republicans continue to protect tax breaks for the few. And I 
will just mention two: the ``Big Five'' oil companies made $1 
trillion in profits in the past 10 years. They are on pace in 
2011 to have their most profitable years ever, even as the 
price of gas at the pump goes up for all of us. Yet, the 
Republican budget continues to protect billions of dollars in 
tax breaks every year, for the ``Big Five'' oil and gas 
companies. We should stop this and save taxpayers billions. We 
cannot afford another 10 years of deficit-financed Bush tax 
cuts and expect our fiscal outlook to change for the better. 
Revenues must be a part of the solution, plain and simple.
    We need sensible, reasonable, and strategic solutions to 
our nation's budget challenges. It is clear that the House 
Republican budget takes one-sided approach. We need a balanced 
approach that meets our commitments to our nation, which is 
fiscally responsible and will strengthen our economy in the 
short and the long term. And I look forward to your testimony 
and the questions and answers.
    [The prepared statement of Allyson Schwartz follows:]

  Prepared Statement of Hon. Allyson Y. Schwartz, a Representative in 
                Congress From the State of Pennsylvania

    Chris Van Hollen is not present at today's hearing because he is at 
the White House participating in the Biden Budget Talks.
    I am looking forward to testimony not because it will be easy to 
hear or because it is new but because it is the reality of what our 
nation is facing and what demands our attention
    The federal budget is a statement of our priorities and our values 
as a nation. It is about three things: being fiscally responsible and 
reducing our deficit, meeting our obligations to our seniors, our 
families and our future, and making targeted investments to grow our 
economy.
    To put our country back on strong financial footing we need a 
balanced approach that includes spending cuts from every aspect of the 
budget, smart investments to ensure our economic competitiveness and 
fair tax reform that will increase revenue.
    We need more just political rhetoric and strict ideology. 
Everything must be on the table and compromise is critical.
    Democrats are committed to deficit reduction. The Congressional 
Budget Office's fiscal outlook reinforces the need for action. The 
question is not if we reduce the deficit, because we must, it is how. 
We need to reduce the deficit, reach primary balance, and begin to 
repay our debt. We must do so in a way that does not endanger our 
current fragile economic recovery. The consequences of inaction are 
clear: higher levels of debt, higher interest payments on that debt, 
drastic tax increases, severe reductions in spending, and economic 
stagnation or worse.
    CBO forecasts a surge in public debt this year that will rise to 69 
percent of GDP by the end of fiscal 2011. This short-term deficit was 
made worse by the deep economic recession and our necessary response to 
it, as well as reduced revenues from the Bush tax cuts and increased 
costs from two unfinanced wars and unpaid-for spending in Medicare Part 
D.
    In the long-term, the deficit is made worse by a dramatic change in 
demographics in this country: our population is aging with 50 million 
more Americans over 65 years in the next decade and the ratio of 
workers to retirees moving from 3:1 to 2:1 in the next 40 years, 
meaning fewer wage earners to carry the cost of retirees. Debt is 
projected by CBO to rise to 84% or as much as 187% by GDP by 2035. This 
is simply unsustainable.
    A long-term balanced deficit reduction plan is absolutely 
necessary. The President's Fiscal Commission (Erskine-Simpson) and the 
Bipartisan Policy Center (Domenici-Rivlin) strongly acknowledge the 
need for both cutting spending and raising revenue. The Democrats 
proposed budget for fiscal 2012 tackles the deficit responsibly with 
both spending cuts and revenue increases. These cuts include: 
reductions from elimination of duplicative spending, fraud and waste, 
streamlining government to make it more efficient, and eliminating or 
reducing programs that don't work while protecting those that are vital 
to our nation. It includes the implementation of Health Care Reform to 
save $1.2 trillion in health costs over 20 years. It increases revenues 
by ending tax cuts for the wealthiest American saving $800B over years, 
and ending corporate tax breaks that bring in billions more.
    The Democratic budget makes smart, strategic investments in 
education, innovation, infrastructure, and research and development. 
These investments will strengthen our economic competitiveness, promote 
private sector job growth, and expand our economy. This is a balanced, 
fair, and responsible approach, and it is a clear contrast to the 
Republican Budget.
    First, the Republican budget takes a sledgehammer to non-defense 
discretionary spending with careless cuts that do not acknowledge the 
impact on Americans or our recovering economy. The Republican budget 
jeopardizes food safety and highway expansion; undermine education and 
scientific research and reduces our best hopes for future prosperity.
    Second, the Republican Budget ignores defense spending. It is 
imperative that we meet our commitment to our troops, our military 
preparedness, and our security as a nation but the growth in DOD 
spending has got to be taken into account--It is after all 20 percent 
of our spending. In the years between FY08 and FY12 we will spend more 
on defense than any period in the last 60 years. This includes the 
Regan cold war build-up in the 1980s, Vietnam and Korea Wars. As we ask 
other government agencies to become more efficient, so must the 
Department of Defense.
    Third, the Republican Budget undermines our promise to America's 
seniors. Make no mistake; the Republican Budget will end Medicare as we 
know it for seniors. We will not reduce costs by turning Medicare into 
a voucher program; it will simply shift that burden on to our seniors. 
The fact is the Republican plan will actually INCREASE the cost of 
seniors' health care. This increase that increase will be borne by 
individual seniors. CBO estimates that the Republican plan will cost a 
65 year old an additional $6,000 in out-of-pocket costs. By 2030, it 
could be as high as $12,000. If Republicans continue their assault on 
health care reform, the cost burden for seniors will only increase, 
while coverage and benefits decrease. Going back on the promise we have 
made to our seniors and disabled Americans is wrong. It is not only 
morally reprehensible, it is fiscally irresponsible.
    Finally, fifth, our Republican colleagues refuse to address the 
need to raise revenue, which is essential to balancing our nation's 
budget. Just as we cut unnecessary federal spending, we must also cut 
special tax provisions that add to our deficit. Tax expenditures add 
over $1 trillion dollars to our deficit annually. Yet, Republicans 
continue to protect tax breaks that benefit a few. For example, the 
``Big Five'' oil companies made $1 trillion in profits the past 10 
years, and they are on pace for 2011 to be their most profitable year 
yet. Yet, they continue to receive billions of dollars in tax breaks 
every year even as the price of gas rises. This should stop and save 
taxpayers billions. The federal government is also subsidizing the 
ethanol industry with $6 billion in tax earmarks. We should, as the 
Senate did, vote to end these tax expenditures. We cannot afford these 
tax earmarks or another 10 years of deficit-financed Bush tax cuts and 
expect our fiscal outlook to change for the better. Revenues must be a 
part of the solution, plain and simple.
    In conclusion, we need sensible, responsible and strategic 
solutions to our nation's budget challenges. It is clear the House 
Republican budget takes a one-sided approach. We need a balanced 
approach that meets our commitments as a nation, is fiscally 
responsible, and will strengthen our economy in the short and long 
term.

    Chairman Ryan. Good. I will just say that we see it a 
little differently, but Dr. Elmendorf, the time is yours.

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

    Mr. Elmendorf. Thank you Mr. Chairman and Congresswoman 
Schwartz. To you and all the members of the committee, the 
budget outlook of the United States is daunting, both during 
the next decade and over the longer term. As the economy 
recovers from the severe recession and the policies adopted in 
response, and as the recession phases out, budget deficits will 
decline markedly in the next few years. However, the retirement 
of the Baby Boom Generation portends a significant and 
sustained increase in the share of the population eligible for 
Social Security, Medicare, and Medicaid benefits. Moreover, per 
capita spending for health care will probably continue rising 
faster than spending and other goods and services.
    In addition, the recession and accompanying policies are 
leaving a legacy of greatly increased government debt. Between 
the end of fiscal year 2008 and the end of the current fiscal 
year, debt held by the public will surge from roughly 40 
percent of GDP, close to its 40 year average, to nearly 70 
percent of GDP: the highest since shortly after World War II. 
Therefore, we face the budget pressures of an aging population 
and rising health care costs from a significantly worse 
starting point than was envisioned just a few years ago. CBO 
analyzed the long-term budget outlook under two scenarios that 
embodied different assumptions about future policies. Although 
there are great uncertainties about future economic conditions, 
demographic trends, and other factors, we think that the broad 
implications of our analysis would be the same under reasonable 
alternative assumptions.
    Here are our findings: Under one scenario, our extended 
baseline scenario, debt held by the public would increase 
slowly from its already high level relative to GDP, reaching 
about 85 percent by 2035. That scenario adheres closely to 
current law; it can be summarized in three broad categories.
    First, spending on the major health care programs and 
Social Security is projected to grow substantially from 10 
percent of GDP today to 15 percent 25 years from now. Most of 
that increase will be for spending on the major health care 
programs: Medicare, Medicaid, CHIP, and subsidies to be 
provided through insurance exchanges; which would grow from 
less than six percent of GDP today to nine percent in 2035. 
Spending on Social Security is also projected to rise but much 
less sharply.
    Second, in this scenario, given the assumptions that 
underlie our baseline projections, government spending on 
everything, other than interest payments on the debt and the 
programs I have just mentioned, this includes National Defense 
and a wide array of domestic programs, that category of 
spending would decline to the lowest share of GDP since before 
the Second World War.
    And third in this scenario, exploration of the tax cuts 
enacted since 2001, the growing reach of the alternative 
minimum tax, the tax provisions of last year's health care 
legislation, and the way in which the tax system interacts with 
economic growth, would all result in steadily higher revenues. 
Revenues would reach 23 percent of GDP by 2035, much higher 
than has been seen in the past. That significant increase in 
revenues and decrease in the relative amount of other spending 
would offset much, though not all, of the rise in spending on 
health care programs and Social Security. So even with revenues 
at historically high levels, debt would continue to rise.
    However, the budget outlook is much bleaker than that under 
an alternative fiscal scenario, in which federal debt would 
grow much more rapidly, exceeding 100 percent of GDP by 2021 
and approaching 190 percent by 2035. That scenario, which more 
closely approximates current policies incorporates several 
changes to current law that are widely expected to occur or 
that would modify some provisions of law that might be 
difficult to sustain for a long period.
    Most important are the assumptions about revenues, under 
this scenario we assume that the tax cuts enacted since 2001 
will be extended, that the reach of the alternative minimum tax 
will be restrained, and that over the long run tax law will 
evolve further so that revenues remain near their historical 
average of 18 percent of GDP. This scenario also incorporates 
assumptions about Medicare's payment rates for physicians, that 
they will remain at current levels rather than declining by a 
third at the end of this year as under current law, and that 
some policies enacted last year to restrain growth in health 
care spending by the federal government will not continue in 
effect after 2021.
    In addition, the alternative scenario includes an 
assumption that spending on all other activities will not fall 
quite as low as under the extended baseline scenario; although 
it will still fall close to its lowest level in the entire 
post-war period.
    It is important to note further that these projections do 
not incorporate the harmful effects that rising debt would have 
on economic growth and on interest rates. Incorporating 
economic feedbacks as we do in the second chapter of the 
report, debt under this alternative scenario would be well over 
200 percent of GDP in 2035, if such a thing could come to pass.
    The implications of this analysis are clear, there is a 
substantial mismatch between what the government would have to 
spend to maintain existing programs in their current form and 
the revenues that tax payers are accustomed to providing. To 
keep deficits in debt from climbing to unsustainable levels, 
policy makers will need to increase revenues substantially as a 
percentage of GDP, decrease spending significantly from 
projected levels, or adopt some combination of those two 
approaches. Making such changes while economic activity and 
employment remain well below their potential levels would 
probably slow the economic recovery. However, the sooner that 
long-term changes to tax and spending policies are agreed upon, 
and the sooner they are carried out once the economy recovers, 
the smaller will be the damage to the economy from growing 
federal debt. Thank you.
    [The prepared statement of Douglas Elmendorf follows:]

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

    Chairman Ryan, Congressman Van Hollen, and Members of the 
Committee, thank you for inviting me to testify today about the 
Congressional Budget Office's (CBO's) 2011 Long-Term Budget Outlook, 
which the agency released yesterday.\1\
---------------------------------------------------------------------------
    \1\ See Congressional Budget Office, CBO's 2011 Long-Term Budget 
Outlook (June 2011).
---------------------------------------------------------------------------
    Recently, the federal government has been recording budget deficits 
that are the largest as a share of the economy since 1945. 
Consequently, the amount of federal debt held by the public has surged. 
At the end of 2008, that debt equaled 40 percent of the nation's annual 
economic output (a little above the 40-year average of 37 percent). 
Since then, the has shot upward: By the end of this year, CBO projects, 
federal debt will reach roughly 70 percent of gross domestic product 
(GDP)--the highest percentage since shortly after World War II. The 
sharp rise in debt stems partly from lower tax revenues and higher 
federal spending related to the recent severe recession. However, the 
growing debt also reflects an imbalance between spending and revenues 
that predated the recession.
