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


 
                   THE CONGRESSIONAL BUDGET OFFICE'S
                      BUDGET AND ECONOMIC OUTLOOK

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

            HEARING HELD IN WASHINGTON, DC, FEBRUARY 1, 2012

                               __________

                           Serial No. 112-17

                               __________

           Printed for the use of the Committee on the Budget


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                        COMMITTEE ON THE BUDGET

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

                           Professional Staff

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


                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, February 1, 2012.................     1

    Hon. Paul Ryan, Chairman, Committee on the Budget............     1
        Prepared statement of....................................     2
        Questions submitted for the record.......................    57
    Hon. Chris Van Hollen, ranking minority member, Committee on 
      the Budget.................................................     3
        Prepared statement of....................................     6
    Douglass W. Elmendorf, Director, Congressional Budget 0ffice.     8
        Prepared statement of....................................    12
        Response to questions submitted for the record...........    57


     THE CONGRESSIONAL BUDGET OFFICE'S BUDGET AND ECONOMIC OUTLOOK

                              ----------                              


                      WEDNESDAY, FEBRUARY 1, 2012

                          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, Campbell, 
McClintock, Stutzman, Lankford, Black, Ribble, Flores, 
Mulvaney, Huelskamp, Young, Amash, Rokita, Woodall, Van Hollen, 
Doggett, Blumenauer, McCollum, Yarmuth, Pascrell, Honda, Ryan 
of Ohio, Moore, Castor, Tonko, Bass.
    Chairman Ryan. The Committee will come to order. Welcome 
all to this very important hearing on the difficult fiscal 
challenges and economic challenges ahead of us. I want to 
welcome the CBO director back with us again with his beautiful 
daughters. It is good to have you here again, Doug, I wish we 
had better news.
    I want to thank Doug, first of all, Dr. Elmendorf and your 
entire CBO staff for the hard work on the release of the annual 
budget and economic outlook. We have a compressed timeline this 
year, given the tardiness of the president's budget, given our 
Easter coming earlier; so we know that CBO was going to be 
pushed extra hard this year, and I know you are working really 
hard around the clock over there. So first off I want to start 
by saying thank you for all you have done.
    There is no question about it; our fiscal and economic 
outlook is grim. According to CBO's outlook, 2012 will mark the 
fourth straight year of trillion dollar deficits. Trillions 
more dollars will be added to the debt in the years ahead, 
putting a chilling effect on job creation today and committing 
the next generation to a diminished future. CBO projects 
economic growth will remain sluggish and the unemployment rate 
to hover near 9 percent through 2014. This report confirms what 
too many Americans already painfully are aware of: President 
Obama's economic policies simply are not working.
    The president and his party's leaders successfully enacted 
much of their agenda, but they have failed to advance policies 
that get our economy growing. They have failed to advance 
solutions that get our fiscal house in order. In the Senate, 
they have failed to pass a budget in over 1,000 days. The 
problems have been growing for years, and there is no question 
that the blame is bipartisan in nature. For years politicians 
from both political parties have failed to be honest with the 
American people about the size and scope of this debt threat. 
The new House majority has worked to chart a new course.
    In this committee, we authored and advanced a principled 
reform agenda that provides a brighter fiscal and economic 
outlook. The House passed budget strengthens our critical 
health and retirement security programs, it repairs our fraying 
safety net, and it makes sensible reforms that spur job 
creation and economic growth, while putting government spending 
on a more sustainable path.
    In response to our budget, the president and his party 
leaders have still yet to put forward a credible plan to solve 
our country's problems. Look, we have a big difference of 
opinion on the big questions of the day, but I hope CBO's 
alarming report encourages us to focus on the urgent need for 
real solutions instead of resorting to the same old false 
attacks with no alternatives.
    Let's build upon the sensible spending cuts enacted last 
year in a bipartisan basis. Here at the House Budget Committee, 
we have worked in a bipartisan manner to advance budget reforms 
aimed at reducing the deficit and improving accountability. 
There are ongoing efforts to build a bipartisan coalition on 
the critical need to save and shrink in Medicare, for example. 
I invite the president and my friends across the aisle to join 
us in this conversation. The CBO's outlook could not be more 
ominous. I look forward to your testimony, Dr. Elmendorf, which 
I hope can inform and guide this committee as we work to 
advance solutions in the year head, and with that I will yield 
to the ranking member Mr. Van Hollen.
    [The prepared statement of Chairman Paul Ryan follows:]

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

    Welcome all to this important hearing on the difficult fiscal and 
economic challenges before us.
    I welcome Congressional Budget Office Director Doug Elmendorf to 
the Budget Committee. I thank you Doug and your entire CBO staff for 
their hard work on the release of the annual Budget and Economic 
Outlook.
    There is no question about it: The outlook is grim.
    According to CBO's outlook, 2012 will mark the fourth straight year 
of trillion-dollar deficits. Trillions more dollars will be added to 
the debt in the years ahead, putting a chilling effect on job creation 
today, and committing the next generation to a diminished future. CBO 
projects economic growth to remain sluggish and the unemployment rate 
to hover near 9 percent through 2014.
    This report confirms what too many Americans are already painfully 
aware of: President Obama's economic policies are not working.
    The President and his party's leaders successfully enacted much of 
their agenda, but they have failed to advance policies that get our 
economy growing and creating jobs. They have failed to advance 
solutions that get our fiscal house in order. In the Senate, they have 
failed to pass a budget in over 1,000 days.
    The problems have been growing for years, and there is no question 
that the blame is bipartisan in nature. For years, politicians from 
both political parties have failed to be honest with the American 
people about the size and scope of the debt threat.
    The new House Majority has worked to chart a new course with bold 
solutions. In this committee, we authored and advanced a principled 
reform agenda that provides a brighter fiscal and economic outlook. The 
House-passed budget strengthens our critical health and retirement 
security programs, repairs the safety net, reforms the broken tax code, 
and puts government spending on a sustainable path.
    In response to our budget, the President and his party's leaders 
have still not put forward a credible budget plan to tackle our 
problems.
    We have big differences of opinion on the big questions of the day, 
but it is not enough to simply criticize. It is not simply enough to 
oppose--we need to propose real solutions instead of resorting to the 
same old false attacks.
    Here at the Budget Committee, we've worked in a bipartisan manner 
to advance budget reforms aimed at reducing the deficit and improving 
accountability. There are ongoing efforts to build a bipartisan 
coalition on the critical need to save and strengthen Medicare. I 
invite the President and my friends across the aisle to join this 
conversation.
    The CBO's Outlook could not be more ominous. I look forward to your 
testimony, Director Elmendorf, which I hope can help inform and guide 
this committee as we work to advance solutions in the year ahead.
    With that, I yield to Ranking Member, Mr. Van Hollen.

    Mr. Van Hollen. Thank you, Mr. Chairman, I want to join the 
chairman in welcoming you, Dr. Elmendorf, and your two 
daughters. It is great to have members of the family here 
today, and I want to reference the report that was issued by 
CBO yesterday that the chairman mentioned because while it 
shows that the economy remains very fragile, it also shows that 
it is slowly recovering; it demonstrates that we still have 
much work to do to create jobs, tackle the deficit and return 
the budget to a long-term fiscally sustainable path.
    For a moment let's focus on the positive signs of the 
budding economic recovery, and remember where we were just 
three years ago. If you could please put up the first slide.



    What this slide shows is the day that President Bush left 
office, the day that President Obama was sworn in, the economy 
was collapsing at an even faster rate than originally thought. 
The gross domestic product was plummeting at a rate of 8.9 
percent, in other words, negative 8.9 percent GDP, and we were 
shedding more than 840,000 jobs a month; so in the month the 
president was sworn in, 840,000 jobs were lost.
    As shown in previous CBO reports and findings, the passage 
of the Recovery Act, coupled with actions to save the auto 
industry and efforts by the Federal Reserve, helped end the 
free fall, and began the climb upward toward economic growth. 
Now we have all heard the expression that we are entitled to 
our own opinions, but not our own facts. The fact is that the 
CBO said that the Recovery Act helped save, or create, up to 3 
million jobs in the year 2010, that it lowered the unemployment 
rate by up 1.8 percentage points in calendar year 2010, and 
lowered unemployment by up to 1.4 percentage points in 2011, 
compared to what it would have done if the Congress had not 
taken action.
    The private sector has now added jobs in every month since 
March 2010, adding 3.2 million jobs in total. More jobs were 
created last year than in any year since 2005. What this chart 
shows, very plainly, is that we were on a huge downhill 
cascade. After the president was sworn in we began to reduce 
the downward momentum, turn the corner, and we have been 
steadily heading up, first reducing the rate of job loss, which 
you obviously have to do when you are losing GDP at a 8.9 
percent rate, and headed into positive job territory. So the 
facts as reported by the CBO are clear that the Recovery Act 
did serve its purpose. It is kind of like when you are walking 
up an escalator that is going down very quickly. If you take no 
action, you will go down very fast. Even if you take action, it 
will appear at first that you are running in place, and then 
slowly you will be moving up, and that is what we are doing.
    The CBO report, of course, also shows that the economy 
remains fragile and that we still face serious budget 
obstacles. While the economy continues to grow, at the current 
rate it will take too long for unemployment to return to the 
pre-crisis levels, which is why our first priority has to be 
making sure we do what we can to help small businesses and 
businesses help put people back to work.
    We should take immediate action in this House on the plan 
the president submitted to the Congress last September. The 
president's jobs plan, including his significant infrastructure 
investments to help rebuild our infrastructure around the 
country. We should finish the job with respect to extending the 
payroll tax cut for 160 million Americans, and making sure that 
unemployment insurance is there for people who have lost work 
through no fault of their own.
    Mr. Chairman, I am going to apologize to both you and Dr. 
Elmendorf because after the statement I am going to have to go 
to the Conference Committee on that issue, and I hope that 
Conference Committee will move forward quickly and without 
delay to get that job done.
    Finally, the Congressional Budget Office's report 
underscores the need to address the looming deficit in a 
balanced, reasoned way. The Budget Control Act that this body 
passed last year and the president signed saves about $1 
trillion from cuts in the discretionary budget over the next 
decade. It will also result in an additional $1 trillion in 
deficit reductions starting in January 2013. There are better 
ways to do that and there are worse ways to do that; I hope 
this Congress will come together and do it in a way that makes 
sense.
    I think as we listen to the testimony from Dr. Elmendorf, 
it will be clear that the bipartisan commission s that have 
looked at this challenge were right: Simpson-Bowles, Rivlin-
Domenici, that you really need to tackle this in a balanced 
way. I am just going to quickly put up two charts and then I 
will conclude my opening statement.



    What this chart shows, and I believe, Dr. Elmendorf, it is 
in your testimony, is that under current law the deficit would 
be reduced to that bottom heavily blue shaded line so that over 
the 10 year period the deficit would decline substantially. If 
we packed our bags and went away and did not come back until 
next year, it would reduce the deficit significantly. That very 
lightly shaded blue right over the bottom bar is the revenue 
that is lost if we keep in place all the current tax policies, 
and so clearly that is a factor. Now, I do not think anyone is 
suggesting that we want to put in policies that would capture 
all that revenue; I am not suggesting that, but this is an 
important chart to understand what current law would do in the 
impact of revenue.
    If we go to the next chart, it quantifies those numbers and 
makes it clear that if you extend all the 2001, 2003 tax cuts 
in index AMT, that adds 4.5 trillion to the deficit.



    The other tax extenders, if you continue those, it adds 
$839 billion. If you add the debt service on that you get to 
over $6.3 trillion in revenue; and if you look at the CBO 
baseline deficits, cumulative over 10 years, they are just over 
3 trillion. So the cost of continuing all those policies on the 
revenue side leads to a doubling of the deficit over the next 
10 years.
    I want to make it clear: I am not proposing that we change 
all the current policies, but I think this does give us a very 
clear indication of the order of magnitude. I will give a very 
clear example. One trillion of that is accounted for by the tax 
cuts for the folks at the very top, and if you returned those 
tax rates to where they were during the Clinton administration, 
a period of great economic growth, that would be $1 trillion of 
that. I think we need to tackle this through tax reform, 
closing loopholes, sensible tax reform, but I do think this 
underscores what the bipartisan groups have said, that you need 
to take a balanced approach; yes we need to make some cuts, we 
need to make some reforms, but we also need to deal with the 
other side of the equation as well. Thank you, Mr. Chairman, 
and I apologize for having to leave.
    [The prepared statement of Chris Van Hollen follows:]

      Prepared Statement of Hon. Chris Van Hollen, Ranking Member,
                         House Budget Committee

