[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.action?chamber=house&committee=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.]