    As the economy continues to recover and the policies adopted to 
counteract the recession phase out, budget deficits will probably 
decline markedly in the next few years. But the budget outlook, for 
both the coming decade and beyond, is daunting. The retirement of the 
baby-boom generation portends a significant and sustained increase in 
the share of the population receiving benefits from Social Security, 
Medicare, and Medicaid. Moreover, per capita spending for health care 
is likely to continue rising faster than spending per person on other 
goods and services for many years (although the magnitude of that gap 
is very uncertain). Without significant changes in government policy, 
those factors will boost federal outlays sharply relative to GDP in 
coming decades under any plausible assumptions about future trends in 
the economy, demographics, and health care costs.
    According to CBO's projections, if current laws remained in place, 
spending on the major mandatory health care programs alone would grow 
from less than 6 percent of GDP today to about 9 percent in 2035 and 
would continue to increase thereafter.\2\ Spending on Social Security 
is projected to rise much less sharply, from less than 5 percent of GDP 
today to about 6 percent in 2030, and then to stabilize at roughly that 
level. Altogether, the aging of the population and the rising cost of 
health care would cause spending on the major mandatory health care 
programs and Social Security to grow from roughly 10 percent of GDP 
today to about 15 percent of GDP 25 years from now. (By comparison, 
spending on all of the federal government's programs and activities, 
excluding interest payments on debt, has averaged about 18.5 percent of 
GDP over the past 40 years.) That combined increase of roughly 5 
percentage points for such spending as a share of the economy is 
equivalent to about $750 billion today. If lawmakers ultimately 
modified some provisions of current law that might be difficult to 
sustain for a long period, that increase would be even larger.
---------------------------------------------------------------------------
    \2\ Mandatory programs are programs that do not require annual 
appropriations by the Congress; the major mandatory health care 
programs consist of Medicare, Medicaid, the Children's Health Insurance 
Program, and health insurance subsidies that will be provided through 
the exchanges established by the March 2010 health care legislation.
---------------------------------------------------------------------------
                          long-term scenarios
    In its report released yesterday, CBO presents the long-term budget 
outlook under two scenarios that embody different assumptions about 
future policies governing federal revenues and spending. Neither of 
those scenarios represents a prediction by CBO of what policies will be 
in effect during the next several decades, and the policies adopted in 
coming years will surely differ from those assumed for the scenarios. 
Moreover, even if the assumed policies were adopted, their economic and 
budgetary consequences would undoubtedly differ from those projected in 
the report because outcomes also depend on economic conditions, 
demographic trends, and other factors that are difficult to predict. 
The report focuses on the next 25 years rather than a longer horizon, 
because budget projections grow increasingly uncertain as they extend 
farther into the future.\3\
---------------------------------------------------------------------------
    \3\ Because considerable interest exists in the longer-term 
outlook, figures showing projections through 2085 are presented in 
Appendix B of CBO's 2011 Long-Term Budget Outlook, and associated data 
are available on CBO's Web site (www.cbo.gov).
---------------------------------------------------------------------------
                     the extended-baseline scenario
    One long-term budget scenario used in CBO's analysis, the extended-
baseline scenario, adheres closely to current law. Under this scenario, 
the expiration of the tax cuts enacted since 2001 and most recently 
extended in 2010, the growing reach of the alternative minimum tax, the 
tax provisions of the recent health care legislation, and the way in 
which the tax system interacts with economic growth would result in 
steadily higher revenues relative to GDP. Revenues would reach 23 
percent of GDP by 2035--much higher than has typically been seen in 
recent decades--and would grow to larger percentages thereafter. At the 
same time, under this scenario, government spending on everything other 
than the major mandatory health care programs, Social Security, and 
interest on federal debt--activities such as national defense and a 
wide variety of domestic programs--would decline to the lowest 
percentage of GDP since before World War II.
    That significant increase in revenues and decrease in the relative 
magnitude of other spending would offset much--though not all--of the 
rise in spending on health care programs and Social Security. As a 
result, debt would increase slowly from its already high levels 
relative to GDP, as would the required interest payments on that debt. 
Federal debt held by the public would grow from an estimated 69 percent 
of GDP this year to 84 percent by 2035 (see Figure 1). With both debt 
and interest rates rising over time, interest payments, which absorb 
federal resources that could otherwise be used to pay for government 
services, would climb to 4 percent of GDP (or one-sixth of federal 
revenues) by 2035, compared with about 1 percent now.


                    the alternative fiscal scenario
    The budget outlook is much bleaker under the alternative fiscal 
scenario, which incorporates several changes to current law that are 
widely expected to occur or that would modify some provisions of law 
that might be difficult to sustain for a long period. Most important 
are the assumptions about revenues: that the tax cuts enacted since 
2001 and extended most recently in 2010 will be extended; that the 
reach of the alternative minimum tax will be restrained to stay close 
to its historical extent; and that over the longer run, tax law will 
evolve further so that revenues remain near their historical average of 
18 percent of GDP. This scenario also incorporates assumptions that 
Medicare's payment rates for physicians will remain at current levels 
(rather than declining by about a third, as under current law) and that 
some policies enacted in the March 2010 health care legislation to 
restrain growth in federal health care spending will not continue in 
effect after 2021. In addition, the alternative scenario includes an 
assumption that spending on activities other than the major mandatory 
health care programs, Social Security, and interest on the debt will 
not fall quite as low as under the extended-baseline scenario, although 
it will still fall to its lowest level (relative to GDP) since before 
World War II.
    Under those policies, federal debt would grow much more rapidly 
than under the extended-baseline scenario. With significantly lower 
revenues and higher outlays, debt held by the public would exceed 100 
percent of GDP by 2021. After that, the growing imbalance between 
revenues and spending, combined with spiraling interest payments, would 
swiftly push debt to higher and higher levels. Debt as a share of GDP 
would exceed its historical peak of 109 percent by 2023 and would 
approach 190 percent in 2035 (see Figure 1).
    Many budget analysts believe that the alternative fiscal scenario 
presents a more realistic picture of the nation's underlying fiscal 
policies than the extended-baseline scenario does. The explosive path 
of federal debt under the alternative fiscal scenario underscores the 
need for large and rapid policy changes to put the nation on a 
sustainable fiscal course.
                the impact of growing deficits and debt
    CBO's projections in most of the 2011 Long-Term Budget Outlook 
understate the severity of the long-term budget problem because they do 
not incorporate the negative effects that additional federal debt would 
have on the economy, nor do they include the impact of higher tax rates 
on people's incentives to work and save. In particular, large budget 
deficits and growing debt would reduce national saving, leading to 
higher interest rates, more borrowing from abroad, and less domestic 
investment--which in turn would lower income growth in the United 
States. Taking those effects into account, CBO estimates that under the 
extended-baseline scenario, real (inflation-adjusted) gross national 
product (GNP) would be reduced slightly by 2025 and by as much as 2 
percent by 2035, compared with what it would be under the stable 
economic environment that underlies most of the projections in the 
report released yesterday.\4\ Under the alternative fiscal scenario, 
real GNP would be 2 percent to 6 percent lower in 2025, and 7 percent 
to 18 percent lower in 2035, than under a stable economic environment.
---------------------------------------------------------------------------
    \4\ GNP differs from GDP primarily by including the capital income 
that residents earn from investments abroad and excluding the capital 
income that nonresidents earn from domestic investment. In the context 
of analyzing the impact of growing deficits and debt, GNP is a better 
measure because projected budget deficits would be partly financed by 
inflows of capital from other countries.
---------------------------------------------------------------------------
    Rising levels of debt also would have other negative consequences 
that are not incorporated in those estimated effects on output:
     Higher levels of debt imply higher interest payments on 
that debt, which would eventually require either higher taxes or a 
reduction in government benefits and services.
     Rising debt would increasingly restrict policymakers' 
ability to use tax and spending policies to respond to unexpected 
challenges, such as economic downturns or financial crises. As a 
result, the effects of such developments on the economy and people's 
well-being could be worse.
     Growing debt also would increase the probability of a 
sudden fiscal crisis, during which investors would lose confidence in 
the government's ability to manage its budget and the government would 
thereby lose its ability to borrow at affordable rates. Such a crisis 
would confront policymakers with extremely difficult choices. To 
restore investors' confidence, policymakers would probably need to 
enact spending cuts or tax increases more drastic and painful than 
those that would have been necessary had the adjustments come sooner.
    To keep deficits and debt from climbing to unsustainable levels, 
policymakers will need to increase revenues substantially as a 
percentage of GDP, decrease spending significantly from projected 
levels, or adopt some combination of those two approaches. Making such 
changes while economic activity and employment remain well below their 
potential levels would probably slow the economic recovery. However, 
the sooner that medium- and long-term changes to tax and spending 
policies are agreed on, and the sooner they are carried out once the 
economy recovers, the smaller will be the damage to the economy from 
growing federal debt. Earlier action would permit smaller or more 
gradual changes and would give people more time to adjust to them, but 
it would require more sacrifices sooner from current older workers and 
retirees for the benefit of younger workers and future generations.

    [The complete CBO report may be accessed at the following 
Internet address:]

           http://cbo.gov/ftpdocs/122xx/doc12212/06-21-Long-
                        Term_Budget_Outlook.pdf




    Chairman Ryan. Thank you Dr. Elmendorf. I have some 
questions regarding your analysis of the House Republican 
budget Medicare Premium Support Plan that I want to get into, 
and then a little bit about the OMB budget, the president's 
budget; and then I will let my colleagues get into the actual 
report here.
    In that analysis you show a significant gap between the 
costs patients would have absorbed under premium support 
compared to traditional Medicare, Ms. Schwartz went into this a 
little bit. Your analysis shows traditional Medicare continuing 
to operate well beyond 2020 when the program's trust fund 
becomes insolvent. At the same time you report, before today, 
it says, ``Once the hospital insurance trust fund is exhausted 
the centers for Medicaid and Medicare services will no longer 
have the legal authority to pay health plans and providers.''
    In a separate analysis you warned, ``A growing level of 
federal debt would also increase the probability of a sudden 
fiscal crisis.'' Yesterday the trustees in Ways and Means 
confirmed in a hearing that Medicare as we know it ends in 
2023, and that is a quote. So I have got three basic questions 
on this part.
    If Medicare's trust funds are empty and paying for 
Medicare's unfunded promises requires tens of trillions of 
dollars to be transferred from general revenue, where will 
these funds come from number one? Number two, how would 
Medicare be financed amidst a fiscal crisis? And is it 
plausible that Medicare could continue to provide current 
benefits indefinitely, as your analysis assumes, in comparing 
it to our premium support plan?
    Mr. Elmendorf. So on the first question Mr. Chairman, if 
the trust fund runs out of money then the only way that 
benefits will be continued at the level specified in current 
law is if general revenue were used for that purpose, and that 
revenue can only come from higher taxes or lower spending in 
other programs.
    Chairman Ryan. Or more borrowing?
    Mr. Elmendorf. Or additional borrowing and that leads to 
the second part of your question, which is what happens in a 
fiscal crisis if the government becomes unable to borrow at 
affordable rates, as we have seen some other countries end up 
in that position. Then there would probably need to be very 
stark changes in the whole range of government spending 
programs.
    Chairman Ryan. In the immediate term at the time.
    Mr. Elmendorf. Right away, when that situation arises. If 
the government cannot turn to capital markets to obtain the 
funds that it needs and it tries to then balance the budget 
almost literally overnight, then the disruption to the federal 
government's policies and to the economy and society can be 
immense.
    Chairman Ryan. So this is unsustainable?
    Mr. Elmendorf. The path that the budget is on at our 
current policies is most definitely unsustainable.
    Chairman Ryan. And the Medicare baseline itself?
    Mr. Elmendorf. So, Medicare, the part A of Medicare, funded 
through the trust fund is on an unsustainable path, and in our 
own projections the fund is actually exhausted in 2020, a few 
years earlier than the actuaries.
    Chairman Ryan. Okay. So, let's get down to the providers 
side of this. I have been on Ways and Means, on the Health 
Subcommittee for a long time, and have gone through a lot of 
provider issues. Historically Medicare, and both parties have 
been working on this, Medicare is starting to control costs by 
paying providers less than private plans?
    Mr. Elmendorf. Yes.
    Chairman Ryan. The president's health care law cut 
providers by $500 billion, not to advance Medicare's solvency 
but to fund another open-ended entitlement program. On top of 
that, physicians are set to be cut by an additional 29.4 
percent of this January, I believe it is 29.4.
    Mr. Elmendorf. Yes.
    Chairman Ryan. Do your projections assume providers will 
continue to accept Medicare patients at the same rate that they 
do now under the traditional program? Because let's remember, 
Medicare already pays providers 80 percent of what they will 
receive in the private market. By 2030, this will fall to about 
40 percent. So do your projections assume providers will 
continue to accept Medicare patients at the same rate they do 
now under the traditional program? And does your analysis 
assume, despite the additional provider cuts coming in current 
law, that this will have no effect on the quality or access of 
care?
    Mr. Elmendorf. The way I would put it Mr. Chairman, is that 
we do not model the behavior of physicians. We do not model the 
access to care or quality of care.
    Chairman Ryan. So you assume it stays on as is?
    Mr. Elmendorf. And that is the point that we noted in the 
letter analyzing your proposal. That is a gap in our tool kit, 
and a gap that we are trying to fill. Under the current 
circumstances we do not model, either in the regular baseline 
projections or in our analysis of last year's health 
legislation or your proposal, the effects that might happen 
under current law or alternatives.