    Thank you, Mr. Chairman. I want to join the Chairman in welcoming 
you, Dr. Elmendorf, and your two daughters; it's great to have members 
of the family here today. And I want to reference the report that was 
issued by CBO yesterday, because while it shows that the economy 
remains very fragile, it also shows that it is slowly recovering. It 
demonstrates that we still have much work to do to create jobs, tackle 
the deficit, and return the budget to a long-term fiscally sustainable 
path. But for a moment, let's focus on the positive signs of the 
budding economic recovery and remember where we were just three years 
ago.
    The day that President Bush left office, the day that President 
Obama was sworn in, the economy was collapsing at an even faster rate 
than originally thought. The gross domestic product was plummeting at a 
rate of 8.9 percent, in other words negative 8.9 percent GDP, and we 
were shedding more than 840,000 jobs a month. So in the month the 
President was sworn in, 840,000 jobs were lost. As shown in previous 
CBO reports and findings, the passage of the Recovery Act--coupled with 
actions to save the auto industry and efforts by the Federal Reserve--
helped end the free fall and began the climb upward toward economic 
growth.
    Now, we've all heard the expression that we're entitled to our own 
opinions, but not to our own facts. The fact is that the CBO said that 
the Recovery Act helped save or create up to 3 million jobs in the year 
2010. It also lowered the unemployment rate by up to 1.8 percentage 
points in calendar year 2010, and lowered unemployment by up to 1.4 
percentage points in 2011, compared to what it would have done if the 
Congress had not taken action. The private sector has now added jobs in 
every month since March 2010, adding 3.2 million jobs in total. More 
jobs were created last year than in any year since 2005. It is clear 
that we were on a huge downhill cascade and that after the President 
was sworn in, and we began to reduce the downward momentum and turn the 
corner. We have been steadily heading up, reducing first the rate of 
job loss, which you obviously have to do when you're losing GDP at an 
8.9 percent rate, and now heading into positive job territory.
    So, the facts as reported by the CBO are clear that the Recovery 
Act did serve its purpose. It's kind of like when you're walking up an 
escalator that's going down very quickly. If you take no action, you 
will go down very fast. Even if you take action, it will appear at 
first that you're running in place and then slowly you'll be moving up. 
That's what we're doing.
    The CBO report, of course, also shows that the economy remains 
fragile and that we still face serious budget obstacles. While the 
economy continues to grow at the current rate, it will take too long 
for unemployment to return to the pre-crisis levels. That is why our 
first priority has to be making sure we do what we can to help small 
business and businesses help put people back to work. We should take 
immediate action in this House on the jobs plan the President submitted 
to the Congress last September, including his significant 
infrastructure investments to help rebuild our infrastructure around 
the country.
    We should also finish the job with respect to extending the payroll 
tax cut for 160 million Americans and making sure that unemployment 
insurance is there for people who have lost work through no fault of 
their own. And, Mr. Chairman, I'm going to apologize to both you and 
Dr. Elmendorf, because after this statement I'm going to have to go to 
the conference committee on that issue and I hope that conference 
committee will move forward quickly and without delay to get that job 
done.
    Finally, the Congressional Budget Office's report underscores the 
need to address the looming deficit in a balanced, reasoned way. The 
Budget Control Act that this body passed last year and the President 
signed saves about $1 trillion from cuts in the discretionary budget 
over the next decade. It will also result in an additional $1 trillion 
in deficit reductions starting in January 2013. There are better ways 
to make those additional cuts; I hope this Congress will come together 
and do it in a way that makes sense. But I think as we listen to the 
testimony from Dr. Elmendorf, it will be clear that the bipartisan 
commissions that have looked at this challenge--both Simpson-Bowles and 
Rivlin-Domenici--were right that you really need to tackle this in a 
balanced way.
    Under current law, if we packed our bags--and didn't come back 
until next year, it would reduce the deficit significantly. And we 
would lose significant revenue if we keep in place all the current tax 
policies, and so clearly that is a factor. Now, I don't think anyone is 
suggesting that we want to put in policies that would capture all that 
revenue; I'm not suggesting that. But it is important to understand how 
big an impact those projected revenues have on CBO's deficit estimates.
    If you extend all the 2001, 2003 tax cuts and index AMT, that adds 
$4.5 trillion to the deficit. And if you continue other tax extenders, 
it adds $839 billion. If you add the debt service on that, you get to 
over $6.3 trillion added to the deficit. Now, if you look at the CBO 
baseline deficits, cumulative over ten years, they're just over $3 
trillion. So the cost of continuing all those policies on the revenue 
side leads to a doubling of the deficit over the next ten years. So I 
want to make it clear, I am not proposing that we change all the 
current policies, but I think this does give us a very clear indication 
of the order of magnitude. I'll give a very clear example. If you 
returned the tax rates for the folks at the very top to where they were 
during the Clinton administration, a period of great economic growth, 
we could reduce our deficit by about $1 trillion.
    This report underscores what the bipartisan groups have said--you 
need to take a balanced approach. Yes, we need to make some cuts, we 
need to make some reforms, but we also need to deal with the other side 
of the equation as well. I think we need to tackle this by also closing 
loopholes and enacting sensible tax reform.
    Thank you, Mr. Chairman, and I apologize for having to leave.

    Chairman Ryan. Sure, my pleasure. Dr. Elmendorf, the time 
is yours.

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

    Mr. Elmendorf. Thank you, Mr. Chairman and Congressman Van 
Hollen. Thank you for your kind words about CBO. I am 
privileged to be leading a group of extraordinarily talented 
and dedicated public servants, and we all appreciate it very 
much this support that you, Mr. Chairman, and you, Congressman 
Van Hollen, have shown for our work. We will continue to do our 
very best for this committee and for the Congress as a whole.
    I will be referring, as I talk, to some charts that I am 
told are in your notebooks. It is about half a dozen slides. 
They are mostly out of the outlook, but they are collected in 
this little handout to makes it easier for you to follow what I 
say.
    Let me begin by noting that our baseline economic and 
budgetary projections are conditioned on current law, not 
because we expect that there will be no changes in law, but 
because this approach provides a benchmark against which 
potential changes can be measured. What we are presenting is a 
benchmark, not a forecast. That distinction has a large impact 
on the budget and economic projections.
    What is our assessment of the economic outlook? As you 
know, the pace of the recovery has been slow since the 
recession ended two and a half years ago, and we project that 
it will continue to be slow for the next two years, reflecting 
both the lingering effects of the crisis in the financial 
markets and the recession, and the fiscal restraint that will 
arise under current law. Specifically, current law fiscal 
policy will reduce the growth of output slightly in 2012 and 
significantly in 2013 through a combination of large tax 
increases and spending cuts. Our projections incorporate the 
upcoming expiration of the payroll tax cut and emergency 
unemployment benefits, the expiration of the tax cuts enacted 
in 2001, 2003, and 2009, as well as other expiring tax 
provisions.
    The constraints on spending imposed by last year's Budget 
Control Act and the winding down of the budgetary effects of 
the 2009 Recovery Act. Taken together those policies will 
generate a sharp fiscal contraction. In addition, the excess 
number of houses, loss of wealth, run-up in debt, and other 
legacies of the economic downturn are continuing to weigh on 
household and business spending.
    If you look at the first slide in the packet which looks 
roughly like this, we project that real GDP will grow by only 
two percent this year and only about one percent next year. We 
expect economic activity to quicken after 2013, but real GDP to 
remain below the economy's potential through 2017.
    According to our projections, the economy is only about 
halfway through the cumulative shortfall in output that will 
result from the recession and its aftermath. This picture is 
not the one to which I am referring at the moment. The costs 
associated with that persistent output gap are immense and they 
fall disproportionately on people who lose their jobs, who are 
displaced from their homes, or who own businesses that fail. In 
particular, the labor market still has a great deal of slack, 
mainly as a consequence of continued weakness in demand for 
goods and services.
    In CBO's forecast, unemployment rate remains above eight 
percent, both this year and next. As economic growth picks up 
after 2013, the unemployment rate will gradually decline, but 
in our projection it remains above 7 percent until 2015 before 
dropping to 5 and one-quarter percent by the end of the coming 
decade. While the economy continues to be weak during the next 
few years, inflation and interest rates will remain low. Let me 
turn now to our budget projections.
    Under current law we expect that this year's deficit will 
be about $1.1 trillion. At 7 percent of GDP, that is nearly 2 
percentage points less than the deficit recorded last year, but 
still larger than any deficit between 1947 and 2008. Over the 
next few years projected deficits in CBO's baseline narrow 
sharply, averaging one and a half percent of GDP and totaling 
about $3 trillion between 2013 and 2022.
    With deficits small relative to the size of the economy, 
debt held by the public drops a little as a share of GDP, but 
remains quite high. Much of the projected decline in the 
deficit occurs because under current law revenues will rise 
considerably. In particular, between 2012 and 2014, revenues in 
our baseline shoot up by more than 30 percent because of the 
recent or scheduled expiration of various tax provisions, and 
new taxes and other collections that are scheduled to go into 
effect. Federal spending on the baseline declines modestly 
relative to GDP in the next few years as the economy expands 
and the statutory caps constrain discretionary appropriations.
    Later in the decade, spending turns up again relative to 
GDP because of increasing expenses generated by the ageing of 
the population, rising costs for health care, and because the 
accumulation of debt and rising interest rates will cause a 
surge in the government's interest costs.
    Of course, these baseline projections are heavily 
influenced by the changes in tax and spending policies that are 
embodied in current law; changes, that in some cases, represent 
a significant departure from recent policies.
    To illustrate the budgetary consequences of maintaining 
some tax and spending policies that have recently been in 
effect, CBO developed projections under an alternative fiscal 
scenario. Like the baseline, this is not a prediction by us 
about policy or a recommendation about policy, it is simply 
meant to show to you the consequences of some fiscal actions 
that are regularly discussed in the Congress. This alternative 
scenario incorporates the following assumptions.
    First, that all expiring tax provisions other than the 
payroll tax reduction are extended.
    Second, that the alternative minimum tax or AMT is indexed 
for inflation after 2011.
    Third, that Medicare's payment rates for physician's 
services are held constant at their current level, rather than 
dropping by 27 percent in March and more thereafter as 
scheduled under current law; and fourth, that the automatic 
spending reductions required by the Budget Control Act, in the 
absence of legislation reported by the join select committee on 
deficit reduction, do not take effect; although, in this 
scenario the original caps on discretionary appropriations 
would remain in place.
    Under that alternative fiscal scenario, deficits over the 
2013, 2022 period would be far higher than in the baseline, 
averaging five and a half percent of GDP rather than one and a 
half percent, and totaling $11 trillion, rather than roughly $3 
trillion.
    Debt held by the public would climb on an unsustainable 
path, reaching 94 percent of GDP in 2022, the highest figure 
since just after World War II. Under that scenario, the economy 
would be noticeably stronger during the next few years than 
under current law, but noticeably weaker later in the decade. 
The report presents estimates of those effects using ranges of 
numbers to reflect the uncertainty involved. The midpoints of 
the ranges for the end of 2013 show GNP, that is two percent 
higher, and an unemployment rate that is 1 percentage point 
lower than would be the case under current law. However, the 
midpoint of the range for 2022 shows GNP that is almost two and 
a half percent lower than under current law because of the 
crowding out of investment that would be caused by the 
escalating debt.
    It bears emphasis that projecting economic outcomes for any 
path of fiscal policy, and the budget outcomes that would 
result from them, is very difficult. Many things could turn out 
to cause the economy and the budget to be worse or better than 
we project; however, there is no plausible economic outcome 
under which the policies of the alternative scenario I have 
outlined would lead to a sustainable budget outcome.
    The fundamental fiscal challenge, during this decade and 
beyond, remains the aging of the population and rising costs 
for health care. The number of people aged 65 or older will 
increase by one-third in the coming decade, substantially 
raising the cost of Social Security, Medicare, and Medicaid. In 
addition, the Affordable Care Act will significantly increase 
the number of non-elderly people receiving assistance through 
federal health care programs.
    Furthermore, CBO predicts that the cost per enrollee for 
Social Security and the major health care programs will 
continue to rise. Because of these forces the stated budget 
policies that were in effect in the past cannot be maintained 
in the future.
    Here is one way to think about the problem using CBO's 
projections under the alternative fiscal scenario, which as I 
have said, represents a combination of many recent and current 
policies. Under this scenario, outlays for Social Security and 
the health care programs would be much higher by the end of 
this coming decade than in the past, more than 5 percent of GDP 
higher than in that 40 year average. However, outlays for all 
other federal programs are projected to be much lower than in 
the past, averaging in the past 40 years, they have averaged 
about 11 percent of GDP. In our projections for this scenario 
they would be about 8 percent of GDP in 2022. That would be 
lower than any year in the past 40 years.
    Despite the constraint on those programs, the rise in cost 
for Social Security and the federal health care programs mean 
that the budget deficit under this scenario is projected to be 
6.1 percent of GDP. To keep debt from rising, relative to GDP, 
the deficit would need to be about $900 billion smaller in 
2022; and that year alone would be the case under this 
scenario.
    Therefore, to put the federal budget on sustainable path, 
policy makers will need to allow federal revenues to increase 
to a much higher percentage of GDP than we have seen in the 
past 40 years, or make very large changes to Social Security 
and federal health care programs, or pursue some combination of 
those two approaches.
    Let me close by highlighting the consequential choices that 
policy makers face this year. One on hand, if policy makers 
leave current laws unchanged, the federal debt will probably 
recede slowly relative to the size of the economy. That will 
occur because of a large increase in revenues and a sharp 
restraint in federal spending apart from the largest programs I 
have mentioned. However, both of those budgetary changes from 
historical patterns will have significant economic and social 
effects. Moreover, the sharp fiscal restraint will markedly 
slow the economic recovery.
    On the other hand, changing current laws to allow current 
policies to continue would boost the economy and allow people 
to pay less in taxes and benefit more from government programs 
in the next few years, but would put the nation on a quickly 
unsustainable fiscal course. If policy makers wanted to achieve 
both a short-term economic boost and medium-term and long-term 
fiscal sustainability, they would need to enact policies that 
lead deficits significantly wider than in our current law 
baseline for the next few years, but significantly narrower 
than would occur under this continuation of current policies 
that we have described in the alternative fiscal scenario.
    In conclusion, how much and how quickly the budget deficit 
declines over the coming decade will depend, in part, on how 
well the economy does. Probably more critical though, will be 
the choices you make as you face the substantial changes to tax 
and spending policies that are slated to take effect within 
this year. Thank you. I am happy to take your questions.
    [The prepared statement of Douglas Elmendorf follows:]

    
    
    
    
    
    
    
    
    
    
    
    