    Chairman Ryan. So therein lies the issue here. Your 
analysis effectively assumes that no matter how much the 
government pays providers for health care services, providers 
will continue to deliver the same quality care and access. That 
is the gap you talk about. While you accept the premise that 
the imposition of price control has actually reduced costs, 
strikes me that your analysis does not appear to take into 
account that choice and competition, despite working nearly 
every [inaudible] in our economy, and even within Medicare 
where applied, will put downward pressure on health inflation.
    Is the takeaway here the only way to get a grip on 
skyrocketing health care costs, is through strict price 
controls and heavy government rationing? Is that what we are to 
conclude from all of this?
    Mr. Elmendorf. No, I do not think that is a fair 
interpretation of our analysis Mr. Chairman. As you pointed out 
yourself, Medicare pays less to providers today than private 
insurers pay. So it is, I think, an open question as to how 
much lower payments can go in Medicare relative to private 
insurers without hindering the access to care or quality of 
care to Medicare beneficiaries in an important way.
    Chairman Ryan. But in your analysis you just do not feel 
like you have the toolkit to model that? Is that what you are 
saying?
    Mr. Elmendorf. We do not have the toolkit to model that. We 
also noted in our letter that we do include the effects of 
competition in the current private insurance market in 
accessing the gap today between the cost in Medicare and the 
cost of treating a similar patient we estimate outside of 
Medicare. But we do not in the analysis incorporate any effects 
of competition that might arise over time from the additional 
price pressures that are built into your proposal and from the 
additional flexibility that the insurers have relative through 
traditional Medicare to adjust the way that the insurance 
[inaudible].
    Chairman Ryan. Okay. So to be clear on that point, Medicare 
Part D which is something we have looked at, has come in at 40 
percent below cost projections, now while those savings can be 
attributed to lower than expected enrollment, CMS calculated 
that nearly 85 percent of the program savings were, ``A direct 
result of competition and significantly lower Part D plan 
bids.'' I mean the premium; I remember we had an amendment in 
Ways and Means to lock the premiums up at a rate that would be 
about 25 percent higher than they actually are today. The 
reforms on our budget are modeled on these kinds of reforms. 
Seniors choose from a set of guaranteed Medicare approved 
coverage options.
    So when analyzing projected costs under the House passed 
budget, did you take into account the effect that choice and 
competition would have on the growth rate of health care cost? 
And do you assume people will continue to utilize health 
services at the same rate as they do now? Meaning, what I got 
out of what you just said, is that you are not really gleaning 
those kinds of lessons from the experience we have from the 
Part D results.
    Mr. Elmendorf. So we are not applying any additional 
effects of competition on this growth rate over time, in our 
analysis of your proposal; and we do not have again the tools, 
the analysis that we would need to do a quantitative evaluation 
of the importance of those factors. I think interpreting the 
Part D evidence, and interpreting other evidence in the world 
is complicated.
    At the time of the Part D estimate, that we made which was 
above the ultimate cost, prescription drugs spending throughout 
our health care system was rising very rapidly. We expected it 
to slow. It slowed much more abruptly throughout the health 
care system than we had anticipated at the time. Part D shared 
in that slowdown. That is, again, a health care system wide 
phenomenon. The extent to which that was passed through to 
Medicare Part D, in a way that it is different that it would 
have been under an alternative structure for Part D, is a more 
subtle analytic question. And if one looks at other examples 
where one tries to compare more traditional health care 
programs to systems where there is competition among private 
insurers, the comparisons are not so straight forward. There 
are, as we show on our report, there are periods of history 
when costs in the public programs are growing faster than costs 
in the private insurance, and there are periods where the 
opposite can be seen.
    If one looks at the FEHBs, the Federal Employees Health 
Benefit Program, premiums in that program have risen fairly 
rapidly along with premiums in the rest of the health care 
system, roughly, despite the competition that occurs there.
    But interpreting this evidence is tricky. We have a public 
health care programs that have evolved over time with a lot of 
policy changes. It is not a clean run of a certain set of 
policies. We have a private health care system that has been 
affected by developments in the public health care system, that 
is affected by the tax treatment of employer sponsored health 
insurance. So it is not a clean run of a purely private system 
either. So what we are trying to do, but this is a long project 
for us, is to glean the lessons from these different parts of 
our historical experience to try to address the central policy 
issue you raise, which is the power of a public's defined 
benefit health care system versus a system where the government 
makes defined contribution the competing private insurers try 
to give you some more analytic reporting.
    Chairman Ryan. And that is what I want to encourage to you. 
Look you guys, and Joyce's whole shop over there does such 
great work, but if we stick with the analytical tool we have, 
or the lack of tools we have, then the only conclusion is price 
controls. And I think economic evidence throughout history 
shows us what happens there. So, I think we have got some work 
to do to really analyze this; any plan, put ours aside for the 
moment, any plan who addresses fiscal crisis obviously must 
address health care programs.
    Mr. Elmendorf. Yes.
    Chairman Ryan. And health inflation, and measuring any of 
these plans against what is really a fiscal fantasy, which you 
are acknowledging, an unsustainable trajectory is really not an 
accurate measurement or comparison, because it is comparing 
some plan against a future which we now know cannot continue.
    And so, I think we all have to do more work to try and 
figure out how to really truly address these issues. I will 
leave it at that because I wanted to get into the budget only 
to say we got your reanalysis of the president's budget. I will 
not go back into that, but the president gave a speech on April 
13, where he outlined a new budget framework that claims $4 
trillion in deficit reduction over 12 years. Have you estimated 
the budget impact of this framework?
    Mr. Elmendorf. No, Mr. Chairman. We do not estimate 
speeches; we need much more specificity than was provided in 
that speech for us to do our analysis.
    Chairman Ryan. All right. I will leave it at that. Ms. 
Schwartz.
    Ms. Schwartz. Thank you. Let me also take a slightly 
different approach, obviously, on Medicare. One is that we are 
concerned about this long-term fiscal health of Medicare, it is 
one of the reasons we passed a law last year in order to use 
every idea that exists out there for containing costs, and 
insuring quality and access for seniors. You have looked at 
some of this and have acknowledged that while it may be 
difficult to quantify all of the cost savings that exist, you 
acknowledge that there are cost savings. I think both you and 
the Medicare trustees have talked about that at a minimum it is 
going to save money over the long run, what we did in the 
Affordable Care Act; and it does extend the fiscal health of 
the trust fund for a number of years. It could do even better 
than that if much of the work that is being done in payment and 
delivery system reform to reduce unnecessary tests and 
duplication and waste as well as to coordinate care and 
improve, again, the efficiencies in the health care system. It 
is not just about future service reimbursements. It is actually 
changing the way we do this so the debate does not become, 
simply, how much do we reimburse doctors, particularly relative 
to the private sector. So, can you just say yes or no that that 
is true?
    Mr. Elmendorf. Yes, there were important changes made in 
the structure of Medicare's payments to providers, a whole 
collection of changes and experiments in last year's 
legislation. I would note that some people were frustrated at 
our analysis of that, quite comparably to the Chairman's 
frustration at our analysis of this year's proposal from him, 
that we do not have the tools, perhaps, to capture the full 
effects of certain changes and we are working in that area as 
well to build a stronger toolkit to provide you with better 
information.
    Ms. Schwartz. But I do appreciate as some of these 
regulations come out that CBO has been able to respond and say 
this is what we believe, whether it is ACOs can save hundreds 
of billions, or some of the other actions we are taking in 
patients and medical homes or pay for performance for 
hospitals, that actually has a cost savings that you have been 
able to analyze.
    Mr. Elmendorf. Yes, so we certainly have estimated some 
savings and, again, I think that for some of the more unusual 
experiments, we are struggling ourselves with developing tools 
that could enable us to provide even better analysis of them.
    Ms. Schwartz. That is right. I just want to make it very 
clear of course, that what we did in the Affordable Care Act 
was to set out a path, and this is a path, it is not going to 
happen in 10 minutes; it is a path for us to be on to get 
better value for our dollars and to assure access to the 
highest quality care for our seniors and the benefits they 
might have.
    I do want to focus on the other piece of what we are 
talking about in Medicare, in particularly the Republican 
proposal for as they call it a ``premium support voucher.'' 
Well they do not call it voucher, it's ``premium support,'' 
which is basically the same thing.
    Chairman Ryan. Would you like to yield on that? I am happy 
to go into this if you want to.
    Ms. Schwartz. No, it is fine. No I completely understand 
how you would equate it to the federal employees and to the 
Congress.
    Chairman Ryan. There is a difference between ``premium 
support'' and vouchers and CBO is very clear about that.
    Ms. Schwartz. I am sure he will answer then. Let me ask the 
question; one of the things that seems clear, and I think is 
understood, and I wanted you to clarify this, is that if we are 
going to give seniors a certain amount of money, a capped 
amount in order for them to be able to go and buy private 
insurance in the marketplace, as costs rise who pays for the 
additional costs? You have been very clear about this, both 
initially and over time, so could you just answer that 
question?
    Mr. Elmendorf. In a defined contribution system where the 
government's contributions are set as under Chairman Ryan's 
proposal, then whatever extra amount private citizens need to 
pay to obtain the services, they would pay themselves.
    Ms. Schwartz. Right. Have you estimated about how much that 
would be for the average senior?
    Mr. Elmendorf. What we have showed in our letter analyzing 
the plan was the effects for a typical 65-year-old buying a 
standardized health insurance benefit, and we estimated that in 
2022 for example, under the baseline scenario a 65-year-old 
would pay 27 percent of the cost of this standardized benefit. 
Under the proposals seniors would pay 61 percent of the cost of 
that benefit.
    Ms. Schwartz. Can you give a number about what that is? I 
have read that it is about $6,000 that the average senior, a 
65-year-old would expect to pay and it could go up as much as 
$12,000 over time.
    Mr. Elmendorf. So I do not have a dollar figure and I am 
told by my colleague that we did not provide a dollar figure.
    Ms. Schwartz. The point I am making here of course is that 
the Republican proposal that is been voted on and supported by 
just about every Republican in the House, does shift the burden 
of additional costs to the seniors, to individual seniors.
    Mr. Elmendorf. Yes, by our estimates it shifts a good deal 
of additional burden and also shifts risk regarding the 
ultimate costs.
    Ms. Schwartz. Right. So the notion that seniors will be 
able to get the same benefits, and would be able to buy it all 
depends on whether they have an extra $6,000 or $12,000 a year 
to pay for them? Or whatever it might cost. It is their choice. 
And I understand Republicans see it as this choice, we see it 
as if you cannot afford it, it is not much of a choice.
    Mr. Elmendorf. So their ability to buy that package of 
benefits depends on the resources they have available and, of 
course, on our estimates being correct as well about those 
costs.
    Ms. Schwartz. That is right. The other point I want to make 
and I think you have made this as well, is that if we are all 
concerned, and we are, and I think you just had this dialogue 
with Mr. Ryan about how we contain the rising growth in costs. 
Is it a responsibility that they can be shared by public 
programs and private insurers, it is one of the paths we are 
trying to move on health reform: How do we actually get better 
value, and contain the rising costs. Businesses in my district, 
nationally, and individual families have seen a 100 percent 
increase in premiums; and it is double digit increases every 
year over the decade, it is been double what you pay for health 
premiums. Under the Ryan proposal, the Republican proposal, 
they are no cost containment built in except for the individual 
senior not being able to afford to buy the insurance. But there 
is not anything that actually moves the system to improve 
quality, reduce costs over time, and eliminate wastes. Is that 
correct? Can you speak to that about the costs, and containment 
piece the lies in the private sector to do it through what 
people can afford to buy?
    Mr. Elmendorf. So let me make two observations. The first 
is that as I understand the Chairman's proposal, traditional 
Medicare would continue roughly along the lines in current law, 
and because people only move into this new system, as they turn 
65 under this proposal, a good deal of the patients in 
Medicare, and an even larger share of the spending in Medicare 
remains in the traditional Medicare system, for decades to 
come.
    Ms. Schwartz. Yes, well, if they move 65-year-olds would be 
in a very different system, they would not be in, if you want 
to call it traditional Medicare, anymore after a certain point. 
It would go side by side for a while.
    Mr. Elmendorf. I am just saying that for the next 20 years, 
by 2030 even, more than half of Medicare beneficiaries are 
still receiving traditional Medicare; 45 percent are receiving 
the premium support payments, so it is a gradual transition and 
the programs, and again as I understand the proposal, the 
programs in place in traditional Medicare would remain. The 
second observation is that the proposal, rather than directing 
specific sorts of experiments on changes as was done in last 
year's health legislation, would rely on the price pressure 
affecting competing private insurers to rely on them for those 
steps instead.
    Ms. Schwartz. But does that mean then that all the cost 
containment provisions that are built in to the law that we 
have now, if it should be repealed, will then go by the 
wayside, and we will not see those cost containments. You call 
them experiments, but a lot of work has been done in the health 
care system and I apologize this is not your expertise, you 
said you have not drilled down in all this, there is a lot of 
important and good work that is being done across the country 
that is actually getting better value for the dollars. We are 
trying to scale that up for more seniors.
    Mr. Elmendorf. Yes. So I do not mean to belittle this in 
any way by using the word experiment. What I am trying to 
signal is that the successful experiments at getting greater 
value, and there have been a number of them, have tended to be 
fairly localized; and the question of how they can best be 
extended across the country is something that both Medicare and 
private insurers are wrestling with.
    Ms. Schwartz. That is right an all payer system would be 
great.
    Mr. Elmendorf. Both Medicare and private insurers are 
trying to find different ways of being providers and so on. So 
I do not mean to belittle that but just to say that there will 
be a certain amount of trial and error, again for both public 
and private insurers. Whatever the system is of insurance we 
need our health care system to become more efficient and I 
think the crucial policy question is whether a more public or a 
more private system applies more of the useful kinds of 
pressure and avoids more of the detrimental kinds of pressure 
as you would judge that?
    Ms. Schwartz. Well, as I believe my time is up but I think 
this is a conversation that we have tried to advance that we 
will contain the rising growth and cost in Medicare. Because we 
are serious about that as well, that this needs to be done in 
order to sustain a Medicare as we hope to, but turning over to 
a private sector, it has not been very good at containing costs 
either for businesses or for families, or for seniors for sure, 
that that actually is a model we cannot rely on. The fact that 
the federal government pays about 46 percent of the costs of 
health care in this country if you look at all the different 
programs. We could and should be, in our view, a force for 
improving quality and insuring access. I think that is one of 
the big debates that we are having of course.
    Chairman Ryan. It is, I am going to take my Chairman's 
prerogative and join this, not get in a tit-for-tat, but I want 
to just try and help answer the questions you asked the 
director. To show you what is kind of our thinking and why we 
propose what we propose, because you are right, we got to 
figure this out on Medicare. Medicare is the biggest driver of 
the debt in the future, and the Affordable Care Act does 
attempt to do that. We disagree with the way in which it 
attempts to do that. Now when you say there is not cost 
containment, there are two ways of doing this; do you put the 
patient in charge or do you put the bureaucracy in charge? We 
think a patient centered system is a better way to go. Now when 
you put the bureaucracy in charge, let's take a look at where 
we are headed right now.
    Accountable care organizations, the idea in theory is a 
very good idea, but look at what is happening. CMS is putting 
this rule out there; nobody is going to participate in it. So 
let's have a system that is decentralized and not government 
centralized. Let's not go with price controls because price 
controls it might make the numbers add up on paper but it will 
just deny access to people. And so, what we have found is that 
when we continue to underpay providers which the trustees are 
telling us, providers are going to get about 66 cents on the 
dollar from Medicare now, going down to 33 cents on the dollar, 
we cannot assume that they are going to keep taking Medicare. 
And so, I or we, do not think that that is the proper approach. 
More to the point, we do not think unelected unaccountable 
bureaucrats, technocrats, no matter how smart they are can 
figure out how to micromanage 17 percent of our economy. We 
believe that providers competing against each other, insurance 
companies, hospital, physicians, competing against each other 
for our business, as empowered consumers is a better way to go, 
and we have a lot of evidence that shows that.
    Now two, the point that his analysis does not include, it 
does not include the fact that we have proposed to risk adjust 
subsidies. As a person gets sicker in Medicare, we want them to 
have a higher subsidy to protect them against ticker shock. It 
also does not include the fact that we have proposed to add an 
additional $7,800 to begin with, which keeps growing every 
year, to low income seniors, to subsidize and cover their out-
of-pocket costs. There is only so much money to go around, and 
our point is we should not subsidize wealthy people, as much as 
everybody else; and we should subsidize low income people even 
more than everybody else. That is the way we think tax payer 
dollars ought to be deployed, and we want the patient to be the 
nucleus of the health care system, in Medicare and everywhere 
else, instead of some board of 15 technocrats giving Caesar's 
thumbs up or thumbs down on whether this will work or not; or 
who gets paid, what, where, when, and how much. We do not think 
that will work because we have lots of evidence already that it 
does not. With that I yield.
    Mr. Elmendorf. Mr. Chairman, so you are certainly correct 
in saying that in numbers that I have quoted, and are featured 
in our report, did not include the effects of the additional 
support for lower income people as we noted in our letter.
    Chairman Ryan. Correct.
    Mr. Elmendorf. I do not understand though your point about 
risk adjustment. What we reported was the cost for a typical 
65-year-old, we understand and included in our model.
    Chairman Ryan. Right. The illustration does not suggest 
that a sicker person will get higher income. You are doing an 
average; it is an average so it does not take into 
consideration the fact that a person who has higher core 
morbidities, higher risks, get a higher subsidy.
    Mr. Elmendorf. To cover the higher cost, so they end up 
getting health insurance coverage.
    Chairman Ryan. Right. I can take up more time on that but 
our analysis now. Mr. Flores.
    Mr. Flores. Thank you Mr. Chairman. Dr. Elmendorf, thank 
you for being here today; your introductory comment I thought 
pretty well said it all. And that is that the budget outlook is 
daunting. I agree with you; it is unfortunate we have been left 
in this situation from the last four years of a Congress that 
was controlled by the other side that racked up $6 trillion in 
debt. I want to talk about three things and Figure 2.1 of the 
materials that you handed out today; you have some GDP growth 
charts. Can you tell me quickly what the GDP growth assumptions 
were in the extended baseline scenario and in the alternative 
fiscal scenario?
    Mr. Elmendorf. Well, so Congressman, we set for the 
underlying path, the benchmark to use for the most of the 
budget projections, a stable economic future. Then we analyzed, 
as you have seen, the effects.
    Mr. Flores. Just give me some numbers real quick.
    Mr. Elmendorf. So under the alternative fiscal scenario, 
GNP would be 7 to 18 percent lower in 2035, than it would be 
under our benchmark that assumes steady debt to GDP ratio.
    Mr. Flores. And what is steady? I mean, not debt to GDP, 
but what do you look at in terms of real GDP growth percentage 
per year, long term?
    Mr. Elmendorf. So the real GDP growth that we have is 2.2 
percent on average per year, from 2022 to 2085.
    Mr. Flores. And that is lower than what we have experienced 
historically, long term I believe, is it not?
    Mr. Elmendorf. It is lower articulately because of slower 
growth of the labor force. It is related to the population 
aging that we see.
    Mr. Flores. Let's talk about tax payer behavior. Now that 
is my second subject. If, you talked about the fact that taxes 
would rise to 23 percent of GDP under the extended baseline 
scenario I believe, is that correct? What you said, do you 
model tax payer behavior in a situation like this? In other 
words, do you live in Maryland, or Virginia, or D.C.?
    Mr. Elmendorf. I live in Maryland.
    Mr. Flores. Okay, so if Maryland doubled its tax rates 
tomorrow, would you move?
    Mr. Elmendorf. My kids just finished their sophomore year 
in high school Congressman. If I move I am in peril of my life.
    Mr. Flores. Okay, you would be looking at it though right?
    Mr. Elmendorf. But our analysis does incorporate the 
effects of changes in marginal tax rates. That is an important 
area that we have actually enhanced our analysis of in the past 
few years, and that, the differences in marginal tax rates as 
well as the differences in debt are included in the GDP.
    Mr. Flores. And that factors in to the lower than average 
GDP growth? So there is an impact on revenue by raising these 
rates because you have put a break on the economy as you move 
forward?
    Mr. Elmendorf. Yes, under the extended baseline scenario. I 
read you the numbers for the alternative scenario where there 
is more or less steady marginal tax rates and rising debt.
    Mr. Flores. Where I am trying to go, and I think you have 
concurred with this is to the extent that you have assumed that 
tax revenues is percentage of GDP are higher than the 18.3 
percent long-term average. It has a dampening impact on 
economic growth, correct?
    Mr. Elmendorf. So one thing I would emphasize is the 
marginal tax rates as you have said before that really matter 
for economic growth not just the level of revenues, it is how 
that money is raised so our modeling captures the effects of 
the marginal tax rates the disincentive to work or to save.
    Mr. Flores. Right, good, okay. The next question has to do 
with provider behavior. I mean again, everything that happens 
in the economy is because an individual or a company behaves in 
a certain way based on the conditions that are thrown at it by 
its government or by some other exogenous factor. When you look 
at provider behavior, if we were to cut the pay of everybody in 
CBO by two-thirds, would that impact the behavior of people 
wanting to work for CBO or move to your position?
    Mr. Elmendorf. I am afraid it would Congressman, yes.
    Mr. Flores. Okay, so essentially what the chainsaw that was 
applied to provider reimbursements under the Obama Care if you 
will, does impact provider behavior; and your modeling does not 
assume any change in that behavior, right?
    Mr. Elmendorf. That is right. We do not capture, again this 
is an issue we are trying improve, but our modeling does not 
capture in any sophisticated way the possible ramifications of 
that.
    Mr. Flores. So looking not theoretically but a likely 
realistic outcome is, if we cut what the reimbursement rates 
are to providers by two-thirds, we are going to have a lot 
fewer providers hence less health care.
    Mr. Elmendorf. That is a possibility Congressman, but I do 
not think it is at all guaranteed. There are a lot of experts 
in the health care system who say there is an awful lot of 
inefficiency, in the way things currently are being managed, 
and that by changing the organization of the health care 
system, that a lot of efficiencies can be achieved, and thus 
that providers can continue to cover these lower, more 
efficient level of costs with lower payments.
    Mr. Flores. But you just said it would not work at the CBO, 
if I cut your pay by two-thirds.
    Mr. Elmendorf. So I think the issue there is what the 
possibilities are for improving the efficiency of the system. 
And we have said ourselves, in our analysis of the health 
reform legislation last year, that how long those cuts could be 
sustained for was uncertain. And that is why we present an 
alternative scenario here, in which those cuts are not 
sustained for a very long period, but I do not think it is at 
all obvious that those cuts cannot happen for some period of 
time. We do not know how far they can go, partly because we do 
not know what the possibilities really are for improving 
efficiency in the health care system, not just as a theoretical 
matter but practically speaking what kinds of efficiencies can 
be achieved not in particular places but across the system as a 
whole.
    Mr. Flores. Could the CBO operate with two-thirds fewer 
people? Would you be able to stream out enough efficiencies to 
provide the same product you do today?
    Mr. Elmendorf. No, we could not Congressman.
    Mr. Flores. Okay well, I suggest that the same is true for 
any health care system, and that is a very important part of 
the U.S. economy. Thank you. Yield back my time.
    Mr. Doggett. Thank you very much. I think one word around 
which this Congress is focused so far this year is cuts; 
immediate, far-reaching cuts. The Education Committee has met 
and voted to eliminate dozens of education programs. Another 
Republican group has said Pell grants which allow folks to go 
to college are just another form of welfare and that we cannot 
sustain the level of financial assistance we have. Votes have 
been taken to eliminate federal support for community policing 
and fire fighters. And of course, it is seldom a week that goes 
by that there is not some proposal to cut health care. Putting 
aside for a moment, the far reaching consequences of denying 
educational opportunity, and health care, and adequate law 
enforcement, I want to direct your attention to the comments of 
the Chair of the Federal Reserve yesterday, Dr. Bernanke, who 
said, ``In light of the weakness of the recovery, it would be 
best not to have sudden and sharp fiscal consolidation in the 
near term. I do not think that sharp, immediate cuts in the 
deficit would create more jobs.'' Do you agree with Dr. 
Bernanke?
    Mr. Elmendorf. Yes I do Congressman, and we have said the 
same thing ourselves on a number of occasions.
    Mr. Doggett. I thought that was the case. So while we want 
more efficiency, and we want to address these long-term costs, 
if these cuts are too dramatic they not only will deny 
educational opportunity and health care security but they will 
cause us to lose more jobs and have less economic growth?
    Mr. Elmendorf. Again, the specifics would depend on the 
specific policies, but our analysis implies that cuts in 
government spending or increases in taxes during the next few 
years would by themselves reduce output in employment relative 
to what would otherwise happen. At the same time credible 
reductions in future deficits would boost output in employment 
in the next few years because they would hold down interest 
rates, and probably increase business and household confidence.
    Mr. Doggett. And I certainly agree with you on both points. 
On the long term, I guess the only problem is the specifics. So 
let me go to one of those specifics and I want to try to quote 
back exactly what you said to Ms. Schwartz, that I believe 
plans similar to what Chairman Ryan has advanced with reference 
to Medicare will ``shift a good deal of burden and risk to 
seniors.'' Now it is great to talk in theory about putting the 
patient in charge. We have had the patient in charge with 
regard to seniors on Medicare in the past with prescriptions, 
and I guess we can put them in charge again and that may reduce 
consumption of health care because there will be some seniors 
that will say I rather eat than go see the doctor, or buy 
another prescription. I am going to keep cutting my pills in 
half. That is the patient as nucleus. While you may reduce some 
consumption that way, in Medicare; what I hear you saying is 
that we have an overall problem about rising health care costs 
that affects at different amounts at different times both the 
Federal Employee Plan, Medicare, Medicaid, the Veterans 
Administration, and the private sector; and that if all we do 
is shift more of the burden, a good deal of the burden, and 
more of the risk to seniors and we have not found a way whether 
it is through experiments or something else to address the 
problem of rising health care costs, we may have relieved some 
of the burden on our debt and on our tax payers but we have not 
relieved the burden indeed we have increased it on some of the 
most vulnerable people in our society at the time that they are 
trying to achieve a decent level of retirement security. Would 
you agree with that?