    Chairman Ryan. So in other words, it is pretty bleak. I 
just sum it up. There are so many areas I could go. Let's talk 
about Medicare and your analytical tools in measuring what is 
going to become the largest federal program. We have two 
scenarios here which do a service of showing where we are 
headed. Extended baseline and alternative fiscal scenario: 
under the alternative fiscal scenario, which is your attempt to 
try and get closer to reality, that is my description, I do not 
know if that is yours, but from your June 2011 long-term 
outlook, you show Medicare doubling as a percentage of GDP over 
the next 20 years, and then rising to 14 percent of GDP in 
2085. By 2037, debt exceeds 200 percent of GDP. So what we 
find, and I think everybody agrees with this, I do not need to 
belabor this, is that Medicare becomes unsustainable under the 
alternative fiscal scenario because it drives debt to just 
untenable levels. So that is a future we know is not going to 
exist because it simply cannot sustain itself. You would agree 
with that, right?
    Mr. Elmendorf. So I agree with the alternative fiscal 
scenario cannot persist indefinitely, and as you say, you were 
referring to our projections over the long run from last June.
    Chairman Ryan. Right.
    Mr. Elmendorf. I think it is the combination of policies in 
that scenario that cannot be sustained together. One could 
sustain the Medicare path while making other changes, or the 
Social Security path while making other changes, or the revenue 
path while making other changes, and the set of changes that 
will be made will depend on you and your colleagues. That 
combination of policies cannot be sustained over the next 
quarter century.
    Chairman Ryan. So when we look at the extended baseline, my 
own experience from being on the Medicare Oversight Committee 
for 12 years now, is that whenever we seek to control costs by 
cutting reimbursement rates to providers, what we learn is that 
the cuts are either not sustained, meaning they are given back, 
or they cause higher utilization rates that actually erode the 
anticipated savings. The president's health care law cut 
Medicare payments to providers by $500 billion over 10 years to 
pay for the new entitlement. It also created the IPAB and under 
this proposal that the president has more recently put out, the 
IPAB will be tasked with holding Medicare's growth to GDP plus 
.5 percent by cutting reimbursement to providers.
    Now, last year you testified that CBO has, I think as you 
said it, a gap in the toolkit when it comes to analyzing the 
behavior of physicians and beneficiaries' ability to access 
care. Do you still more or less have that gap in the toolkit to 
try and analyze behavioral changes and access on both the 
provider and the beneficiary side?
    Mr. Elmendorf. I am afraid we do, Mr. Chairman. It is a gap 
that we are trying to fill. We have projects underway, and we 
have been in conversation with members of our panel, health 
advisers, about what evidence we can draw on in trying to give 
the Congress a better sense of how changes in payments to 
providers would affect the beneficiaries access to care and 
quality of care, but we are at the beginning of that road, 
certainly not the end.
    Chairman Ryan. So I obviously want to encourage you to keep 
doing that because we are getting analysis from the actuaries. 
Rick Foster, the chief actuary of CMS, was here just a few 
weeks after you were the last time, where he basically told us 
that he estimates that 40 percent of providers will become 
unprofitable by 2050 and therefore go out of business, or just 
stop taking Medicare according to the cuts in the current 
health care law. So they are able to make those kinds of 
projections. He also has told us that Medicare currently pays 
physicians 80 cents on the dollar, but is on course to pay 
physicians less than 30 cents on the dollar in decades ahead.
    He is basically telling us that there are going to be 
massive access problems and providers are just going to stop 
taking Medicare beneficiaries. So we are getting this kind of 
analysis from CMS, I think it would be helpful to get it from 
CBO.
    Let me ask you another question about your toolkit. There 
have been many health care economists, both from the left and 
the right, that have argued that choice and competition 
actually would lower cost and improve quality, and we have seen 
some anecdotal evidence of that even in Medicare areas. A 
premium support model, which we have talked about here quite a 
bit, you have bipartisan efforts that have been made: Alice 
Rivlin, former CBO director and OMB director, and I had 
recently worked with Senator Ron Wyden, which attempt to employ 
a competitive bidding process to measure the growth rate of 
premium support payments. Do you still lack the modeling 
capabilities to measure the lower cost under such a competitive 
premium support kind of a system?
    Mr. Elmendorf. We are working very hard to try to fill that 
gap as well Mr. Chairman. In the analysis that we did, for 
example, your proposal last spring, we were able to incorporate 
the effective competition and other factors on the cost of 
insurance through Medicare or the private sector today, but we 
did not have the tools to try to analyze how the flexibility of 
the providers that insurers would have in your proposal, or 
proposals like it, or how the price pressures that people would 
face under your proposal, or proposals like it, would affect 
the dynamic path of spending over time, and that is what we are 
working to do. Again, we are working with our panel of health 
advisers, getting their insights as well as our own work, but 
we are only partway along that road as well.
    Chairman Ryan. So here is the point I am trying to make. 
The work you do on a long-term budget outlook with respect to 
Medicare and health care spending because this, as you 
mentioned, health care is the big driver of our debt issue in 
the future. These gaps in the toolkit need to be filled.
    I know you face serious challenges, but I want to basically 
get your response to some of the caveats I have so we can 
better understand how Medicare analysis works today to get a 
better understanding of what we are really looking when we get 
these analyses and where they are lacking. When you compare the 
impact of proposed Medicare reforms relative to the alternative 
fiscal scenario, we acknowledge that that scenario is 
unsustainable. The comparison, therefore, is really not fair or 
accurate since it is based on a scenario in which the federal 
government would not have the means to fully fund Medicare 
benefits to beneficiaries, so we do not want to compare 
ourselves to some mythical future that we know is unsustainable 
and will not exist.
    When you compare Medicare reform options to the extended 
baseline, we ignore the notion that providers, if they are 
going to be paid 30 cents on the dollars, are not going to be 
continuing to provide benefits. So that scenario is pretty 
implausible, and we are not capturing a dynamic and a 
phenomenon that has been advocated by experts on both sides of 
the aisle that choice and competition actually work to reduce 
costs, or to tame inflation. So I think it is important to 
acknowledge that we are not fully capturing a proper analysis 
of what reforms actually achieve relative to these two 
scenarios which we know are pretty much untenable, or at least 
we cannot even measure the full effects of these two 
alternative scenarios. Is that pretty accurate?
    Mr. Elmendorf. I certainly think we have not provided you 
with all the information that we would like to provide to help 
you and your colleagues understand better the trade-offs that 
you face. As you know Mr. Chairman, let's make sure others 
understand, over the course of this past year we have worked 
desperately hard for a succession of deficit reductions that 
have been pursued on the Hill.
    Chairman Ryan. I know.
    Mr. Elmendorf. Much of that work involved proposed changes 
to health care programs, even though those were not ultimately 
voted upon. So I have a team of people who have been doing an 
awful lot of work on a number of proposals, but it has, no 
doubt, slowed our work on the ideas that you are discussing. 
Now, what effects we will find when we finish this work are 
unclear, I think. There was an exchange recently in the last 
couple of weeks in the New England Journal of Medicine about 
premium support plans, that leading health economists wrote for 
and against. Both the for and against people were members, our 
members, on our panel of health advisers were among people that 
we have consulted. I do not know, I do not want to prejudge 
what our findings will be, but I agree, and we all agree at 
CBO, that we need to push very hard to bring more to bear to 
give you a fuller sense of the true choices that you face.
    Chairman Ryan. That is basically the point I am trying to 
make. Look, we understand that there was a lot of interplay in 
Congress on all super committees and all of these efforts which 
tied up CBO analysts to do that work instead of trying to 
improve on the analysis of these kinds of health care reforms, 
but the problem is that where we are is that these programs, 
which are the biggest drivers of our debt in the future, we are 
measuring in a reform effort against two futures that we know, 
based on the latest CMS analysis and outside analysis, are 
untenable. We know, from other analysis, that if we pay 
providers pennies on the dollar, they are just not going to 
keep providing. What good is having a program if no provider 
will actually provide the benefit?
    And then we also know that if we stick with the status quo, 
meaning current policy baseline, that our debt gets so out of 
control that basically we go into a tailspin. So there has got 
to be another way, and we need to make sure that we have a 
better analytical toolkit to analyze how best to chart that 
better way, and we just have our work cut out for us still. 
With that, let me turn it to Mr. Doggett.
    Mr. Doggett. Thank you very much, Mr. Chairman, and thank 
you Dr. Elmendorf for your testimony, service, and the various 
studies that you bring to our work.
    Mr. Elmendorf. Thank you.
    Mr. Doggett. I think all America would benefit if we were 
able to return to the prosperity of the Clinton years, contain 
the short-term deficit as we did when President Clinton was in 
office, and begin to work together to address these long-term 
challenges of soaring health care cost. I think we have to do 
it in a way that is different from what the chairman recommends 
because I believe whatever label you put on it, what is 
basically a Medicare voucher system simply shifts those health 
care costs onto vulnerable seniors and individuals with 
disabilities, and does not really resolve the problem, it just 
shifts the problem from the taxpayer to the seniors.
    Looking at the issues of how we advance our immediate 
economic growth, your office put out a study back in November 
that looked at the impact of the Economic Recovery Act and 
while I believe you had a wide range of the effects of that 
act, all of it was positive, was it not, encouraging economic 
growth and encouraging job growth.
    Mr. Elmendorf. Yes, we think the effects over the past few 
years have been certainly positive and we have a range 
reflecting the uncertainty in the economics' literature.
    Mr. Doggett. And that range reflecting the uncertainties of 
even predicting the past, if you will, that range suggested 
that growth may have been advanced through the Economic 
Recovery Act by over 4 percent in 2010, and again by over 2 
percent in 2011, and that the Economic Recovery Act may well 
have been largely responsible for creating millions of jobs in 
this country, is that right?
    Mr. Elmendorf. Yes, you have identified the high ends of 
those ranges, Congressman, and you have identified those 
correctly.
    Mr. Doggett. And looking at the effects of the Economic 
Recovery Act and the composition of it, and then trying to 
understand what that means for policy choices now, again those 
policies that would place dollars into the pockets of the 
families that need them the most right now, for example, 
extending unemployment compensation; that is the type of policy 
that will encourage economic growth, is that correct?
    Mr. Elmendorf. Yes, that is right, Congressman.
    Mr. Doggett. The same thing would be true of a good 
infrastructure investment in terms of roads, and bridges, and 
rail across the country. Those also would be likely to 
encourage economic growth.
    Mr. Elmendorf. Yes, Congressman, they would.
    Mr. Doggett. And on the other extreme, other than building 
things that taxpayers can see the advantages of in encouraging 
economic growth, how does it compare to eliminate the 
inheritance tax, the estate tax in terms of encouraging 
economic growth? Does that have much real benefit in 
encouraging job growth?
    Mr. Elmendorf. Congressman, I do not think we produced 
estimates of changes in the estate tax directly. We prepared a 
long testimony for the Senate Budget Committee in the fall that 
had a chart of this sort that looked at the effects of 
different sorts of tax and spending policies in boosting 
economic activity this year and next. On the higher end of the 
ranges, the policies that seem to have a higher bang for the 
buck, if you will, are increasing aid to the unemployed and 
payroll tax reductions for employees or employers. On the lower 
end of the range are things like broad based cuts in income 
taxes, but also on the low end of the range for the next few 
years, actually, is infrastructure spending. That is not 
because it does not matter when it happens, but because it 
tends to happen rather slowly after the Congress acts because 
of the planning and contracting process.
    Mr. Doggett. And specifically, since you mentioned the 
Senate and the effect of changes in the tax rate, I believe 
that you did a study that was presented in the Senate in 2010 
concerning what the effect would be of extending, over the next 
decade, the Bush tax cuts, and what did you find would be the 
effect on economic growth of extending the Bush tax cuts?
    Mr. Elmendorf. So our findings in that testimony, 
consistent with what I have said today, is that extending those 
expiring tax cuts for a few years provides a boost to the 
economy during those few years, but will, by the end of the 
decade and beyond, be a drag on GDP because the effects of the 
accumulating debt and crowding out private investment outweigh 
the beneficial effects of lower tax rates; and that is what we 
showed in this testimony you are referring to from 2010 in the 
Senate, and again, consistent with the analysis we presented in 
this outlook yesterday.
    Mr. Doggett. Exactly, though it sounds really great in 
political speeches, the actual effect of extending the Bush tax 
cuts over the next decade is to reduce economic growth by 
between 1 and 2 percent. Is that not correct over the decade?
    Mr. Elmendorf. Yes, again, there is a range of estimates 
depending on precisely what one does in the economic 
assessments.
    Mr. Doggett. That range does not include any plus economic 
growth, all of it is negative in extending those tax cuts.
    Mr. Elmendorf. Right, so in the outlook we released 
yesterday, Congressman, I think what you are referring to when 
we looked at the effects of the alternative fiscal scenario, 
which is the tax cuts plus some other things, but the effect of 
that set of policies is to boost the economy we think, over the 
next few years, but by 2022 to reduce GNP by between 1 percent 
and 3.7 percent relative to what would occur under the current 
law baseline.
    Mr. Doggett. And there were a number of things in that 
alternate baseline that you looked at, other than the negative 
effects of extending all these tax cuts over the next decade, 
during the short-term, if I understand your testimony to 
Chairman Ryan, it is that if we reduce the short-term deficit 
too quickly with sudden reductions in expenditures for vital 
public services, it will actually retard economic growth in the 
short-term.
    Mr. Elmendorf. Yes, I think that is right Congressman. 
Reductions in the deficit too quickly, through either tax 
increases or spending reductions, would retard the economic 
recovery and that is consistent with, I think, the consensus of 
thinking in the economics profession, consistent with the 
experience that we are seeing in Europe where countries that 
are in worse budget shape that we are and are forced by their 
inability to borrow to make very drastic changes in policy very 
quickly are suffering economic consequences from that. When we 
wrote an issue brief a year or so ago about the risk of a 
fiscal crisis in the United States, one of the risks that we 
highlighted was that budget situations tend to deteriorate when 
the economies are already in trouble, and that makes it a 
particularly bad time to then have to implement these changes 
very quickly, that emphasizes the importance of Congress acting 
before we had a crisis of that sort, but given the low level of 
current Treasury interest rates, our continued ability to 
borrow, for now at least, I think many experts believe that 
although that the changes should not be implemented right away; 
and I want to emphasize that is not an argument against the 
Congress deciding upon what changes in policy to make, given 
the scale of the changes that will be needed relative to 
current policies, but more warning that people have and 
business have, that state and local governments have, about 
what policies will be undertaken, the better it will be.
    So there is a real cost to waiting to decide upon the 
courses of action. Once one is decided, then there is a more 
difficult tradeoff about the speed. Waiting too long, of 
course, has the cost of ending up in a fiscal crisis. Moving 
too quickly has the cost of slowing the economic recovery.
    Mr. Doggett. So pursuing an aggressive austerity program 
similar to that that the conservative government in the United 
Kingdom has pursued, and some of the other European countries, 
is likely to present some of the same type of economic problems 
for us that it is presenting today to the Europeans.
    Mr. Elmendorf. I think that is right Congressman. I want to 
be careful not to second-guess the decisions those governments 
have made. They face a particular set of circumstances and I 
think in some cases had no choice because of an inability to 
borrow money or a fear that they would be unable to borrow 
money in the very short-term. So I am not suggesting that they 
have done the wrong thing, necessarily, we have not studied 
their choices carefully enough to speak to that; I am just 
using that as an example of that sort of very sharp fiscal 
contraction does weigh on economic activity and jobs in the 
short run.
    Mr. Doggett. And as far as encouraging more jobs, though it 
is not my preferred policy choice, extending the payroll tax 
cut is one very positive way of encouraging economic growth.
    Mr. Elmendorf. Yes, we think so Congressman.
    Mr. Doggett. Thank you very much, thank you Mr. Chairman.
    Chairman Ryan. Thank you, Mr. Garrett.
    Mr. Garrett. So just following up on a couple of points we 
just raised on this point. With regard to what was done in 
Europe and the decision making there, obviously, as you 
correctly say, we cannot second-guess them. Some of that goes 
to one of the questions I have is, your presumptions on 
interest rates. According to your baseline, the American people 
will be paying about $4.3 trillion in net interest over the 
next 10 years based upon, I think it is on Page 30 or 31 of the 
charts, and what have you, but obviously if those interest 
rates are skewed in a different direction, that number goes up 
significantly, right?
    Mr. Elmendorf. Yes, Congressman, no doubt.
    Mr. Garrett. What is that?
    Mr. Elmendorf. Yes.
    Mr. Garrett. And right now we have the benefit of the fact 
that we are the reserve currency of the world, and that is able 
to keep it down, but we saw what occurred in the private 
sector, how the spreads changed in 2008 basically overnight 
because these various companies that initially had very good 
rates, is that not correct?
    Mr. Elmendorf. Yes, that is right.
    Mr. Garrett. And did we not see the exact same thing that 
occurred over in Europe with the PIGs, with Portugal and Italy 
and Greece especially, that their interest rates were somewhat 
favorably for, but basically in an overnight, figuratively 
overnight period of time, the spreads expanded beyond anyone's 
projections. Is that a fair assessment?
    Mr. Elmendorf. Yes, that is right. I mean, I'm not sure of 
anyone's projections, but certainly in a way that surprised 
many observers. Yes, I think a significant risk in our 
projections is the interest rates will rise more rapidly than 
we have projected. I should say there is risk on the other 
side, too. Our projection of interest rates lies well above the 
rates that are implicit in current financial market 
transactions when one can essentially back out of the Treasury 
yield curve, the market's predictions of interest rates over 
the second half of the decade.
    Mr. Garrett. But they are certainly not above historical 
averages for the United States. All we have to do is go back 
and look into the Carter years and we would see those rates off 
the charts, and that would put this number at a multiple of 
this 4.3 trillion. Is that not correct?
    Mr. Elmendorf. Yes, that is right.
    Mr. Garrett. So within our lifetime we have seen interest 
rates in this country dramatically above where they are.
    Mr. Elmendorf. Yes, Congressman.
    Mr. Garrett. Which may give, in the final point of this, 
credence to the argument that whether we not overly aggressive 
contraction, but an aggressive contraction as far as spending, 
might be the prudent direction this Congress should go in.
    Mr. Elmendorf. Yes, I think and we have said in other 
testimonies as well, that there is this trade-off.
    Mr. Garrett. Right, I understand that. Let me just go back 
on something. Earlier this past month, a bill came out of this 
committee, 3581, the Budget and Accountability Transparency 
Act, which among other things changes the credit reform 
methodology. You are familiar with that, I am sure?
    Mr. Elmendorf. Yes.
    Mr. Garrett. Back in June, CBO testified before the 
Committee, quote ``By including a market based risk premium, 
fair value estimates provide a more comprehensive measure of 
cost which recognizes that financial risk that the government 
assumes when it is issuing guarantees, is more costly to the 
taxpayers than estimates suggest.'' In other words, fair 
accounting suggests. Do you agree?
    Mr. Elmendorf. Yes, Congressman. We believe that the fair 
value method of accounting for federal credit transactions 
provides a more comprehensive measure of their true cost.
    Mr. Garrett. Okay, moving on to another topic that we have 
had in discussion here, and that is the FHA bailout. Very 
quickly then, on FHA bailout, there is a possibility, it 
reports that chances of future net losses on the current 
outstanding portfolio could exceed current capital resources at 
close to 50 percent, which could necessitate a taxpayer bailout 
for them. Currently the numbers show that their leveraging 
ratio is around 400 to 1, which obviously makes everything else 
that we have been seeing on Wall Street basically pale by 