    Mr. Elmendorf. Well, Congressman, certainly if the Congress 
chooses to shift the burden to all or some members of an age 
group or other demographic group, then that is addressing the 
government's budget constraint by tightening other people's but 
I would just emphasize that almost anywhere I can think of to 
address the government's budget constraint involves tightening 
somebody's budget constraint. That, as I said, we are 
collecting, we are used to collecting, a certain amount of 
revenue relative to GDP, which has varied over time but has not 
shown much trend around this 18 percent mark; the same time we 
have government programs that provide certain sorts of benefits 
to older Americans, Social Security, Medicare, and Medicaid, 
and we have a whole lot of other tasks for the government, 
National Defense, Homeland Security, Veteran's Care, and on and 
on, that have over time occupied a certain share of GDP. We 
cannot have all those same things together in the future. We 
cannot repeat the past in the federal budget because of the 
aging of the population and rising health care costs.
    Mr. Doggett. Certainly we cannot; but we can avoid, as you 
say, shifting a good deal of the burden and risk to seniors 
without addressing the broader issue of health care costs. 
Thank you very much.
    Chairman Ryan. Mr. Huelskamp.
    Mr. Huelskamp. Thank you Mr. Chairman. Doctor, thank you 
for joining us here today. Quick question, how many years have 
you been director at the CBO?
    Mr. Elmendorf. Almost two and a half years Congressman.
    Mr. Huelskamp. Two and a half years, and director, we have 
had discussions today of the House Republican budget plan and I 
am a freshman; how long has it been since you have actually 
analyzed a Congressional Democrat budget plan?
    Mr. Elmendorf. Well, so Congressman, I do not want to sound 
too technical but we do not really analyze budget resolutions 
usually. Budget resolutions come from the Budget Committees, in 
fact for Chairman Ryan's proposal we analyzed the longer term 
impact of that proposal, as we have analyzed the longer term 
impact of other proposals he has had. We do not really do an 
estimate of a budget resolution, it is not a bill, it is not a 
law.
    Mr. Huelskamp. So, the Senate Democrat Proposal, out of 
their Budget Committee, when was the last one you analyzed that 
came out of their committee?
    Mr. Elmendorf. I think Congressman, that the last budget 
resolution voted on by the Senate Budget Committee was in 2009.
    Mr. Huelskamp. 2009, been a little over two years? Or did 
they even have one in two years?
    Mr. Elmendorf. So I believe they did in 2009 because the 
reconciliation instructions that came out of that budget 
resolution turned out to be quite important in the final act of 
the health legislation.
    Mr. Huelskamp. Did that pass the Senate?
    Mr. Elmendorf. Yes, I believe, I guess I am not sure 
Congressman.
    Mr. Huelskamp. And then the House Budget Committee, that 
time, did they pass a budget proposal?
    Dr. Elmendorf. I guess we are not completely sure 
Congressman. Again, it is a piece that we do not look at 
directly.
    Mr. Huelskamp. I was trying to figure that out. I have 
heard that there has not been anything passed for a couple 
years, and that is pretty amazing to me. What I want to talk 
about though is a question on your economic assumptions. You 
talk about pages 26 through 28, the impact of more borrowing, 
higher tax rates, and its impact on economic growth; and 
economists pretty well agree that if you increase spending by 
issuing more debt it is going to impact the private economy 
negatively, increasing spending by raising taxes will do the 
same. So under most economic assumptions it would seem that the 
only reasonable alternative is still grow the economy and 
tackle the deficit is actually reducing spending now? Is that 
correct?
    Mr. Elmendorf. Well, Congressman, there are tradeoffs here, 
so higher marginal tax rates do reduce economic activity to 
some extent under the views of most economists. But certain 
forms of government spending are important for economic growth, 
and reducing those could be damaging to economic growth.
    Mr. Huelskamp. Excuse me, doctor, but in your analysis, 
this is pages 26 to 28 talked about increasing taxes will hurt 
economic growth.
    Mr. Elmendorf. Marginal tax rates.
    Mr. Huelskamp. Yes.
    Mr. Elmendorf. Yes.
    Mr. Huelskamp. As it is been suggested by the president. 
Additionally, by borrowing more debt it has a similar impact on 
the economy.
    Mr. Elmendorf. Yes.
    Mr. Huelskamp. And so, explain to me that while reducing 
spending is not the only alternative.
    Mr. Elmendorf. So again, Congressman, for a dollar 
reduction in the deficit if one cuts some form of spending that 
was not itself an investment in economic growth, that would be 
better for the economy than if one raised a dollar through an 
increase in marginal tax rates.
    Mr. Huelskamp. So is Medicare spending an economic growth 
driver?
    Mr. Elmendorf. I do not think it is an important driver in 
the long term.
    Mr. Huelskamp. How about Social Security?
    Mr. Elmendorf. I do not think it is an important driver in 
the long term.
    Mr. Huelskamp. How about the Department of Defense budget?
    Mr. Elmendorf. Again, there are some pieces of it that have 
mattered.
    Mr. Huelskamp. We have just eliminated two-thirds, or 
three-fourths of the budget, doctor, is economic growth drivers 
on the spending side? We have to be spending. You just 
eliminate two-thirds of it, so the remaining third drives 
economic growth?
    Mr. Elmendorf. Just saying Congressman, that there are 
pieces of federal spending that have been important in economic 
growth. I do not have an exhaustive list of that, and we are 
not good at modeling those effects.
    Mr. Huelskamp. But you do make a statement that, and you 
did not identify that in the report, I would appreciate a 
follow-up if you could identify the particular programs that 
you believe drive economic growth. Mr. Bernanke refuses to 
identify those. Refuses to face the possibility that we have a 
debt crisis, and that if we do not face that very soon and 
quickly, and suggest that we cannot cut spending, that somehow 
we can borrow on tax and that is going to work out. Obviously 
your report does not say that, so I would ask that as a follow 
up if you could provide that determination if you would, of the 
type of spending CBO believes will help drive economic growth, 
because we are working with that now. And I would appreciate 
that distinction.
    Mr. Elmendorf. I will be happy to work with your staff 
Congressman and provide the information you are interested in.
    Mr. Huelskamp. Thank you Mr. Chairman. Yield back my time.
    Chairman Ryan. Mr. Yarmuth.
    Mr. Yarmuth. Thank you Mr. Chairman. Dr. Elmendorf, nice to 
see you again; thank you for your testimony and your work. 
Earlier Mr. Flores mentioned in passing $6 trillion worth of 
additional debt over the last four years attributed to 
Congressional activity, have you done an analysis of the 
factors that contributed to additional $6 trillion in debt? How 
much would have been attributable to Congress' actions and how 
much to policies that were already in place?
    Mr. Elmendorf. So Congressman, we have done analyses 
sometimes of the swing in the budget deficit from what CBO is 
projecting about a decade ago to what has come to pass and as 
it turns out I think I have that table with me. I often do not 
remember to bring it but I have it with me; and as you I think 
know Congressman there have been a collection of policy actions 
taken over the last decade that have significantly worsened the 
current budget picture. There has also been a collection of 
developments in the economy that were not predicted by CBO that 
have also led to worsening of the budget situation.
    Mr. Yarmuth. Okay. Would you say that a majority of the 
additional accumulated debt over the last four years was 
because of Congressional activity or because of existing 
policies; Bush tax cuts, and wars initiated in the earlier 
years?
    Mr. Elmendorf. So relative to our baseline projections in 
January 2001, so a little over 10 years ago, the deterioration 
in budget outcomes in 2008, '09, '10, and '11; those are what 
[inaudible] use as the four years, are due much more to 
legislative changes than to the economic and technical 
surprises. And those legislative changes include both 
reductions in tax revenue and increases in spending.
    Mr. Yarmuth. Yeah. Okay, we will leave it there. There is 
been a fair amount of conversation already about the impact of 
increase in marginal tax rates. When you make those statements, 
conclusions that they reduce economic activity, do you assume 
an increase in marginal tax rates across the entire population? 
Do you break it down as to the impact on economic activity of 
raising the marginal tax rates on people making over $250,000, 
and then people making over $1 million? And is there a 
difference in the impact, economic impact of those increases?
    Mr. Elmendorf. So, Congressman, we do look at the effects 
on a variety of income categories. I do not know exactly what 
they are off-hand. And we try to apply historical evidence 
about what we think the responsiveness would be, and you can 
see some of this analysis testimony we did for the Senate 
Budget Committee last fall that different ways of extending the 
expiring tax provision, and some of those scenarios we studied 
we assumed that all of the expiring provisions were extended. 
That did in fact occur in the end of last year, in other 
scenarios we looked at extending only the tax provisions up to 
a certain point in income distribution and not a above that. I 
do not have those results at hand.
    Mr. Yarmuth. Is it safe to say as a general proposition, 
that if you raise the marginal tax rate from 35 percent to 39.6 
percent on people making over a $1 million a year, that that 
will not have a huge drag on the economy versus extending the 
marginal rates on the other 99 percent of the population.
    Mr. Elmendorf. Well, there a question about the total 
impact and the impact per dollar of revenue. So there are many 
more people on the rest of the distribution. Much more income 
earned, and thus changes in the marginal tax rates below that 
threshold will have a larger aggregate effect on the economy. 
But per dollar revenue lost, the effects are generally larger 
at the top of the income distribution because the changes in 
marginal tax rates, the lesser revenue is given up in a sense 
relative to the change in the incentives. So in terms of the 
distortion to the economy per dollar revenue lost that is not 
smaller at the top than it is at the bottom. But it depends on 
the precise nature of the tax policies.
    Mr. Yarmuth. Okay, I look forward to discussing that 
further. One last question, in the Republican budget that was 
passed by the House there is an assumption, as I recall, that 
unemployment drops to 2.8 percent by 2015 in that range and 
then stays at a, relative to today's terms and historic terms, 
a very low level. I believe I am correct on that. If I am not I 
am sure the Chairman will.
    Chairman Ryan. I will, correct you.
    Mr. Yarmuth. But what kind of assumption do you make in 
your baseline scenario as to what unemployment would be for the 
next 10 years or so?
    Mr. Elmendorf. So because the recovery is slow, we think 
the unemployment rate will come down, only slowly and will over 
the second half of the coming decade be down to about 5\1/4\ 
percent of the labor force.
    Mr. Yarmuth. Okay, thank you.
    Chairman Ryan. I will just answer the question, that is not 
an assumption in the budget. CBO is the measuring stick we use. 
There was an outside economic forecasting group that did its 
own separate analysis of the budget, they subsequently revised 
that analysis to a deal with that particular statistic which 
they said was an anomaly and wrong; and they revised it to I 
think five percent or something like that. Next is, Mr. 
Stutzman.
    Mr. Stutzman. Thank you Mr. Chairman and thank you Mr. 
Elmendorf for being here. My question is, in your report you 
note the federal government could not issue even an ever larger 
amounts of debt relative to the size of the economy and 
definitely, do you believe that the current level of debt is 
harming the economy?
    Mr. Elmendorf. The current level of debt is reducing our 
output, our incomes relative to what would be the case if we 
had a lower level of debt. Leading aside the effects of this 
particular recession which complicate that; but over the longer 
period of this sort of analysis, higher levels of debt are 
certainly more damaging than lower levels of debt.
    Mr. Stutzman. Do you think that the discussion about tax 
increases keeps money on the sideline as well, without 
encouraging economic growth?
    Mr. Elmendorf. I think Congressman, that uncertainty about 
federal policy is diminishing household and business spending 
and that uncertainty covers a whole set of policies. I think it 
covers tax policy, it covers regulatory policy. Covers health 
policy, I should say we think the more important source of 
uncertainty is household and businesses uncertainty about their 
own incomes and the demands for their products, apart from 
government policy. But we think government policy is probably 
playing some role.
    Mr. Stutzman. And you know I agree with and I think what 
families are doing is that they are doing what they can control 
and that is cutting their own spending in their own budgets; 
controlling their budgets. They cannot necessarily control the 
income revenue because the job market is tough. They cannot go 
take on more debt, because it is tough to borrow, and it is not 
necessarily wise to do so. So, I hear in this committee, you 
know that we only want to cut spending. I know you have been in 
this job for about two and a half years or so, when was the 
last time Congress talked about cutting spending and actually 
did cut spending in Washington?
    Mr. Elmendorf. Well, so as you know Congressman, the 
Appropriations Bill that was passed this past Spring reduced 
spending to what would have occurred.
    Mr. Stutzman. Before that. I do not keep a list of that to 
be honest. I think there is a whole variety of proposals that 
have been enacted into law that include combinations of 
spending cuts, spending increases, tax cuts, tax increases, I 
am not even sure how I would keep such a tally.