comparison. Have you all examined this? Have you examined the 
budgetary implications if we have to go through a bailout for 
FHA; and B, what would the implications be to the debt limit; 
and C, a quick answer on that one is can you give a projection 
as to the next debt limit increase?
    Mr. Elmendorf. So you are correct, Congressman, that the 
reserves that FHA holds are below the statutory minimum, but 
there will be no bailout required in the sense that the 
Congress does not need to take any action to deal with this low 
level of reserves. If more people default on FHA guaranteed 
mortgages than FHA has reserves for, then like other federal 
credit programs, there will be what is called a credit re-
estimate. There will be an assessment of a higher cost that 
will be recorded in the budget, but will not require the 
Congress to take any explicit action. This is the case for all 
federal credit programs. What it will mean, of course, is that 
if the FHA does not get money back, or pays money out, that it 
would not have to, then that will affect future government 
borrowing.
    Mr. Garrett. So the estimates that we have seen by analysis 
that we may have to pony up another $50 to 150 billion at that 
2 percent capital level which is now at .25 basis points goes 
to zero, and they will not have the money actually to make the 
payments, that we would not actually have to come up with the 
cash to pay that is incorrect?
    Mr. Elmendorf. Depends what you mean by whether you have to 
pony up. What I was saying was that automatically, in the 
budget, without Congressional action there will be no vote 
about whether to bail out the fund.
    Mr. Garrett. But my question was have you have seen what 
that impact would be on the budget deficit?
    Mr. Elmendorf. Yes, so our baseline projection includes our 
assessment of what the cost will be for FHA going forward, and 
I think that is incorporated in the projections that we have 
shown.
    Chairman Ryan. We have a lot of members here, so with all 
due respect, we have to keep to the time so everybody can get a 
chance. Mr. Blumenauer.
    Mr. Blumenauer. Thank you, Mr. Chairman. Thank you, doctor, 
for the good work that your staff does and your patience with 
this committee coming before us as we plow some of the same 
ground, but I think each of your visits, for me, provides 
greater clarity, and I am not as grumpy as our chair. I think 
there is a pretty clear path going forward which actually is 
buried in your report, implicit in your testimony, and I think 
what most of the people here can sort of get their arms around. 
The chair references the problem we have had in controlling 
Medicare costs, for example, over time, and it is because we 
have a flawed payment system more than anything else, and as 
long as we are going to pay for volume, people will up the 
volume. Congress will, when the heat comes on, dial down what 
purported to be reforms and it is a bipartisan failing. 
Congress has folded. More volume, less value.
    What we have in the Affordable Care Act, at least, is an 
outline of things that if your studies show if allowed to work 
over the course of the next 20 years, would have a substantial 
affect on bending the cost curve. I think we could have a very 
robust conversation around this table if we focused on how we 
right-sized the military. I think most of us do not think we 
need troops in Western Europe 65 years after World War II. We 
can dramatically scale down what is necessary to maintain a 
nuclear arsenal. Do we need 12 multi-billion dollar aircraft 
carriers and build another one, when nobody else in the world 
has even one that is comparable to what we have got; and you do 
not build those things overnight, so we could gear up if some 
change took place.
    I mean, I go through the things with the chairman on 
agriculture, and actually that was, I thought, a little bright 
spot in an otherwise mixed bag that was offered up. There is a 
chance to come together to actually save money. What you buried 
in your testimony there, I loved the line where you talked 
about the various scenarios going forward, but you talked about 
one where the deficit scale is up a little bit in the short-
term, but with balanced policies that deal with refinement and 
revenue, we can end up having lower deficits in the out year 
without economic disruption that are predicted with some of the 
other scenarios that you are talking about.
    I would hope that we get to the point where this committee 
starts zeroing in on areas of agreement that are not 
necessarily ideological or partisan, but really point us 
towards the path that you have outlined. I think it is very, 
very important. One thing that I am concerned about is 
equipping you to be able to help us go through. There was a 
fascinating article in Ezra Klein's column this morning where 
he talked about how much of the deficit is attributed to 
policies that President Obama signed into law, and how much is 
attributable to policies that were part of the Bush 
administration. He comes up with a calculation $1 billion 
Obama, $5 billion Bush administration policies.
    Now to debate, more or less, what you are talking about on 
this, but this should not be from a columnist in the Washington 
Post and a couple of think tanks. It would be great to be able 
to work in a refined basis with you on things like that going 
forward; but I wish that you would comment on your capacity to 
deal with the demands of this committee for more data, more 
methodology, more ideas that are coming thick and fast; that we 
want faster turnaround, and the implications of what we do with 
the data is profound, dealing with trillions of debt and 
spending in the out year. What is happening to your budget and 
your ability to respond to this committee?
    Mr. Elmendorf. I appreciate your concern.
    Chairman Ryan. And please answer in 30 seconds.
    Mr. Elmendorf. I appreciate your concern for our capacity, 
Congressman. Certainly for the three years that I have been at 
CBO, the demand for work for us has greatly outpaced our 
ability to supply it, and we feel bad about that all the time, 
and the chairman referred to some specific cases, but it 
happens many, many times. I am on the phone with colleagues of 
yours apologizing for work we have not been able to get to.
    On the specific question, yes our budget is being reduced, 
I think along with the budgets of the other congressional 
support agencies and the committee staffs, and from my 
parochial perspective, that is too bad, but it is not for us to 
judge that decision of the Congress any more than we can judge 
the other divisions of the Congress.
    Mr. Blumenauer. Right, my time is expired, I appreciate the 
chair's patience, but I think that this is one thing that we 
ought to look at. Cutting their budget 10 percent when we are 
throwing more things at them and there is more that relies on 
what they can produce for us, is something that every member of 
the Budget Committee ought to maybe reflect on, if that is 
maybe not penny wise and pound foolish.
    Chairman Ryan. As you know, that is the jurisdiction of the 
Appropriations Committee, but thank you. Mr. Campbell.
    Mr. Blumenauer. No, no. We are so persuasive I think it 
would make a difference if we outlined being the budget torch 
carriers.
    Chairman Ryan. Mr. Campbell.
    Mr. Campbell. Wow, it is like I am at concerts ready to 
sing. If I do sing I think I would rather sing like President 
Obama than Mitt Romney, unfortunately, but one of them would be 
better at being president, but that is not what we are here to 
talk about, and not the same one that is better at singing. I 
do not know whether I will be as obedient as Mr. Blumenauer, as 
grumpy as Mr. Ryan; I will try to be cheerfully realistic.
    Dr. Elmendorf, good morning. The ranking member, in his 
opening comments, threw out a couple of figures that if all the 
Bush tax cuts were allowed to expire and the AMT index et 
cetera, it would raise about $6.3 trillion using static 
modeling, which those of here do not always subscribe to, but 
$6.3 trillion over the 10 years. He also said that if it was 
just the wealthy, which I presume is $250,000 or more, since 
that is the number the president has thrown out, it would raise 
about a trillion. I do not know whether those numbers are 
correct, but if they are, and you can tell me if they are 
roughly in the ballpark, then that means that the over $250,000 
account for about 15 percent, roughly, of the total tax 
potential if you let everything expire over the next 10 years, 
is that correct?
    Mr. Elmendorf. I think that is right, Congressman. It is 
about 20 percent of the set of tax provisions enacted 2001, 
2003, 2009. Then we also show on our tables other expiring tax 
provisions, including, for example, the research and 
experimentation tax credit to set more standard tax extenders. 
So I think the effects of the top tax rate as being about a 
fifth, based on the latest estimates I have seen from the staff 
of the Joint Committee on Taxation, of the set of things often 
described as the Bush tax cuts.
    Mr. Campbell. Right, okay. So if you take all of the 
different tax things, 15 to 20 percent let's say, then if you 
wanted to get to the alternative scenario, and you only raised 
taxes on $250,000 or more, then you have to take, roughly, 80 
to 85 percent of the rest of that money and get it out of 
spending, is that correct?
    Mr. Elmendorf. Yes, I think that is right. I mean, the 
alternative fiscal scenario said what if you do not do these 
things, and I think what you are saying is that the piece, 
which is just raising those top tax rates, only makes a small 
difference in moving the alternative fiscal scenario back 
toward the current law baseline.
    Mr. Campbell. Correct, thank you, and the reason I bring 
this up is there is obviously a lot of rhetoric that goes on, 
that somehow we can solve the deficit problem with just that 
slice of the populace, and we cannot. If you want to do that, 
then you have to do a lot on the spending side, or you have to 
increase taxes on virtually everybody to get more towards the 
alternative scenario.
    Second thing I would like to ask about, and I think I have 
these numbers correct, but the health care law, which we 
affectionately call Obamacare, the numbers on that were on the 
basis of some late 2009 CBO projections, and at that time CBO 
projected that unemployment would be 4.9 percent in 2014. From 
looking at your thing here, you have 2013 at 9.2 percent. You 
have 2014 through 2017 at 5.6, so clearly in 2014 you project, 
now, significantly more unemployment.
    Mr. Elmendorf. 8.7 percent.
    Mr. Campbell. Okay, 8.7 percent you now project in 2014 
versus 4.9 percent when CBO's numbers scoring the Obamacare law 
were put into effect. So, if we were rescoring that today, 
based on the scores that you have today because that is when 
some of the Medicaid increases and exchange subsidies kicked 
into effect, would not the cost of Obamacare be projected to be 
significantly larger because of that much higher unemployment 
figure?
    Mr. Elmendorf. So that piece alone would raise the cost of 
the Affordable Care Act. I do not know by how much. We say this 
in the outlook, but I should emphasize, we are not able, for 
this outlook, to update those estimates; that is a particularly 
involved job. We will be doing that as part of our March 
baseline, which is due out in just a month and a half we hope. 
In the March baseline you will see new estimates of all of the 
programs in the budget, but part of that will be new estimates 
of the cost of the coverage provisions in the Affordable Care 
Act, and onboard that change.
    Mr. Campbell. Right, that and then the CLASS Act which we 
may be dealing with this week and the fact that likely that is 
going to be pulled back. Thank you very much; I yield back the 
remaining three seconds of my time.
    Chairman Ryan. Ms. Bass is next in line.
    Ms. Bass. Thank you for your testimony this morning. 
Earlier when we opened, I believe the chair mentioned the need 
for the president to present solutions instead of just 
criticizing, and I just wanted to mention that yesterday the 
president sent his Start Up America Legislative Agenda to 
accelerate start up and small business growth to Congress. 
Parts of this agenda have already won bipartisan support in the 
House, including allowing small businesses to raise capital 
using social networks and eliminating taxes on capital gains 
and key investments in small businesses; and I think this is an 
example of the types of economic stimulus we should be 
pursuing, and I am hoping that my colleagues on the other side 
of the aisle will bring the president's package to the House 
floor for a vote soon.
    I did want to ask you about states and the fiscal pressure 
on states, which I do see as a major obstacle to sustainable 
recovery. At the start of 2012, 29 states have already 
projected a gap of about 44 billion for fiscal year 2013, and I 
imagine that this number is going to grow. Given that federal 
aid was a lifeline for states and now, far from providing 
assistance to states, I am sure that we will likely be 
proposing additional cuts. I wanted to know if you could 
respond to what toll on the overall economic growth is due to 
states still facing a long and uncertain recovery.
    Mr. Elmendorf. Congresswoman, of course we do not study 
state budgets as carefully as we study the federal budget, but 
state budgets do matter for the overall economic outlook for 
the economy, and for the federal budget outlook as well. 
States, as you know, have been through a terribly tough time. 
Things are a little brighter than they used to be; revenues 
have started to grow a little bit in many states, but the 
overall levels of revenues remain well below what they were, in 
most cases, before the recession. Obviously, the experiences 
varies a great deal across states, but in general, revenues 
remain well below pre-recession levels.
    As you have said, the federal support, much provided 
through the Recovery Act of 2009, is extra federal support and 
is now waning, which will put increasing pressure on state 
budgets. One way in which that matters for the economy is that 
state and local governments have been reducing their level of 
employment. So if you look back from the peak of the business 
cycle, before the recession started at the end of 2007, since 
then state and local governments have shed nearly half a 
million workers and that is part of what has, not a large part, 
but a non-trivial part of the loss of jobs.
    Ms. Bass. Thank you. Could you also comment about the 
proposed changes to unemployment insurance, specifically what 
impact it would have on the economy to reduce the number of 
weeks, that is currently being proposed?
    Mr. Elmendorf. I will answer the question sort of a little 
backward, if I might. Our baseline, our projections that you 
see assume current law and thus assume the expiration at the 
end of this month; however, if the Congress were to extend the 
emergency unemployment benefits along the same lines that they 
are currently in place, and that is one of many options of 
course, that they would extend along the same lines that would 
add maybe about a quarter of a percent to the level of GDP at 
the end of this year without any other changes in policies, and 
that would then add maybe about a quarter million jobs by the 
end of the year.
    Ms. Bass. Thank you. Chairman Ryan. Mr. McClintock.
    Mr. McClintock. Thank you, Mr. Chairman. Mr. Elmendorf, we 
have been hearing a recurrent them from the other side that the 
recovery is pretty strong, the economy is getting better, of 
all is well with the world. Let me ask you, are there more 
people working today or fewer people working today than on 
Inauguration Day of 2009?
    Mr. Elmendorf. I believe the answer to that is there are 
fewer people, Congressman.
    Mr. McClintock. Is the unemployment rate higher or lower 
than it was on Inauguration Day?
    Mr. Elmendorf. To be honest, Congressman, I do not know the 
unemployment rate on Inauguration Day.
    Mr. McClintock. In January 2009 I believe it was 7.8 
percent. Is that higher or lower than it is today?
    Mr. Elmendorf. So the current rate is higher than that rate 
that you have identified Congressman.
    Mr. McClintock. And if the labor participation rate had 
remained the same as it was on Inauguration Day, that is if so 
many workers did not get discouraged and leave the workforce, 
what would the unemployment rate be today?
    Mr. Elmendorf. Let me see if we have an answer to that 
question. I am sorry; I do not have that off-hand Congressman.
    Mr. McClintock. Would you say it is over 10 percent?
    Mr. Elmendorf. I do not know. It is a complicated question; 
I do not want to speculate.
    Mr. McClintock. Is the debt higher or lower today than it 
was on Inauguration Day?
    Mr. Elmendorf. The debt is higher, Congressman.
    Mr. McClintock. How much higher?
    Mr. Elmendorf. Again, Congressman, I have a lot of tables, 
but they do not really keep track of political events, they 
keep track mostly of economic events.
    Mr. McClintock. Would $4.5 trillion more be in the 
ballpark?
    Mr. Elmendorf. That may be right; I do not know.
    Mr. McClintock. How about the price of a gallon of 
gasoline, more or less than it was on Inauguration Day?
    Mr. Elmendorf. I am sorry Congressman, I do not know.
    Mr. McClintock. Would it be up about 83 percent, perhaps?
    Mr. Elmendorf. I do not know.
    Mr. McClintock. Let me ask you this. We heard it said that 
we just need to go back to the Clinton prosperity, and I would 
heartily agree with that. That looks awfully good by today's 
standards. Did the Clinton administration increase or decrease 
spending as a percentage of GDP during his eight years in 
office?
    Mr. Elmendorf. I can check; we have these nice tables in 
the back of our book.
    Mr. McClintock. As a percentage of GDP, did it not decrease 
under the Clinton administration by a whopping 3.5 percent?
    Mr. Elmendorf. Depends, of course, how one aligns the 
fiscal years with the presidencies. Fiscal year 1994, for which 
the budget was set in 1993, spending was 21 percent of GDP, and 
in the year 2000, it was 18.2 percent of GDP.
    Mr. McClintock. So he cut spending relative to GDP?
    Mr. Elmendorf. Well, I would have said that the president 
and the Congress in that era made a set of decisions.
    Mr. McClintock. Give credit where credit is due, the 
president signed that legislation. Did he expand or contract 
the federal government's entitlement obligations during this 
period?
    Mr. Elmendorf. That is a hard question to answer 
Congressman, I do not have it off-hand.
    Mr. McClintock. I am referring to specifically to welfare 
reform that abolished the open ended welfare system that we had 
at the time.
    Mr. Elmendorf. Yes, so that was a change.
    Mr. McClintock. Did it turn in deficits or surpluses during 
the last four years of his administration?
    Mr. Elmendorf. There were several years of surpluses, 
Congressman.
    Mr. McClintock. Okay, so Clinton reduced spending relative 
to GDP, he contracted our entitlement obligations, he turned in 
budget surpluses during his final years in office. Bush, on the 
other hand, increased spending relative to GDP, expanded our 
entitlement obligations, and turned in major budget deficits. 
It seems to me if increasing spending, increasing our 
entitlement obligations, and turning in major deficits were the 
path to prosperity, we should be in the golden age of the 
American economy right now.
    Let me ask you this question. How does this recovery track 
with the Reagan recovery? Senator Phil Gramm has estimated that 
if the economy tracked under the Obama administration as it did 
under the Reagan administration; and if you recall, Reagan 
inherited a double digit unemployment, double digit inflation, 
mile long lines around gas stations, interest rates at 21.5 
percent. Gramm estimates that if the economy tracked today as 
it did under the Reagan years, at this point of the 
administration there should be 16 million more Americans 
working with per capita income $4,000 higher than it is today. 
Do you have a comment on that?
    Mr. Elmendorf. No doubt Congressman this recovery has been 
very unusually weak by U.S. historical experience, and we have 
shown charts like that.
    Mr. McClintock. One final quick question, and that is last 
year we had a number of experts including yourself warning that 
we were about five years away, at best, from a sovereign debt 
crisis.
    Where are we today?
    Mr. Elmendorf. I was not one of the people who put a date 
on that. What we said consistently is that is very difficult to 
predict: what set of economic and budgetary circumstances, what 
set of political dynamics will drive financial markets to stop 
being willing to lend a government money at reasonable interest 
rates?
    Chairman Ryan. Mrs. Castor.
    Ms. Castor. Thank you very much. Thank you for your 
testimony. The economy is creating jobs right now. The trends 
are positive; they are in the right direction. Private sector 
payrolls added nearly 1.9 million jobs in 2011. The announced 
unemployment rate in December is 8.5 percent, which is the 
lowest in three years. We always hear that if the economy can 
create more jobs, it would lower the deficit. Could you give us 
a little more detail on that? I know you have a certain 
projection, now. If your projections of the unemployment rate, 
if we created more jobs how does that reduce the deficit?
    Mr. Elmendorf. So we actually wrote a letter, which I was 
looking for but cannot find off hand, to Congressman Van Hollen 
a few months ago that talked about the effects of a stronger 
economy on the budget, and the largest part of the widening of 
budget deficits over the past few years has been the weakness 
of the economy. The explicit actions of the government, the 
Recovery Act and other things, have also led to wider deficits, 
but the largest part of the widening has been the automatic 
changes, particularly in revenues, but also on the spending 
side to a weak economy: less taxable income, more people out of 
work, and those things have had a big effect on the budget. A 
very important part of the narrowing that we see in the budget 
deficit over the next few years under current law is 
improvement in the economy. There is also, of course, a very 
large part, which is the changes in policies scheduled to take 
effect under current law; but the economy matters a great deal. 
We show in an appendix in this outlook a rule of thumb for how 
stronger or weaker economic growth would affect budget 
outcomes.
    Ms. Castor. Is there a precise number, if the unemployment 
rate is reduced, say, by .2, the exact impact that has on 
cutting the deficit?
    Mr. Elmendorf. There certainly is not a precise number in 
my head, whether we could estimate a number for you, I think we 
probably could. I did find the letter we wrote to Congressman 
Van Hollen, this was actually October 4th of last year. In this 
experiment I think we looked at the effects of moving the 
economy all the way back to its potential level, but we could 
certainly look, Congresswoman, at what the effects of a 
particular change in the unemployment rate might be.
    Ms. Castor. Because this is the great frustration, that 
over the last year the Congress really has the ability to do 
some things, for example, the Transportation Bill that is long 
overdue, I know you said there is a lag there, but what if we 
had gotten it done a year ago? What if we had some short-term 
investments in some jobs initiatives that the president laid 
out in the American Jobs Act? People at home love the idea of 
repairing schools, putting people to work there; we have got so 
many bridges in the state of Florida and schools that are in 
need of repair, and it would just seem to be a great common 
sense solution that would put people back to work and help us 
reduce the deficit.
    Mr. Elmendorf. I found the answer to your specific 
question, actually, and this was in the letter to Congressman 
Van Hollen. We estimate that a one percentage point reduction 
in the unemployment rate would reduce the deficit by about a 
half a percent of GDP, using some average historical 
relationships.
    Ms. Castor. Great, thank you very much. On another topic, 
colleagues, we really should all be working together to try to 
find a solution on a permanent Medicare ``doc fix.'' I know one 
proposal that is being considered is looking at the savings, 
President Obama has now ended the war in Iraq with the support 
of the American people, and there are savings in the overseas 
contingencies funds, which are the funds where, I guess, CBO 
has said we are going to anticipate staying in Iraq longer. 
What is available in the OCO for us to use in possibly 
developing a permanent fix so that our parents and grandparents 
can maintain their relationship with the doctor of their 
choice?
    Mr. Elmendorf. So let me try to explain this issue of the 
Overseas Contingency Operation funding and how it appears in 
our projections; I think it is a technical and complicated one. 
Let me try to explain for everyone. There is not an OCO fund in 
the sense of a set of money which is sitting somewhere. What 
our baseline does do is for discretionary spending that is not 
capped by the Budget Control Act, and this OCO funding is not 
capped by the Budget Control Act, for that sort of funding we 
take the latest level of appropriations provided by Congress, 
and we extrapolate that with increases for inflation over time, 
and that extrapolation from the latest funding that Congress 
has provided for those purposes amounts to about $1.4 trillion 
over the coming decade; but that is just our extrapolation 
based on the latest actions of the Congress, and how the 
Congress might want to think about that money in relationship 
to other things that Congress wants to do, is really up to you 
all.
    Chairman Ryan. Which is all borrowed money.
    Mr. Elmendorf. Well, there is a lot of tax revenue, there 
is a lot more spending than tax revenue; we are borrowing a lot 
for some purpose, Congressman.
    Chairman Ryan. Thank you. Mr. Stutzman.
    Mr. Stutzman. Thank you, Mr. Chairman and thank you Mr. 
Elmendorf for being here today and I really appreciate your 
testimony today and I think we would all be wise to take your 
report and act upon it. I would like to touch on two things. I 
would like to touch on the tax rate, and then also on Social 
Security a little bit. Could you, and maybe you touched on this 
a little bit and maybe I missed it, but could you touch on if 
Congress would raise taxes at the end of this year outside of 
the payroll tax rates, what kind of effect would that have on 
the economy immediately?
    Mr. Elmendorf. If Congress did nothing, so the tax rates 
automatically increased going into next year, then we have 
shown an estimate in the outlook for the effects of that and 
other policies together, but I can give you an estimate for the 
effects of the tax piece alone. Let me be clear about what 
experiment I have in mind here. In the current law baseline, 
taxes go up and spending is cut, particularly because of the 
Budget Control Act; and our economic forecasts has conditioned 
on that. If instead the Congress extended the expiring tax 
provisions for the next few years, then that would increase the 
level of GDP at the end of 2013 by between .3 percent and 2.5 
percent, by our estimates. That is about two-thirds of the 
total effect of this alternative fiscal scenario that we show 
in the outlook, the other third is the effects of relaxing the 
spending cuts that we include in the scenario.
    Mr. Stutzman. Would you recommend that Congress extend the 
current tax rates for three to five years to boost the economy 
and then revisit the issue once the economy started to 
progress?
    Mr. Elmendorf. It is not our place, Congressman, to make 
recommendations, but we have tried to illustrate here in the 
analysis we did and the comments I have made, the short-term 
negative economic consequences of fiscal contraction that is 
very rapid, and of course, as you understand, as we talked 
about there are long-term very negative economic consequences 
of our not having fiscal restraint relative to the current 
policies in place.
    Mr. Stutzman. I think the facts are pretty clear that if we 
would raise taxes, if taxes were to be raised at the end of 
this year, that could be a detriment to the current state of 
our economy, is that correct?
    Mr. Elmendorf. We think that the increases in tax rates 
built into current law for the end of this year, will reduce 
economic activity and employment next year, relative to what 
would occur if those tax rate increases were deferred.
    Mr. Stutzman. I want to touch on the payroll tax rates 
currently. Your estimate of the deficit does not include any 
costs associated with extending the payroll holiday. What is 
the cost of extending the payroll holiday to the end of this 
year and what would be the deficit that would be added to that 
cost?
    Mr. Elmendorf. If the lower payroll tax rate were extended 
through the end of this calendar year, we estimate that would 
add $75 billion to the fiscal year 2012 deficit, and $25 
billion to the fiscal year 2013 deficit; of course that is just 
because fiscal year 2013 starts in the last quarter of this 
calendar year. So the total is about $100 billion.
    Mr. Stutzman. So what does that do to Social Security? How 
many years are we shortening the life of Social Security if we 
continue the current rates?
    Mr. Elmendorf. Well, it has no direct effect on the Social 
Security trust fund. It depends, of course, how you do it, but 
what has happened in these lower payroll tax rates so far is 
that general revenue has been transferred to the Social 
Security trust fund in the amount of the foregone payroll tax 
receipts. So the trust fund has been held harmless on the lower 
payroll tax rate, and if you extend the lower payroll tax rate 
with the same provision as is in place now, then the trust fund 
would continue to be held harmless. If you did not do that, 
then the trust fund would be $100 billion to the worse by the 
end of the year, relative to what would happen under current 
law. I do not know what effect that has on, say, the expiration 
date of the trust fund. The trust fund is trillions of dollars, 
we think the Old-Age and Survivors Insurance fund, that part of 
Social Security has decades before it will be exhausted.
    Mr. Stutzman. Did you look at if the payroll tax rates were 
not to be extended at the current levels, what kind of effect 
would that have on the economy? If we let Americans keep more 
of their money in their pocket, does that have any effect on 
the economy, positive or negative?
    Mr. Elmendorf. Yes, relative to current law extending the 
payroll tax cut for the end of the year will increase output 
and increase employment by the end of the year. I mean, in 
general, lower taxes or higher spending, in the short-term, 
given an economy with so many unused resources, those actions 
would tend to provide a boost in the short-term. The amount of 
the boost depends on the specifics of the policy, and the 
testimonies that we have done, including the one last fall, we 
tried to lay out what we estimate to be the relative bang for 
the buck of different sorts of policies, but the directions are 
pretty consistent. The crucial point to remember is that works 
for a few years in an economy with unemployed resources because 
the constraint on economic activity now is really the demand 
for goods and services.
    By later in the decade, the constraint on their economic 
activity will be the supply of savings, it will be the later 
supply, it will be productivity, and in that sort of world, the 
way the budget choices matter is importantly through the amount 
of borrowing the government does, also through the effects of 
tax rates on people's behavior and through the effects of 
certain spending programs.
    Chairman Ryan. Mr. Pascrell.
    Mr. Pascrell. Thank you Mr. Chairman. There was a sharp 
increase in military spending in 1943, guess why? So when you 
take numbers out of context and game the numbers, I think we 
all have a responsibility here to set the record clear. We have 
an entirely different situation.
    Chairman Ryan. Who are you addressing?
    Mr. Pascrell. The gentleman from California just took off.
    Chairman Ryan. The gentleman is not here.
    Mr. Pascrell. I will reduce my remarks about it, if that is 
okay with you. We had a very different situation in terms of 
President Bush I when you lowered taxes, and Mr. Clinton raised 
taxes. So if you want to put numbers in context and why things 
were better at one time and not so good at another time, we 
need all of the facts. Both of those presidents worked hard to 
do what was necessary at the particular time in history when 
they took office. This president took office in January of 
2009, and you know what the employment and unemployment was in 
the two months before him, and in the two years before him, and 
in the two months after he raised his hand and in the two years 
after he raised his hand?
    So I want to show you a chart, if I may.
    We are gaming the numbers. The blue line in this chart 
shows the rate at which state and local government have been 
growing or shrinking as compared to real GDP since the late 
1980s; it is very clear, even I understand it; so you all 
should understand it. Those are the numbers. You did not put 
them there, and I did not put them there. These are the 
numbers. In 2007, if you try to look closely, the private 
sector and government were growing, then the economy began to 
shrink and then fell off the cliff during the financial crisis 
which occurred at the end of 2008.
    Can I see the second chart please?
    Thank you. This chart shows the rate of government 
investments or how we are sacrificing the future as well as the 
present. At the beginning of 2009, in the face of political 
timidity and outright obstructionism, we acted to stem the drop 
in economic growth and unemployment, and we passed the Recovery 
Act, February of 2009. The most successful parts of the 
Recovery Act were state fiscal relief that went directly into 
state and local jobs. The result was the blue line's upward 
spike in 2009.
    Then we all know the rest of the story. The private sector 
2009 recovery stalled, and everything started to drop in the 
second quarter of 2010. The president proposed the American 
Jobs Act, which included $35 billion to reverse this trend, but 
it stalled in the Congress. We lose teachers, we lose police, 
and we lose firefighters. Now we have lost close to 700,000 in 
the public sector; so one is going up, and the other is going 
down dramatically.
    Last night, so we could put a human touch on this, Mr. 
Elmendorf, police officer Kevin Brennan in Brooklyn was shot 
down, shot in the face pursuing an individual with an illegal 
gun. We have reduced, in human factors, when we glibly talk 
about what we can cut, and what we cannot cut. I mean, the 
direction we are going we are going to have to cut money to the 
FBI, transportation, border security, vets benefits because 
that is where we are headed. There are people here that want to 
destroy the government, and that it has no responsibility and 
they cannot live up to the obligations. Now, my question to you 
is this: In your opinion, was the effect of the elimination of 
thousands of public sector jobs, teachers, police, and 
firefighters, in overall economic growth to the economy?
    Mr. Elmendorf. No, Congressman.
    Mr. Pascrell. Why not?
    Mr. Elmendorf. The loss of public sector jobs is, as I said 
earlier, a part of the overall loss of jobs that we have seen 
in this very prolonged and severe economic downturn.
    Mr. Pascrell. We have seen that sector of the job market 
shrink.
    Mr. Elmendorf. Yes, Congressman.
    Mr. Pascrell. Thank you very much.
    Chairman Ryan. Mr. Flores.
    Mr. Flores. Thank you, Mr. Chairman, thank you director 
Elmendorf for joining us today. Start out with a caveat to 
begin with. Economic growth is virtually the same as employment 
growth, right? I mean, if we talk about economic growth, we can 
talk about more people working.
    Mr. Elmendorf. They certainly move together, obviously not 
perfectly.
    Mr. Flores. Not perfectly, but pretty good correlation. So 
my question starts with this, and I would like to keep the 
answers fairly short. Which economic activity provides greater 
economic growth and employment, option A is private investment 
or option B is federal spending.
    Mr. Elmendorf. Congressman, it depends on the nature of the 
federal spending you have in mind.
    Mr. Flores. Well, I have a chart, I do not have it with me 
right now, but private investment is the correct answer. 
Private investment trumps federal spending almost every time. 
Which policy option provides greater economic growth, leaving a 
dollar in the hands of a taxpayer, or taking that dollar from 
that taxpayer and increasing federal spending?
    Mr. Elmendorf. Depends on the nature of the federal 
spending, Congressman. I am not trying to be difficult, but it 
does matter what money is used for.
    Mr. Flores. Okay. Well, let's put it this way then. What 
would create more jobs, Keystone XL pipeline or Solyndra? We 
spent about a half billion dollars on Solyndra, how many jobs 
do we have from that?
    Mr. Elmendorf. Congressman, we have not studied those 
particular examples.
    Mr. Flores. Not very many though, right?
    Mr. Elmendorf. Companies that fail generally do not create 
a lot of jobs, they do along the way, of course, and I have not 
tried to study the history of that firm.
    Mr. Flores. And how many federal dollars is it going to 
take to build the Keystone XL pipeline?
    Mr. Elmendorf. I do not know Congressman.
    Mr. Flores. Zero. And the estimates varies widely; some 
people say 20,000 temporary jobs, some people say it is just in 
the thousands, but it does not make any difference. On one 
hand, option A is Solyndra, where we spent a half a billion 
taxpayer dollars and got no jobs. On the other hand, we have $7 
billion of private investment and we get good long-term 
economic job growth out of it, right?
    Mr. Elmendorf. Certainly a shortfall in private investment 
in the past years has been a drag on the economy during the 
past few years and will continue to be a drag on the economy 
over the decade. Part of the reason we say in that report that 
we have marked down the projection of GDP at the end of the 
decade, relative to what we would have had without the 
financial crisis and recession, is a shortfall in investment.
    Mr. Flores. That takes us to my next question. In your 
opinion or in your agency's analysis, what is the optimum level 
of these activities as a percentage of GDP? Tax revenues, what 
is the optimum level at which you have good economic growth, 
you are not raising the deficit too high to cause long term 
damage, but at the same time you are taxing at an appropriate 
level to fund the government. What percentage of GDP is that?
    Mr. Elmendorf. I do not think there is an analytic answer 
to that question, Congressman, it is a matter of people's 
choices. Deciding the level of taxes that one thinks is 
appropriate cannot really be done separately from deciding the 
level of spending that one thinks is appropriate.
    Mr. Flores. Well that is my next question. So what is 
optimal? I mean, one of the things you have talked about here 
is the rub that we have, on one hand, you have said that the 
increase in tax rates that we are going to have on January 1st 
of next year is going to dampen economic activity, and it is 
going to have a pretty big dampening impact on economic 
activity.
    On the other hand, you said that the deficits, which 
deficits are just transfer payments; they represent government 
spending and excess revenues; so you could call it a giant 
stimulus bill if you wanted. If you have a trillion dollars of 
deficits, it is really a trillion dollars of government 
stimulus. You said that stimulus is going to ramp up economic 
activity; if we turn that spending down it is going to lower 
economic activity. So what I am trying to get to is what the 
optimum percentage of tax revenues versus spending is? I mean, 
in the real world they ought to be the same, and I am just 
trying to get a feel for what that should be, and, again, as a 
percentage of GDP.
    Mr. Elmendorf. It certainly cannot be too far apart for too 
long.
    Mr. Flores. Right.
    Mr. Elmendorf. So the thing that cannot happen is that the 
ratio of our debt to our GDP rises indefinitely. That cannot 
occur because at some point, we cannot really predict when, but 
at some point people will stop lending that government money.
    Mr. Flores. Right. Let's go to the next one. What was the 
cost per job created under the stimulus spending, under the 
ARRA?
    Mr. Elmendorf. I am sorry, Congressman, I do not have an 
answer to that off-hand. We can take the estimate we have of 
the changes in employment, and divide that by the $837 billion, 
but I do not know off-hand what the answer to that would be.
    Mr. Flores. Okay. Well, it is substantial. It is a lot more 
than private dollar investment or the number of jobs you get 
for a private investment dollar spent. Lastly, you noted in 
your report that the cost of the stimulus has increased from 
$821 billion to $839 billion. What is behind that cost 
increase?
    Mr. Elmendorf. I think we made some small revisions to the 
cost of some of the refundable tax credits enacted in that 
legislation, and maybe on the unemployment insurance side as 
well: just the refundable, I am told. Some revision of the 
refundable tax credits.
    Mr. Flores. I guess the bottom line is the cost of the 
stimulus plan is still going up, and we do not have many jobs 
from it. Thank you.
    Chairman Ryan. Mr. Honda.
    Mr. Honda. Thank you. Thank you very much. Thank you Mr. 
Chairman and welcome back.
    Mr. Elmendorf. Thank you, Congressman.
    Mr. Honda. I enjoyed that last discussion and congratulate 
your daughters coming to watch you work.
    Mr. Elmendorf. Thank you.
    Mr. Honda. I am sure they are going to learn something 
here. One of the things I have learned over the last couple 
years of being in this Budget Committee is that your job is to 
be neutral in your responses, and to respond in ways that are 
objective and honest and not be shaded by some the way we would 
like to lead our questions, and to have some sort of a response 
that appears to be favorable or unfavorable. I appreciate the 
difficulty of your task and I am awed at your grasp of the 
information that you have, having to respond to the different 
folks here.
    Mr. Elmendorf. Now you are going to stump me. You set me 
up.
    Mr. Honda. No, I am trying to just reflect my thinking on 
the kinds of things that we are trying to struggle with here in 
the Budget Committee on behalf of the country. I think every 
member of Congress agrees that we do have a deficit and a debt 
problem that deserves our serious attention. This attention 
should be looked at in terms of the dynamics of what has 
happened in the past, what could happen in the future, but how 
we put together the different policies and the mixture of that 
so that we try to figure out what is the best outcome in the 
future. We only disagree, I guess, about the best way on how to 
solve it, and I hope that we can really take a balanced 
approach and use a mix of the many tools at our disposals.
    So in your initial gut reaction to a plan that has these 
kinds of characteristics, what was your reaction to having the 
plan that balances the budget by 2021, and makes a targeted 
investments in areas like infrastructure and education, and 
then finances these changes with a progressive tax code, and 
also ending our overseas military engagements? What would be 
your gut reaction to a plan that has those kinds of elements in 
it?
    Mr. Elmendorf. Congressman, I mean, we can and do analyze 
the economic effects of particular sorts of policies that 
Congress is considering. We have done quite a bit of this, for 
example, in terms of different tax policies that we have talked 
a little about today. We have also written about the value of 
certain sorts of government investments in physical capital, of 
a sort, of traditional sorts of highways and other 
infrastructure, but also in what economists call human capital, 
the skills of workers. That is harder to quantify, though. So 
we can talk about specific choices of that sort.
    We have not been asked to analyze the effects of an 
overarching fiscal plan, except to the extent that we do an 
analysis every year of the president's budget, both the direct 
budgetary effects and the economic effects; and we have done an 
analysis in this outlook of this particular alternative 
scenario, which is not good in the long run. We have not looked 
at what you are talking about, exactly, and we would have to 
know exactly what it was. But also, I want to emphasize that 
the reason that CBO does not make policy recommendations is 
because the policy choices are not just a matter of analysis. 
It is a matter, ultimately, of value judgments by you and your 
colleagues on behalf of me and my fellow citizens of what we 
want the government to do and not to do. I think the lesson of 
this alternative fiscal scenario and the size of the gap in 
2022, and the fact that relative historical pattern we see 
there is so striking is the rise in the cost of Social Security 
and the health care programs.
    The ultimate question will be whether we want to make, as a 
country, substantial cutbacks in Social Security and the 
federal health care programs, relative to how they are 
scheduled to work now, or substantial increases in tax revenue, 
relative to the historical experience. We have to pick at least 
one, we could do a combination of those two, we cannot do 
neither. We cannot sustain the traditional levels of tax 
revenue and the current benefits we provide for Americans when 
they become older at the same time, given the rising number of 
older Americans and the rising cost of health care. So any 
proposal that is set on one side of that or the other, has 
implications for the other side, and it is up to you and your 
colleagues to weigh those, and we can provide some analysis 
that I hope is helpful, but ultimately it is a matter of value 
judgments.
    Mr. Honda. Thank you, and I guess the analogy remains X 
equals whatever your value system is.
    Mr. Elmendorf. Thank you, yes.
    Chairman Ryan. Mr. Mulvaney.
    Mr. Mulvaney. Thank you, Mr. Chairman, thank you Mr. 
Elmendorf. I am going to move away from the policy and get down 
into the weeds on some of the numbers if I can. If I could get 
that first slide up, that would be great; it's probably 
something that is just of interest to you and me, but let's 
take five minutes and go over some detail.