    Well I just do not understand why does it seem like it 
should be out of the realm of cutting spending, addressing 
everything; whether it is entitlements, whether it is 
discretionary, non-discretionary spending, military. I mean I 
believe everything should be on the table and from your 
analysis in the report is that we need to be very cautious in, 
or that the debt that we hold is damaging or is holding back 
the economy. I think everybody agrees that higher taxes, just 
the discussion of it, holds money on the sideline. So cutting 
spending should be a part of the discussion. Did you score the 
Affordable Health Care Act?
    Mr. Elmendorf. Yes, we did.
    Mr. Stutzman. There was a report yesterday about a glitch 
found in the bill that is going to send roughly three million 
middle income Americans into Medicaid. Can you touch on that?
    Mr. Elmendorf. Yes, Congressman. So I do not know whether 
it was a glitch in the drafting or an intent of the drafting 
but in any case, our estimate of the bill incorporated the 
effects of that provision as it was written.
    Mr. Stutzman. Well, what do you think that is going to do 
to three million middle income Americans trying to find 
confidence in the economy, finding confidence in Washington. If 
we continue this sort of, I mean, I am not blaming you because, 
but the intent obviously was there or for some reason it was 
there and now we are finding out after the fact and what it is 
going to do to effect at least three million Americans 
possibly.
    Mr. Elmendorf. So I should say, we do not have an estimate 
of the number of people who are affected. We took the 
definition of income eligibility into account in our estimate, 
but we do not have any separate count of how many people were 
affected by that piece of the definition, and in fact that is 
not really an answerable question it depends what else you 
might have changed other places in the law. So I do not want to 
endorse the three million, I have seen that number but that is 
not from us. All I can say is that we have this in our 
estimate, is not a surprise to us that it is there.
    Mr. Stutzman. So this glitch is not a surprise to CBO?
    Mr. Elmendorf. No, it is not. Again, I do not know if it is 
a glitch or an intent but we read that piece to the legislation 
and used that language in our estimate.
    Mr. Stutzman. That is what it seems to be called and that 
there is some backtracking by some folks here that this is a 
glitch and that, ``Oh we did not recognize what happened 
here.'' You know, that is I appreciate your answers because you 
have been very you know balanced in I think approaching this 
because if we do not start talking about cuts and you know your 
report obviously gives us, I mean it is not so rosy a picture I 
do not believe and we have a lot of work to do in that we have 
to control what we can control, and that is cutting spending 
without doing further damage to the economy. But I believe tax 
increases; more borrowing is detrimental to our long term 
outlook. Would you agree with that?
    Mr. Elmendorf. I believe that more borrowing is detrimental 
to our long term outlook and I believe that higher marginal tax 
rates are also detrimental to the long term outlook, and that 
is why we tried to capture both those effects, where they were 
relevant in our economic analysis in this report.
    Mr. Stutzman. Okay. Thank you very much.
    Chairman Ryan. Mr. Tonko.
    Mr. Tonko. Thank you for joining us here today Dr. 
Elmendorf and clearly these are days where your expertise is 
tremendously needed so, again welcome. If I could just return 
briefly to Mr. Yarmuth's line of questioning. Is it reasonable 
to assume that education spending impacts economic growth?
    Mr. Elmendorf. Yes, I think so Congressman.
    Mr. Tonko. And what about our investment or spending on 
basic infrastructure, the roads, the bridges, the connections 
we need, the infrastructure to move people and goods around the 
country?
    Mr. Elmendorf. So we have done some analysis of 
infrastructure investment, and obviously there were some 
aspects of that investment that have been more beneficial to 
the economy and some that have probably not been beneficial at 
all; but on balance, sensible investments in public 
infrastructure, investments that pass some sort of benefit cost 
test, enhance economic growth.
    Mr. Tonko. Asked another way, is there any reason to 
believe that we might see an economic dip if we do not do some 
of the investments in education and infrastructure?
    Mr. Elmendorf. So I think, well the term dip to me implies 
a sort cyclical effect, and a sharp cut in spending or 
increases in taxes in the short run would, as I have said 
before, I think cause that sort of dip, but usually for people, 
conversations about education or infrastructure are thinking 
more of the longer term and I think reductions in the amount of 
education that occurs in the country, reductions in 
infrastructure that we build would be detrimental to long-term 
economic growth.
    Mr. Tonko. And what about our unemployment, which I have 
read has a return in economic activity, that somewhere we are 
between $1.60 to $1.70 on every dollar spent on our 
unemployment insurance?
    Mr. Elmendorf. So we think that in the short run, in the 
situation of our economy now, where they are a lot of 
unemployed workers and underutilized factories and equipment; 
that putting money into the spending stream through benefit 
payments or reductions in taxes encourages more spending, and 
that leads to more output and more employment. And in our 
estimates the effects of putting money into unemployment 
insurance is especially powerful because the people who receive 
it tend to spend a very large share of it since they are people 
who have lost their jobs and in many cases do not have other 
sources of income.
    Mr. Tonko. It seems as though the economic activity that we 
need to inspire would at least help those that are in that 
unfortunate realm. Can we bring up the charts that we have on 
the long-term debt. There we go. This chart is from Summary 
Figure One I believe, in it you present, Dr. Elmendorf, two 
projections of where our debt is headed in the next 30, maybe 
35 years. Under both scenarios debt continues to grow relative 
to the size of the economy but there is a tremendous difference 
between these two line graphs. Where do we end up at the end of 
the chart in 2035 under each scenario in this chart?
    Mr. Elmendorf. So under the extended baseline scenario, 
which largely follows current law, we end up with debt at 84 
percent of GDP. Under the alternative fiscal scenario, which 
more closely corresponds to current policy settings, we end up 
with debt at 187 percent of GDP in 2035.
    Mr. Tonko. Thank you. And can you briefly summarize the key 
policy choices that differentiate the two scenarios?
    Mr. Elmendorf. Yes, so the biggest difference is on the 
revenue side, under current law because of the expiring tax 
provisions, provisions of last year's health legislation, just 
the natural interaction of the tax code with economic growth, 
revenues rise quite a bit relative to GDP. Under the 
alternative fiscal scenario, we hold revenues, we assume that 
these expiring provisions are instead extended and keep 
revenues down closer to their historical average share of GDP. 
So in 2035, revenues under the extended baseline scenario are 
23 percent of GDP and on the alternative fiscal scenario are 18 
and a half percent of GDP. There are also differences on the 
spending side, in both the health programs and the non-health, 
non-Social Security part of the budget. In the health programs 
we are principally assuming under the alternative scenario that 
some of the cost control features of last year's legislation do 
not continue over the entire quarter century we are showing 
here, and on the other non-health care, non-Social Security 
spending we are assuming still a very substantial decline 
relative to historical experience but not quite as stark an end 
of point as under the extended baseline scenario.
    Mr. Tonko. To summarize one scenario sticks to current law 
and puts the debt at about 80 percent of GDP in 20 or so years. 
While the other scenario puts that debt at 180 percent of GDP 
by, among other things, extending tax cuts for the wealthy and 
refusing to implement the Affordable Care Act. That sounds, to 
me, to be an awful lot like the Republican agenda this year; 
and my concern is that you know we are wasting month after 
month on policies supported by the majority that are merely 
digging us into a deeper hole. Regardless of how you feel about 
that best strategy going forward, I think we can all agree that 
we need to do far better.
    Chairman Ryan. Gentleman's time is expired.
    Mr. Tonko. Thank you Chairman.
    Chairman Ryan. I ask the gentlemen get back to him in 
writing if he wants you to do so. Mr. Woodall.
    Mr. Woodall. Thank you Mr. Chairman. Thank you Dr. 
Elmendorf for being here. I want to talk a little bit about 
cost containment. I am one of the freshmen here. In all of the 
modeling that you do, can you point me to some of the other 
areas where the government has been successfully involved in 
cost containment, other industries, or other product lines, 
that I could look at to see our success at cost containment?
    Mr. Elmendorf. So that is a good question, Congressman. I 
do not know of other parts of the federal budget, other parts 
of the economy, whether or not our government plays as large, 
parts of the economy as large as health care, where the 
government plays as large a part as it plays in health care.
    Mr. Woodall. For example I know we are spending more, a 
larger proportions of Americans are, on food stamps this year 
than have ever been on food stamps historically. Are we 
involved in any kind of cost containment, because I know the 
price of food with that Ethanol tax credit and what not, the 
price of foods gone, food inflation is rising dramatically. Any 
cost containment programs going on?
    Mr. Elmendorf. Not that I am familiar with Congressman. Of 
course, as you know, the principal reason why that cost of food 
stamps is so high is because the economy is weak and many 
people are out of jobs.
    Mr. Woodall. Well if there are no good cost containment 
examples, I know you were talking with Mr. Huelskamp earlier 
about efficiencies in the market place and how to squeeze some 
efficiencies out. Are there any industry sectors you can point 
me to where the government has really been a driver in creating 
efficiencies, because the private sector was not succeeding at 
that and so we have really got a great efficiency program run 
by the government?
    Mr. Elmendorf. Well Congressman, so if one turns to, if you 
have it in front of you, Table 3-1 in the report, it is on page 
42, we report excess cost growth in spending for health care, 
and if one looks at that table one can see periods where in 
fact federal spending on health care and Medicare/Medicaid has 
increased more slowly than private health care spending. There 
are other periods where the opposite has been true, as I said 
in response to an earlier question, so I think that just 
looking within the health care system, the verdict on whether 
the private or public sector is better at controlling costs is 
not self evident from this table.
    Chairman Ryan. Would the gentlemen yield on that point? I 
am looking at Table 3-1, I see of the four time periods you 
have measured, other meaning private health plans have lower 
cost growth than Medicare. There is one of the four periods 
where Medicare is lower, which was the period of Managed Care, 
than the private sector; all other is lower in cost growth than 
Medicare. Am I misreading this chart?
    Mr. Elmendorf. Well, I am sorry Table 3-1.
    Chairman Ryan. Table 3-1, yes table 3-1.
    Mr. Elmendorf. So these are overlapping periods, I would 
emphasize. So in the 1985 to 2007 period, the last 22 years I 
guess leading up to this latest downturn, Medicare/Medicaid 
spending growth was a good yield below spending growth in the 
private sector. And as I emphasized earlier I do not want to 
pick a particular row out of this table.
    Chairman Ryan. Yeah but then you have 1990 to 2007, it is 
1.6 Medicare all other 1.5 percent.
    Mr. Elmendorf. That is right, so over the last 17 years, 
Medicare's been slightly above all other, Medicaid's been below 
that. So, what I am suggesting is that drawing conclusions 
about which system is better, I think you cannot draw those 
straightforwardly out of just a look at some historical 
tabulations like this. And that what makes this analytic 
challenge that we face difficult.
    Mr. Woodall. And I am not so much trying to draw a 
conclusion about which is better. I am trying to draw a 
conclusion about where the efficiencies are created. I mean 
would you say that when you have the government purchasing 
almost half the health care in this country, we can just tell 
folks we are going to pay less. That does not actually create 
efficiency, I mean. Does your modeling suggest that efficiency 
is why you see these numbers change? Or does your modeling 
suggest it is just the legislative changes, because we are not 
going to pay you? Are there successes that the government is 
experiencing that the private sector is not experiencing on the 
efficiency side? The price controls clearly they are far 
successful if they are done by the government.
    Mr. Elmendorf. So I think whether one views paying 
providers less as an efficiency measure or not, is a hard 
thing. I think there are health analysts who point to the 
experience of European countries that pay providers less for 
health care than we do. And they view that as an appropriate 
way to proceed. And we are not here to make recommendations, as 
you know. So, I am not sure, I think the word efficiency means 
different things to people in this context.
    Mr. Woodall. Let me go briefly to a different topic. You 
talked about certain forms of government spending that are 
important to economic growth. Did you actually mean certain 
forms of government spending? Or just certain forms of 
spending? Would you actually point to areas of spending that 
are more valuable if done by the government, done by the 
federal government, than if done by a state or local government 
or if done by an individual?
    Mr. Elmendorf. That is interesting and a hard question, 
Congressman. The point I was trying to make before was simply 
that one should not view all forms of government spending as a 
drag on the future economy because there are some pieces that 
have returns. Whether they could be done better or more 
effectively in different ways, I do not know. Some of these 
things are, to say national standards or consistency across the 
country. One might think of the interstate highway system as an 
example of that. Others are more individual to particular parts 
of the country and maybe could be done more effectively at that 
level.
    Chairman Ryan. Thank you. Mr. Blumenauer.
    Mr. Blumenauer. Thank you, thank you Mr. Chairman. I would 
just like to follow up where we are in terms of government 
efficiencies. Have you done an analysis of the cost per patient 
for veteran's health versus national averages in the private 
sector?
    Mr. Elmendorf. We have done analyses of the veteran's 
health care system, Congressman. That is a good example to 
raise. The Veteran's Health Care System at this point and time 
provides a high quality care at low cost.
    Mr. Blumenauer. At lower costs than the average. If we took 
prescription Medicare drugs, where the Veterans Administration 
actually negotiates prices; do they provide prices less than 
what people are paying in the private market?
    Mr. Elmendorf. They do, I want to caution Congressman, 
about the difficulties extrapolating from individual systems to 
the entire health care system.