    I was looking at the report last night, and noticed 
something fairly interesting regarding the inflation numbers, 
and it is something that you and I have talked about before, I 
have talked about with Dr. Bernanke, a bunch of different 
folks. To run through the quick history, in your forecast of 
last year, you all expected inflation, and we're talking about 
the CPI now for urban workers, we can pick any measure you 
want, but we use them across this same analysis. You thought it 
would be 1.3 percent, then in August you adjusted that up to an 
assumption of 2.8 and then we finished the year at about 3.3.
    At the same time that we saw in actual rates of inflation 
that were higher than your estimates, you did not change the 
assumptions for 2012, roughly the same: 1.3 last January, 1.3 
again in August, and 1.4 in the report from yesterday. That 
grabbed my attention and it led me to the next slide, which I 
want to ask you about.



    We took a look at your projections for CPIU for the next 
five year window, the first five year window and the second 
five year window; they are slightly different, off by a year 
because of they are a rolling number, but let's call it the 
first year in the five year window. You have, despite the fact 
that inflation turned out to be considerably higher last year 
than you had expected, you actually revised down your 
expectations for inflation over the course of the first five 
year window, and left it the same for the second five year 
window. What we did, Mr. Elmendorf, was went in and looked at 
the historical data from the BLS since 1970, and took a series 
of five year rolling averages, and it turns out you are using 
an assumption for the first five year window in this report 
that would be the lowest five year rolling average in recorded 
history; and I am just wondering how you can justify that? If 
you take a look at what we have got: the average five year 
rolling average, which I know sounds strange, but I think you 
can see where I am going, over the last 40 years is almost 4.5 
percent. The average five year rolling average over the last 10 
years is 2.5 percent. The lowest we could find of any five year 
rolling average, going back to 1970, was actually 2006 through 
2010, and that was still 2.2 percent, 2.18; and the worst, as 
Mr. Garrett referenced earlier in his questioning, was 1977 
through 1981, when the average was above 10 percent. What is 
the justification in taking these unprecedented rates of 
inflation, as your assumption, as you look into the future?
    Mr. Elmendorf. I have not looked at those precise numbers, 
but I understand your point, I think, Congressman. You are 
certainly correct that our forecasts of inflation have errors 
in them like our forecasts of all other economic variables. In 
terms of last year, there were some particular developments in 
energy markets and other parts of the economy that pushed 
inflation above what we and many people have been expecting, 
and a number of people thought at the time that those were 
likely to be transitory developments, and the way the data are 
unfolding, is so far consistent with that story. So the change 
in the CPIU over the past three months is less than it was over 
the past six months, which is less than it was over the past 12 
months. The latest information about inflation suggests that it 
is in fact coming down.
    Now, more broadly, I will mention two things. One is that, 
relative to years preceding the early 1980s, there has been a 
fundamental change in the behavior of central banks, in this 
country and around the world, related to a fundamental change 
in economists understanding of the role of central banks in 
keeping inflation down.
    So as we look out to the second half of the decade, we 
think it is very clear that the Federal Reserve's objective is 
to keep inflation around 2 percent, and we think they have the 
tools to do that. For the next few years, I think the crucial 
thing to realize is that we have a period of unprecedentedly 
prolonged high unemployment since the Depression. We are living 
through a period that is the longest period of excess workers 
and houses and so on in the economy, that we have had in my 
lifetime, and there is a systematic relationship.
    Mr. Mulvaney. And I do not mean to cut you off but I am 
running out time, and I may have to finish this in a second 
round, but I understand the relationship between GDP growth and 
the fact there is excess capacity in the labor markets, and 
that would allow us to grow the economy without seeing a lot of 
inflation, and this is the next slide, you all have actually 
revised up your GDP estimates over the course of the first five 
year window from 3.4 percent when we did this last January to 
4.1 percent today, which again is well above the historical 
average and approaching the highest ever of the actual 
performance within the GDP growth in a five year window.