    Mr. Blumenauer. I appreciate that but I just want to say, 
with all due respect, that there are models that the federal 
government is doing now that are providing higher quality at 
less cost. In terms of food inflation, I would think part of 
that is that we are lavishly subsidizing corn production to 
burn unnecessarily where the federal government and Congress, 
which has blinked and not fixed it, and in fact we had a chance 
in this committee to vote against that, contributes to food 
inflation. But I want to go back to something that you said, 
that I had a little concern with, you mentioned in the course 
of your testimony that having money for food stamps actually 
tends to get into the economy, has a higher multiplier effect 
because people take it and they spend it very quickly. And then 
in terms of reaction to my friend where you were saying Social 
Security's not an economic driver. It would seem to me that 
that money that goes into the hands of our senior citizens is 
almost analogous to food stamps. The senior citizens in my 
district are much more likely to spend that Social Security 
dollar than some of the lavish subsidies that we have now that 
we have tried to trim back. I mean, are you really saying that 
that does not have substantial economic impact?
    Mr. Elmendorf. So, thank you for the chance to clarify 
this.
    Mr. Blumenauer. Good, I am sure you wanted to.
    Mr. Elmendorf. The discussion we were having over here I 
think was about a long-term economic growth path that we show 
in Chapter Two of our report. And over the longer term, over 
the medium term and longer term, what matters most for economic 
growth is the supply of the factors of production. How many 
workers there are.
    Mr. Blumenauer. Okay, you are talking about growth not 
immediate.
    Mr. Elmendorf. How much saving capital there is. In the 
short term, particularly in an economy like ours now, with a 
lot of unemployed resources, then the principal determinant of 
the rate of economic growth is the demand for goods and 
services, and that is why I have said and others have said, 
that cuts and spending today and increases in taxes today, 
would tend to slow economic growth.
    Mr. Blumenauer. Super, I appreciate the clarification. That 
is very helpful for me. I guess I would like to just conclude 
in one area that you referenced that other countries spend far 
less than the United States, actually almost every developed 
country spends dramatically less than the United States and if 
you are old fashioned, you look at things like life expectancy, 
child mortality, indicators that the rest of the world use to 
look at health care quality. It appears that they provide on 
average better outcomes for far less cost. I wanted to ask a 
question with that factual basis.
    I do not think anybody disputes the numbers that we have 
been provided although some may dispute what they want to say 
is the best care, but I am just trying to get at the sense of 
is there something intrinsically, about the United States that 
would prevent us from being able to take to scale reforms 
within the existing system. I come from a state that is low 
cost, high quality for Medicare; and if everybody practiced 
medicine the way they do in my community, or in Wisconsin, we 
would not have the crisis we are facing. Is there something 
intrinsic about the economic system that would prevent us from 
being able to nationalize better quality different practice 
patterns?
    Mr. Blumenauer. I think there is a lot of potential in our 
system to do much better than we are doing Congressman. I think 
the question at hand has been what is the best institutional 
framework to encourage those sorts of changes? As you point to 
a foreign health care system, you are certainly correct they 
spend less money than we spend, and have in many cases better 
health outcomes. The thing I was going to be, wanted to be more 
careful about and what you said was, what would have to measure 
of health care quality, it is more complicated because they are 
a variety contributors to health, health care is part of that, 
so is lifestyle differences. And in analyses of the treatment 
for specific sorts of conditions, in this system or other 
health care systems, it is less clear.
    Chairman Ryan. Ms. Black.
    Mrs. Black. Thank you Mr. Chairman and Dr. Elmendorf, thank 
you so much for being here today to give us this perspective of 
long-term budget outlook. I want to follow up on what 
Congressman Stutzman was talking about and he was going more on 
how debt is affecting individuals and families, and I would 
like to turn the attention a little bit in a different 
direction, on private investment. Because a private investment, 
obviously as we invest in jobs and different, new technologies 
and things of that sort, we grow the economy and when economy 
grows there is a need for more jobs. So, first I would like for 
you to talk a little about the crowding out affect, explain 
that, and then go to what level does government debt crowding 
out private investment become problematic?
    Mr. Elmendorf. So crowding out as you know Congresswoman, 
refers to the phenomenon that if there is more government debt 
being issued then a larger share of the private savings in the 
economy are devoted to holding that debt rather than going to 
investment and physical capital in plants and equipment that 
can make us more productive over time. And that is one of the 
large costs of rising debt is the cost that economists can best 
quantify so the cost that we quantify in this report, they are 
other costs of rising debt that we are not as good at 
quantifying that we write words about in the report, the more 
debt you have the more interest payments the government needs 
to make and that crowds out other kinds of spending, and 
requires higher taxes. The more debt you have the less 
flexibility you have to respond to emerging crises and the more 
debt you have the greater the risk of fiscal crisis itself. And 
so the, so for all of these reasons additional debt is a 
problem, for much of these effects there is no particular 
tipping point, every extra dollar of debt is a little bit 
worse, everything else equal. The one for which there may be a 
tipping point is this risk of a fiscal crisis, one might get to 
some particular level of debt but as we wrote in an issue brief 
last year, we do not think we can identify a particular level 
because it is not just the level of debt that matters, it is 
the expected trajectory of the debt. It is the confidence of 
investors in the governing process in a country to make changes 
in fiscal policy, it's the underlying strength of the economy 
and so on. So it is an awful lot of factors that matter, that 
is why we have been I think appropriately unwilling to identify 
some particular tipping point, and even in the well known work 
of Carmen Reinhart and Ken Rogoff on this subject, they do not 
really find a tipping point so much as they pick countries in a 
lot of debt and so they do worse than countries with less debt. 
But whether there is some threshold is not clear, and I think 
in fact if you talk with them they would say that it depends on 
all the factors of the country as well.
    Mrs. Black. And just along those lines, I want to note that 
Figure 2-2 in your report does seem to indicate that government 
barring will have a negative effect on the economy in as little 
as just a few years and you do have that in your report, so I 
appreciate that and I think that we, given the fact that there 
is no tipping point as you say and there is no time limit where 
we can say ah definitely this is going to happen and what I 
appreciated so much is, we have had previous panel members who 
have indicated as sort of like a pond that you are skating on 
where you skate around the edges that are shallow and the ice 
is very thick and you feel very safe, but none of us know when 
that ice starts to get thin, the water starts getting deeper, 
and when we are going to fall through, and we just have to look 
to some of those countries that have already been in that 
situation where that debt can tip us at a point that would be 
unknown and could in many cases be very quick without us being 
able to respond. So, then I assume with the short period of 
time that I have left you would agree that the sooner that we 
address this debt issue the more safe we are going to be and 
the less likely we are going to be to look like those countries 
in Europe.
    Mr. Elmendorf. Congresswoman, I certainly think that the 
sooner that policy changes are agreed upon the safer the 
country will be in terms of the fiscal picture. The question of 
how quickly to implement the policy changes you agree upon 
involves tradeoffs that I cannot judge for you. The sooner that 
you act in terms of implementing changes, the less debt is 
accumulated and the more credibility is attached to the future 
cutbacks that have been discussed. On the other hand the sooner 
that government spending is cut or taxes are raised, the less 
time that individuals and businesses, state and local 
governments have to adjust to the changes, so the harder that 
transition will be for them and also changes implemented in the 
next few years will be hitting an economy that is all ready 
quite weak and we think weakening it further. So, there is a 
tradeoff in the sea of implementing these changes, I think in 
some ways that reinforces the risk of going up high levels of 
debt because one gets into a position where one is confronted 
with less and less palatable choices and I think that part of 
what you see in this tradeoff.
    Mrs. Black. Thank you Mr. Chairman, I yield back my time.
    Chairman Ryan. Mr. Pascrell.
    Mr. Pascrell. Thank you Mr. Chairman. Good morning. In the 
health care reform, Mr. Elmendorf, let's get back to that issue 
since it keeps on coming up, does it not. We passed what I 
consider to be significant savings, you know one-third of that 
legislation was devoted to Medicare and Medicaid; many of those 
savings were not scored for understandable reasons. That is not 
the issue here. In a large part, which is a large part of our 
deficit, we created innovative payments and delivery models. I 
am not telling you anything you have not heard before. That was 
the whole purpose, when people say we did not bring any 
changes, the Democrats, God bless you, who supported that 
legislation did not bring anything new to the table about 
entitlements, they obviously did not read the bill. But the 
majority's plan to stop these models and move everyone into the 
private market, oh that is a brilliant idea, pre-1964, very 
effective. If we look at the private market costs rose in 2010, 
it is interesting now you only went to 29 Mr. Chairman, my good 
friend. 2010 shows a very different situation. In 2010 costs 
rose 7.75 percent, the cost of health care compared to Medicare 
cost rose by 3.3 percent. That is in the Standard & Poor's 
indices of 2010. That is before three-quarters of the health 
care bill even went into effect, or four-fifths. So the point 
about what costs more and how we can save money, let's take a 
look at the facts.
    And we will improve the legislation, but to do away with 
the legislation I think would be very hurtful to the economy 
and particularly those who are not covered. And particularly 
those who are losing their job, and we obviously Mr. Elmendorf 
did not get the forecast correctly about the economy in 2008, 
or 2006, or 2004, because in 2001 and 2003, when we made those 
dramatic cuts, tax cuts, and I am not singling out any group, 
but when those cuts were made, what were the plans, what was 
the forecast of why we were doing this, and what the results 
would be? And then what were the results? Did we have the 
business investments that my good Ms. Black talks about? Did we 
have an increase in jobs? No, in fact if you look back over the 
last four decades, four decades, the only president that has 
substantial increase in job investment and when the economy 
stood strong was Bill Clinton. Carter did not do it, 3 percent 
increase and business investment under Jimmy Carter. 3.4 
percent under Ronald Reagan, under Bush I and Bush II, 
President Bush, President Bush II we got an increase about 3.5 
percent, 3.6 percent. They actually did a better job than 
Ronald Reagan. And under Bill Clinton 10.2 percent in those 
eight years he was the president of the United States, business 
investment. So tax cuts are not the panacea that we all are 
pretending it is. Is it Mr. Elmendorf?
    Mr. Elmendorf. Well, Congressman I think the variety of 
influences on the economy, the policies of presidents and 
congresses are obviously important. A lot of other things are 
important as well. I would be loathe to draw any strong 
conclusion from the period averages that you suggest.
    Mr. Pascrell. They are pretty accurate.
    Mr. Elmendorf. I am not disputing the numbers I am just 
stating that to map those directly to the policies of those 
presidents, I think involves leaving out all the other factors 
that matter.
    Mr. Pascrell. There are other factors are there not Mr. 
Elmendorf. So, when Obama raised his hand, when the president 
raised his hand in January, 2009; he had no idea, we had no 
idea, of how bad this economy was. Would you agree to that?
    Mr. Elmendorf. Yes I do Congressman.
    Mr. Pascrell. Thank you, for the record, Mr. Chairman.
    Chairman Ryan. All right, thank you Mr. Pascrell. Mr. 
Garrett.
    Mr. Garrett. And I thank the Chairman. So taking a page out 
of Mr. Pascrell's comments I guess, but not with the same tone 
and forcefulness. So it is hard to make these projections, that 
you make over time.
    Mr. Elmendorf. It certainly is Congressman.
    Mr. Garrett. There you go. So, when you make these 
assumptions, or when you take in the assumptions to make these 
projections, what do you do, quickly, with regard to your 
assumptions with regard to the overall capital market structure 
in this country, euphemistically Wall Street and investments, 
and what have you? How does that play into it?
    Mr. Elmendorf. So private saving matters, that is the is 
the source of funds for investments, to the extent that is not 
crowded out by additional debt, and we assume that private 
saving continues over time and away, that keeps interests rates 
about stable, under a benchmark and then we do other things for 
the particular policy scenario.
    Mr. Garrett. So within that for example, do you take in 
assessments so you study to look at to see where the capital 
markets, where the proverbial trillion dollars on the 
sidelines, or whether that is being invested or not, that sort 
of things that you look at?
    Mr. Elmendorf. For this sort of longer term analysis we are 
looking more at 40 year or 30 year or 20 year averages, when we 
look to our projections. For our near term economic 
projections, the ones we are updating for August, we are most 
definitely looking at the current state of capital markets.
    Mr. Garrett. So you hear Chairman Bernanke say, a week or 
two ago, some statement where he said, he was asked by Jaime 
DiMon, did they, the FED, look into and consider what the cost 
of all Dodd Frank at all is on the market place and he said, 
no, it is just too complicated for us to do. You heard that?
    Mr. Elmendorf. I have heard that.
    Mr. Garrett. But have you? Is it too complicated?
    Mr. Elmendorf. We have also not tried to quantify the 
effects of that legislation on the system of the economy.
    Mr. Garret. A. Is that something that you are able to do? 
and B. Is that something you should be doing?
    Mr. Elmendorf. I do not think we have the capacity to do it 
Congressman. Ideally, yes I think it is an interesting 
question.
    Mr. Garrett. Well I mean, more than interesting, but does 
not that sort of drive part of the cost as far as the economy 
going, as going forward?
    Mr. Elmendorf. I think it is certainly a factor in economic 
growth.