    So I guess my question is: How is it that you are assuming 
historic rates of growth and historically low rates of 
inflation?
    Mr. Elmendorf. The 15 second answer, Mr. Chairman, if I 
might, is that we are starting that growth from a particularly 
large gap between our actual output and the potential output of 
the economy. Then I am happy to take this up with you 
additionally, Congressman, later.
    Mr. Mulvaney. Thank you, Mr. Chairman.
    Chairman Ryan. Ms. McCollum.
    Ms. McCollum. Thank you very much Mr. Chair. Dr. Elmendorf, 
it is good to have you here. I have two questions. They are 
rather brief and so I will give them to you together. Many 
Americans get up and go to work every day. More of them would 
like to be able to get up and go to work today, but Americans 
get up and go to work every day. They work hard and they 
contribute to the success of our country. For every dollar of 
income from wages, these working Americans, they will end up, 
quite often, paying as much double the tax rate: double the tax 
rate of investors receiving income from dividends or capital 
gains. So to me this hardly seems fair. Since there is such a 
significant tax benefit, even a bias I would say, extended to 
investors over working Americans, is there some equitable, 
qualifiable benefit to the economy and job creation inherent in 
every dollar investors receive from dividends or capital gains, 
versus the dollar that is earned in wages? So what is the 
impact the federal deficit and this tax inequity and the 
benefits provided to investors over workers?
    My second question I would like you to kind of summarize 
the different options because people have asked you a lot of 
questions, so you have some scenarios that you can talk about 
that you have presented to us. Again, all the Bush tax cuts are 
allowed to expire at the end of 2012, what is the effect on the 
economy and the federal deficit if only the upper end Bush tax 
and income earners over a million are allowed to expire, or if 
all the Bush tax cuts were extended for the next 10 years, what 
is the effect on the economy, what is the effect on the federal 
deficit? I have been struggling with this, you know, a worker 
who earns a dollar versus an investor who gets a benefit?
    Mr. Elmendorf. Congresswoman, as you know, in setting tax 
rates Congress takes a number of considerations into account. 
The equity issues are part of that, so is the effect on the 
economy and, you know, the economic effects are not necessarily 
correlated with what you or others might view as the justice of 
the situation, so it is really sort of a separate issue, and I 
am not qualified to speak to the equity issues, except in my 
own personal role.
    When we do analysis of the effects of changes in tax rates, 
higher tax rates generally discourage the thing that is being 
taxed. Higher tax rates on work on balance, reduce work effort. 
Higher tax rates on the returns of saving, on balance reduces 
the amount of saving, and we incorporate those effects in the 
estimates that we do. I do not think there is a right answer 
from a economics perspective of what the relative tax rates 
should be because it is this combination of what the economic 
effects and value judgments again. We can do work about the 
effects of changes in the particular sorts of taxes, as can our 
colleagues and staff in the Joint Committee on Taxation, but I 
do not have comparisons of different sorts of things to use 
here.
    On the second question you asked, the economic effects of 
extending all of the expiring tax provisions would be a little 
larger than the economic effects of extending all the expiring 
tax provisions, except for the top tax rates. So in the short-
term the lower the taxes are in general and the higher spending 
is in general, that tends to boost the economy as I have said. 
Now an analysis we have done, before we have said that the 
effects of lowering the top tax rates is smaller on the economy 
in the short-term than the effects of changes in tax rates 
further down the income distribution because higher income 
people tend to spend a smaller share of the money that they 
have, and what the economy needs in the short-term is more 
spending. So the effects of extending the expiring tax rates at 
the top will be smaller, dollar for dollar, in the short-term 
in stimulating the economy, than the effects of extending the 
other tax cuts.
    In the longer term it is more complicated because in the 
longer term what matters, importantly, as I said, is not the 
demand for spending, it really is the supply of saving and the 
work effort and so on, and in the longer run it is more 
complicated actually to look at the effects of different sorts 
of changes in the tax rates, and we have some examples of this 
in the testimony I did for the Senate Budget Committee a year 
and a half ago, or so, and we talk more about that, but it is 
more subtle in the longer term.
    Chairman Ryan. Thank you. Ms. Black.
    Ms. Black. Thank you Mr. Chairman, and thank you Dr. 
Elmendorf for being here today. I want to turn our attention 
back to a subject that has been mentioned several times in the 
previous questions about trust funds, but more specifically 
about Social Security. In understanding trust funds and I think 
you have done a good job in the introduction to this particular 
section and I want to lift up one paragraph that is in there on 
Page 121 when you say, ``A trust fund receives cash receipts 
that are not needed immediately to pay benefits or cover other 
costs, the Treasury uses the extra income to reduce the amount 
of new federal borrowing that is necessary to finance the 
government-wide deficit, and the reverse happens when revenues 
for trust fund falls short of the expenses in a given year.'' 
So I think that helps us to understand a little bit more about 
how the trust fund works. Then I want to turn everyone's 
attention to Page 122, and there just above the Social Security 
trust fund statement or section you say, ``Without legislative 
action, that there are three trust funds are projected to be 
exhausted during that period,'' and that period you are talking 
about is 2013 to 2022: Social Security Disabilities, Insurance 
trust fund, Medicare hospital trust fund, and the highway trust 
fund.
    Now, looking at Social Security trust fund, we know that it 
is running a cash deficit, and payments are going out for 
benefits that exceed the Social Security payroll taxes that are 
coming in, and of course, if this trend were to continue we 
would need to redeem the Social Security trust fund's assets to 
make payments. Do the Social Security trust funds represent 
real assets that government can draw upon?
    Mr. Elmendorf. So as we say Congresswoman, in the paragraph 
following the one you read, the balance in the trust fund is an 
asset for the individual program, but a liability for the rest 
of the government, and the resources to redeem a trust fund 
securities in some future year must be generated through taxes, 
income from other government sources, or borrowing from the 
public in that year. Therefore, trust funds have an important 
legal meaning in that their balances are a measure of the 
amounts the government has a legal authority to spend for 
certain purposes, but they have little relevance in an economic 
or budgetary sense.
    Ms. Black. You say on Page 124 ``By 2022 the trust fund for 
the Old Age and Survivor's Insurance is projected to show a 
deficit.'' What then? What then do we do? Do we go into the 
securities? Are there actual securities there that can be 
redeemed to pay for the benefit?
    Mr. Elmendorf. Well, there are actual securities there, the 
trust fund is the legal owner of a very large pile of honest to 
God government securities, but the resources to honor those has 
to come from some other place, as we have discussed, so when 
the trust fund starts to give securities back to the 
government, the rest of the government, and ask for cash, that 
cash has to come from some source in that year.
    Ms. Black. And again, help me understand where they come 
from. You mentioned borrowing.
    Mr. Elmendorf. Basic sources of funds to the government on 
a unified basis all the time is the revenue that is collected, 
the taxes or fees or something else, and borrowing.
    Ms. Black. So at the end of the day, it almost is a shell 
game where we just move this money around and it appears that 
in trying to understand when we tell people that are paying a 
tax, a payroll tax, and at the other end they expect a benefit, 
the dollars really that are being put in there, are not 
necessarily the dollars that, at the end of the day, are going 
to be redeemed because there is a lot of shifting and moving of 
the money?
    Mr. Elmendorf. How much people get out depends on the 
decisions of the Congress about future benefits. As you know, 
in CBO's work, we focus very much on the unified federal 
budget. The Social Security trust fund and others are 
accounting mechanisms and they have a useful role, I think, as 
accounting mechanisms, but in our analysis of the budget 
situation and our projections of the future budget, we focus on 
the outlays for programs and the collection of money without 
focusing on which particular account something is being kept 
track of in. We do talk about the trust funds in this appendix 
that you have read, but we think a more useful way for you and 
your colleagues to think about the fiscal policy choices, is 
not through the trust fund lens as much as in terms of the 
overall activities of the government, in both providing 
benefits and services, and in collecting revenue.
    Ms. Black. I think, to make a point here, and I know my 
time is up, but I need to make the point here is that at the 
end of the day the money has to come from somewhere, and the 
money, if it starts to run out, has to come from somewhere, and 
i.e. many times that is borrowing more money and increasing our 
deficit.
    Chairman Ryan. Thank you. Mr. Ryan.
    Mr. Ryan of Ohio. Thank you Mr. Chairman, thank you for all 
that you do for us and welcome to your family that is here.
    Mr. Elmendorf. Thank you.
    Mr. Ryan of Ohio. So, how many jobs do you guys estimate 
the stimulus bill created?
    Mr. Elmendorf. As a path over time, our estimate is that in 
2010, for example, that it added between .7 and 3.3 million 
people in employment. In 2011, that it added between .5 and 2.6 
million people in employment. In 2012, those numbers are 
smaller because the budgetary effects of the Recovery Act are 
waning.
    Mr. Ryan of Ohio. The money is coming out of the economy, 
or not going into the economy.
    Mr. Elmendorf. Not going into the economy.
    Mr. Ryan of Ohio. Right.
    Mr. Elmendorf. Yes.
    Mr. Ryan of Ohio. So we have CBO telling us that the 
stimulus has created millions of jobs here officially on the 
record. What was the change in GDP growth from, say, January 
and February prior to the stimulus bill? We know we were 
bleeding 600,000, 700,000 jobs a month. What was the change in 
GDP growth, say from that January and February to now, for 
example?
    Mr. Elmendorf. Well, as you know, GDP was falling very 
sharply at the beginning of 2009 and it reached its trough 
around the middle of the year, economists call that the end of 
the recession; recession is a technical term that means the 
declining period when GDP is declining. Since then GDP has been 
growing.
    Mr. Ryan of Ohio. By how many points from the bottom in 
that summer to the growth that we saw in the last quarter?
    Mr. Elmendorf. So I am sorry, I do not know that off hand.
    Mr. Ryan of Ohio. What did it grow last quarter, 2.8?
    Mr. Elmendorf. Yes.
    Mr. Ryan of Ohio. What was it in that summer? Do you 
remember, the negative?
    Mr. Elmendorf. I do not remember what it was in the first 
half.
    Mr. Ryan of Ohio. Okay, but we have had significant change. 
We have had jobs created. So one of my colleagues said earlier, 
you know, what is better, private investment and private 
investment trumps federal spending, and I do not think there is 
anybody here who would not rather have the private sector 
coming in, making investments, creating jobs; that is what we 
are all trying to figure out how to make that happen, and what 
environment needs to be in place in order for that to happen 
from deficits to investments that we make. But the issue 
really, at that point, was that there was not private 
investment, correct?
    Mr. Elmendorf. Yes, I think there was a very sharp 
reduction in household spending on the consumer goods, in 
housing construction, in business investment, and as private 
demand faltered, part of what happened in response to that was 
an automatic change in the government budget. Tax revenues fall 
when income falls, and spending rises when incomes are down, 
but also then the government acted through the Recovery Act and 
other measures, and we think that the Recovery Act provided 
some additional demand, some from government purchases, but 
some by lowering taxes in a way that boosted private demand.
    Mr. Ryan of Ohio. Did you run any models on what the world 
would have looked like had we not passed the stimulus package? 
At that point you guys had to have been saying, if you do a 
stimulus package that is 800 billion, if you do one that is 1.5 
billion, or one 1.5 trillion, or if you do nothing, what was 
the model looking like of the do nothing scenario?
    Mr. Elmendorf. We did estimates in the winter of 2009 of 
the effects of the versions of the Recovery Act as they were 
being considered, and I think we published a chart at some 
point that showed a decline in the level of GDP that was very 
severe in the absence of the Recovery Act, and the decline that 
was still severe, but not as severe, in the presence of the 
Recovery Act. In a sense, one can take our estimates that we 
published now of the effects of the Recovery Act and subtract 
off those effects from the realized GDP growth and employment 
levels, to get a sense of what we think would have happened in 
the absence of the Recovery Act.
    Mr. Ryan of Ohio. Okay, great. I just want to make that 
point. I mean, no one here is happy with where we are at today, 
believe me, I represent Youngstown, Ohio; we have the poorest 
city in the country. No one is happy with where we are at, but 
I think it is important for us to say wait a minute, there was 
no private investment, this had had some significant effect, 
CBO is telling us millions of jobs, a turnaround in GDP growth.
    Last quick question, so now we are debating these value 
judgments of raising taxes on hedge funds, billionaires, 
millionaires, whatever, versus federal spending. What increases 
the GDP more significantly, a tax cut for a millionaire or 
higher, versus a federal investment in, say, building roads and 
bridges and fixing the combined sewer overflow problem we have 
in the country?
    Mr. Elmendorf. Over the next few years, Congressman, we 
think that higher income people spend a small share of the 
incremental income or wealth they have from a tax cut, does not 
provide very much stimulus to the economy relative to giving 
money to people who will spend a larger share of that money, 
and that includes sending money in the form of infrastructure 
investment. The big issue in that case, as I mentioned before, 
is the delay from your actions to the money actually flowing.
    Chairman Ryan. Thank you. Mr. Ribble.
    Mr. Ribble. Thank you Mr. Chairman. I do have a couple 
slides, I wonder if we can get those brought up. Dr. Elmendorf, 
thanks for being here, I know that it has been a long morning 
already. I appreciate your patience; you have been kind with 
your time. I want to take a look at two slides very briefly, 
and then just kind of get you to comment on them.