    Mr. Garrett. So then he said at a press conference I think 
it was last week, he said he is seeing some sort of soft spots 
in the economy, right. And he said he does not quite 
understand, he is sort of clueless if you will as to why that 
soft spot. In other words, he had his projections like you did 
too, going forward, doing all those things with QE-1 and QE-2. 
He thought we were going to at certain places on GDP and growth 
and unemployment but we are not there. You saw that comment?
    Mr. Elmendorf. Yes.
    Mr. Garrett. Yeah, so could that be part of the problem 
though? That if both you and he are failing to have that bit of 
information as far as what the cost of regulation and 
implementation of it is to the economy, that that could be 
explaining on some of our charts of where the problems are?
    Mr. Elmendorf. It could be a factor Congressman. I mean 
they are an awful lot of things that we do not have in our 
models and our models do not model very well.
    Mr. Garrett. Capital markets I would think it would be a 
pretty big factor in as far as, I mean that is one of their two 
responsibilities in job growth. Just quickly another point. 
That is true is it not?
    Mr. Elmendorf. So capital market are important then 
Congressman, yes.
    Mr. Garrett. So I came in and I heard you say a couple of 
times, I may paraphrase. You said sharp cuts right now and tax 
increases now would slow economic growth or words to that 
effect.
    Mr. Elmendorf. Yes that is right Congressman.
    Mr. Garrett. Can you quickly define for me what are sharp 
cuts in spending?
    Mr. Elmendorf. So I was trying to convey with the word 
``sharp'' was some sense of the magnitude of the cut or 
increase relative to the size of the economy. So we have an 
economy even in its weakened state, has GDP of $15 trillion, 
policies that move that have to be significant.
    Mr. Garrett. Can you define that for me?
    Mr. Elmendorf. No because there is no cut-off per say. It 
is a question of degree.
    Mr. Garrett. If we cut $100 billion out of the 2012 budget 
is that a sharp cut?
    Mr. Elmendorf. That is enough of a cut that it would affect 
our projections for GDP growth over the next few years, yes 
Congressman.
    Mr. Garrett. A $100 billion would, to what extent?
    Mr. Elmendorf. Well it depends on exactly what you change 
right, so the analysis that we have done of the Recovery Act 
and of alternative policies for increasing output in employment 
show a range of different effects depending on the specifics of 
the policy. Which I think is the analysis you want us to be 
doing. Not just a matter of dollars, it is a matter of what is 
in the policy.
    Mr. Garrett. What percentage is that, 100 of that $15 
trillion account?
    Mr. Elmendorf. So the economy is $15 trillion.
    Mr. Garrett. You are good with numbers.
    Mr. Elmendorf. One percent of that is $150 billion, so $100 
billion is two-thirds of a percent to the economy. For some 
forms of changes in government policy, the effect on the 
economy could be less or more than that, but two-thirds of a 
percent is not trivial, the downward revisions in Federal 
Reserve's forecast that got some coverage yesterday for this 
year's economic growth are less than that.
    Chairman Ryan. So two-thirds, so about a .66 percent cut in 
spending in your model slow down the economy right now?
    Mr. Elmendorf. Yes, I think all the models try to capture, 
even the small effects, which I was trying to convey with the 
term sharply.
    Chairman Ryan. I find that interesting. Ms. Wasserman 
Schultz.
    Ms. Wasserman Schultz. Thank you Mr. Chairman, I want to 
just follow up on that same line of questioning that Mr. 
Garrett had. So if we are assuming that a $100 billion cut 
could affect the growth of the economy demonstrates that what 
even seems like a small percentage cut would have a significant 
impact. That seems backed up Mr. Elmendorf by Chairman Bernanke 
who said in an article in Politico today, that ``I do not think 
that sharp immediate cuts in the deficit would create more 
jobs. It would be best not to have sudden and sharp fiscal 
consolidation in the near term.'' So we have more than one of 
our economic experts it seems pointing to the danger of cutting 
too much too fast. So generally are you concerned that the 
proposed, what I term reckless, but the proposed Republican 
budget cuts at the pace that they have proposed them, and the 
amount and size that they have proposed them would negatively 
impact our ability to recover?
    Mr. Elmendorf. So Congressman, I agree with Chairman 
Bernanke's statement. We have not done an economic analysis of 
the Republican budget resolution. As I have said earlier on 
other occasions, near term cuts in spending or increases in 
taxes, under the current economic conditions would slow the 
economy. Credible reductions in future deficits from future 
spending cuts or tax increases would boost confidence, lower 
interest rates, and thus strengthen the economy today. So I 
think the effects of an overall fiscal package on today's 
economy depends on the balance of, and the timing of the 
changes and policies.
    Ms. Wasserman Schultz. So does it make more sense in terms 
of making sure that we pace ourselves on trying to strike that 
right balance to use a chisel when it comes to cuts, to make 
sure that we have the right combination of investments and 
cuts, so we do not upend the apple cart?
    Mr. Elmendorf. From our analysis there are tradeoffs in the 
speed of the fiscal consolidation, it is a term of ours. The 
faster one moves, the less debt is accumulated, the better that 
is in the long run, and the more credible future promise cuts 
would be, which is good for the short run. On the other hand, 
the faster that policy moves, the less time people, businesses, 
other levels of government, have to adjust and the bigger the 
hit on the economy, in the short term. So there is a tradeoff 
there that all we can do is to try to elucidate that tradeoff, 
but it is up to you and your colleagues to judge how to 
proceed.
    Ms. Wasserman Schultz. Right, thank you. I want to shift to 
Medicare in just the last couple of minutes that I have. CBO's 
analysis of the voucher payment in Mr. Ryan's plan in 2022 says 
that basically it is equal to what a 65-year-old would cost in 
traditional Medicare. My question is, does that mean that at 
least in the first year of the program, that the voucher does 
not really save the government any money? And doubles the out-
of-pocket costs for the first 65-year-olds to be covered under 
the plan? Am I understanding that correctly?
    Mr. Elmendorf. Congresswoman, we did not actually study the 
proposal in the first decade. We do not usually study budget 
resolutions, we analyze the longer term implications as we have 
with other plans of the Chairman's. And also we need to 
distinguish between federal costs and total costs. So by our 
analysis it is more expensive to treat a 65-year-old through 
private insurance, than it is to treat that person through 
Medicare today for a typical 65-year-old. But the plan also, 
over time reduces the federal government's payments. So we show 
over time, the plan reducing federal payments relative to the 
existing Medicare system, and but we also show as you know 
beneficiaries paying more.
    Ms. Wasserman Schultz. Paying more; and just my final 30 
seconds. Your analysis also on page 13 indicates that the 
reality of the proposal is that some people would not actually 
purchase insurance because of the extra cost that they would 
face, so does that mean that we could actually see an increase 
in the rate of elderly who are either uninsured or 
underinsured? And would have to spend a substantial amount of 
their income on health care to make up for the difference in 
what the coverage used to be?
    Mr. Elmendorf. Congresswoman, you might see an increase in 
people running short. We were not able to analyze that and I 
think that is a very important question, and one of a number of 
significant caveats to that analysis. We, in another context as 
you know, we have studied participation decisions given a set 
of rules the government would put in place, we just have not 
been able to do that for this proposal. It raises the risk of 
people, more older Americans over the age of 65.
    Ms. Wasserman Schultz. And it changes the safety net that 
exists now under Medicare for seniors.
    Mr. Elmendorf. It is a very different world than the world 
that exists under the traditional program today. Yes 
Congresswoman.
    Ms. Wasserman Schultz. Thank you Mr. Chairman. I yield 
back.
    Chairman Ryan. Right on time. Last speaker, Mr. Ribble.
    Mr. Ribble. Doctor, it is good to see you again.
    Mr. Elmendorf. Good to see you Congressman.
    Mr. Ribble. Going back to my colleague's question on would 
we lose more people in health care because they would not have 
the money to buy the difference. If our plan actually directed 
funds more toward lower and middle income, as opposed to 
wealthy millionaires and billionaires, would not we in fact 
maybe improve the circumstance with those being insured?
    Mr. Elmendorf. If we were able to analyze the participation 
decision, you are absolutely right Congressman. We need to take 
into account the levels of subsidies for different groups of 
Americans and how that fits with their own resources, that is 
part of what that analysis would be.
    Mr. Ribble. And helping poor Americans and middle class 
Americans is a good idea.
    Mr. Elmendorf. Well it is not my place to make a value 
judgment, but certainly the additional subsidies for lower 
income people would increase their participation relative to a 
world without the subsidies.
    Mr. Ribble. I would like to come, circle back to this 
mystical, magical, $100 billion in cuts and the impact on the 
economy.
    Mr. Elmendorf. Yes.
    Mr. Ribble. Assuming that the federal government's not 
actually borrowing that money, where else does the federal 
government get that money from?
    Mr. Elmendorf. Well, so it comes from either borrowing or 
tax revenue Congressman.
    Mr. Ribble. Sure, let's assume it is coming from tax 
revenue, either from a higher taxes or we are just taxing it. 
So how does taking money from one sector of the U.S. economy, 
i.e. the consumer, and giving it to another sector of the 
economy, i.e. the government, change the number of dollars 
circulating in the economy?
    Mr. Elmendorf. Well, I think the policy scenario that we 
were talking about was a cut in spending that was not matched 
by an equal cut in taxes. So it is a cut in spending that will 
lead to a reduction and borrowing and that has various 
advantages as I have said, but it is also true by our analysis 
and I think the analysis of many economists with that reduction 
in spending is some American who is not getting a benefit 
payment or it is some American business that is not getting a 
contract and that reduction in the government's money pushed 
into the economic system reduces the spending of the households 
or businesses that would otherwise get it and with that 
reduction demand slows the economy relative to what would 
otherwise happen.
    Mr. Ribble. Unless of course we took the money from some 
consumer who might spend it on their own, based on their own 
free choice. Maybe they buy it from a cool roofing contractor 
like my company instead.
    Mr. Elmendorf. Well so again Congressman, it depends on the 
policy scenario when its envisioning, but I think the question, 
if I understood the question, it was a reduction in spending 
not matched by reduction in taxes; and that means partly, it 
depends what the nature of the spending cut is, but it means 
that somebody is not getting a check that they would otherwise 
be getting either as a benefit payment or in payment for a 
service provided to the government.
    Mr. Ribble. And I might not also be getting a tax that 
otherwise would have.
    Mr. Elmendorf. Well I think that the expectation of future 
taxes, again in this scenario taxes are not being exchanged 
right away, but people's expectations of future taxes would 
probably be different and that matters as well. And that is why 
I emphasize that credible reductions in future deficits through 
lower spending or high taxes would have confidence building 
effects on people. And why our modeling incorporated the 
effects of tax rates on people's behavior.
    Mr. Ribble. Because in your report you saw that long term 
budget, I am on page four, CBO's projection in the most of the 
2011 long term budget outlook, understates the severity the 
long term budget problem because they do not incorporate the 
negative effects that additional federal debt would have on the 
economy nor do they include the impact of higher tax rates on 
people's incentives to work and save. Which I think is 
significant. And then going on to the next page, you say 
growing debt would also increase the probability of a sudden 
fiscal crisis. And I wonder if you could talk to me because it 
is simple to look at what sudden is and what crisis is but what 
does sudden and crisis mean to you. How fast is sudden, and how 
big is the crises?
    Mr. Elmendorf. So first let me emphasize that in most of 
the projections in the report, hold the economic conditions 
fixed for a comparison across policies. We do in Chapter Two do 
an extended analysis of the effects of these policies on the 
economy. Sudden fiscal crises in other countries, have come on 
in a matter of months, or weeks, or days; and they have 
generally had very disruptive effects on those economies 
because governments are suddenly forced to make the sorts of 
decisions that they had put off for the years leading up to the 
crisis. And those threats of sudden adjustments particularly at 
a moment when the economy is all ready under siege if you will 
are particularly difficult and particularly painful and 
particularly detrimental to economic conditions.
    Mr. Ribble. And I will make just one final comment then I 
will yield. You say also during which investors' would lose 
confidence on the government's ability to manage its budget and 
the government would thereby lose its ability to vouch at 
affordable rates. I would dare say, based on the conversations 
I've had with American citizens in my district, that many 
investors and many Americans have a relative lack of confidence 
in this government to make the right choices.
    Mr. Elmendorf. That may be true Congressman but if one 
looks to financial markets, the investors who are actually 
putting their money on the table are not charging our 
government high rates today, they are actually charging our 
government low rates at this point and that illustrates the 
risk of fiscal crisis which is things are fine until they are 
not anymore. And as we talk to people in financial markets, 
including in our panel of economic advisor's meeting a few 
weeks ago, the financial market participant were themselves a 
little surprised that financial markets were not more concerned 
that investors were not more worried. Their view was that most 
investors do in fact think that policy actions will be taken to 
put the government's budget on a sustainable path. And they at 
this point, those investors have confidence in that.
    Mr. Ribble. And I hope we warrant that confidence and I'll 
yield back Mr. Chairman.
    Chairman Ryan. Thank you. Thank you for indulging us. I 
know you were hoping to get out of here by noon and, pretty 
close to that so thank you. Hearing is adjourned.
    [Whereupon, at 12:04 p.m., the Committee was adjourned.]

                                  
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