    This one shows consumer spending dating back to 2001. We 
can see the recession period in there, the drop-off in at 
consumer spending, but even that drop-off, it dropped off back 
to about 2007 levels, which was at the end of the housing boom, 
one of the largest growth periods in the nation's economy, and 
then subsequently it has turned around and began to grow again. 
I guess the thing that pops in my mind is we hear a lot about 
consumer spending. If consumer spending is the ticket to job 
growth, and consumer spending is up and up fairly dramatically 
from 2007, I wonder why we do not have jobs.
    Mr. Elmendorf. It is the sum of the demands for goods and 
services that drive overall employment; so it is adding up what 
is happening in consumer spending and business investment, and 
housing investment and the federal and state and local 
governments purchases of goods and services and net export.
    Mr. Ribble. Good. Let me just bring another slide up. I am 
going to talk along the same lines. Let's go ahead and I will 
let you continue. I have got one more slide if we can bring 
that up.



    All right, we have talked a lot, and my colleague did, Mr. 
Ryan from Ohio just mentioned it, you just mentioned in your 
comment, about private investment. I know that you are an 
economist, but I am going to ask you to put on your psychology 
hat, and can you possibly tell me because I spent 30 years in 
the private sector running my own business creating jobs in 
this country. I know that the political class here in 
Washington likes to claim they claim jobs, Democrats claimed 
all these jobs and Republicans create all these jobs. I find it 
a little insulting. I thought I actually helped create them 
myself in my company, but private investment is way off. Why do 
you suppose that is?
    Mr. Elmendorf. Well, investment is one of the more 
cyclically sensitive parts of the economy. So in general, 
business investment falls sharply in recessions and then 
rebounds sharply in recoveries, but it is true that in this 
particular downturn, business investment fell to an especially 
low level; we show a picture of that ourselves in our outlook I 
think. And there are a number of factors here, and it is hard 
to disentangle them. We are actually doing some work now trying 
to disentangle various factors that have led to the slow 
recovery, and when that work is finished we will of course 
supply it.
    Mr. Ribble. Let me tell you what small business owners and 
job creators are telling me back in my home district. They are 
telling me that they have absolutely no confidence that the 
political class in Washington, D.C. can solve these problems. 
Until they have a sense that we can solve the problems, until 
they have a sense that Democrats and Republicans can lay down 
their swords, maybe put aside preconceived impressions of 
reality, I have to defend this type of economic model, they 
have to defend their type of economic model and we are going to 
hold on to it until we die, business is not going to invest 
money because they do not trust us. I would call on all my 
colleagues to just lay down the sword and try to fix this 
thing, and inject some confidence back into the economy because 
I will tell you, the other thing I hear from them is that the 
government has gotten too much in the way. They feel that a $16 
trillion debt, it scares the living daylights out of them. They 
feel that a regulatory environment that places thousands and 
thousands and thousands of pages and new rules on them every 
single year is a burden on them; and they feel that oppressive 
tax rates that continue to take from them money that they could 
use to create more and more jobs is a risk to them; and I hear 
this over and over again, not from just one or two.
    I am going to close with one other comment, and one other 
question. I was really pleased to see that you brought your 
daughters with you today; I wish my own two children were here 
with me today and my grandchildren were here today. You have 
done a wonderful job, I am sure they are very proud of you. Do 
you think that their future is brighter today than it was $4 
trillion of debt ago?
    Mr. Elmendorf. A lot has happened in the country since our 
debt was $4 trillion smaller, Congressman, and I think some 
aspects of that have been good for their future and some not, 
but that is a personal judgment in any case.
    On the matter of business investment, I am not at all 
surprised that the uncertainty about future government policies 
is weighing on business. There is a recent paper, actually co-
written by a member of our panel of economic advisers, that 
shows that uncertainty about government policies is especially 
high now, and given the tempering nature of so many parts of 
the tax code, such lack of clarity about what will happen in 
health care policy, in financial regulatory policy and so on, 
we think that is weighing on business investment decisions, but 
I would just say quickly, that I think the surveys of business 
suggest that the biggest factor weighing on their hiring and 
investing is uncertainty about the future demand for their 
products, and that is a sort of circular exercise, which is 
that if some businesses spent more and hired more, that would 
bolster demand for other business to work, and that would have 
a virtuous circle, but I think the biggest source of 
uncertainty that businesses face is their sales.
    Mr. Ribble. And I completely agree with you, and I will 
tell you that regulations and taxes are affecting that demand. 
Thank you.
    Chairman Ryan. Mr. Huelskamp.
    Mr. Huelskamp. Thank you Mr. Chairman. Mr. Director, I 
appreciate your time today. I was looking through the report 
and on Page 36 you actually discuss participation in the labor 
force, and you note the employment rate in the fourth quarter 
of 2011 would have been one-quarter percentage point higher 
than the actual rate 8.7 percent. Trying to understand this, so 
when you factor in the number of people who quit looking for 
work, our effective unemployment rate is really to 10 percent?
    Mr. Elmendorf. Yes, I guess that is right. I cannot find 
the specific place, but yes. It is often the case in downturns 
that some people who lose jobs keep looking and some stop 
looking, at least for a while, but I think that effect has been 
particularly pronounced in this downturn, of course the rise in 
unemployment and the duration of high unemployment has been 
particularly pronounced as well.
    Mr. Huelskamp. Yeah, it has been very difficult, but again, 
10 percent effective unemployment rate, that still does not 
factor in the underemployed, that is correct, that does not 
include those?
    Mr. Elmendorf. I think that is right.
    Mr. Huelskamp. Okay. If we factor those in, what percentage 
do we have of unemployed or underemployed?
    Mr. Elmendorf. I am sorry, I do not have that. That is an 
important concept, Congressman, I just do not have those 
numbers at hand.
    Mr. Huelskamp. It certainly is and so I appreciate that. To 
follow up on that, my other question is turning to taxes, you 
have two scenarios, but if I do back of the envelope estimate 
is that if Congress does nothing we foresee at least a $5 
trillion tax increase if the Bush/Obama tax cuts of 2001, 2003, 
and 2010 all expire, is that about $5 trillion over that 10 
year window?
    Mr. Elmendorf. Yes, that is right, Congressman.
    Mr. Huelskamp. Okay, and the net economic impact of a $5 
trillion tax increase would be positive or negative?
    Mr. Elmendorf. Well, in the short run we think that that 
tax increase would have a negative effect on the economy. By 
the end of the decade, we think that that tax increase 
scheduled in current law would have a positive effect on the 
economy, and the reason is because the increase in tax rates 
embodied in current law has opposing effects on GDP over the 
medium-term and long-term. The lower tax rates do encourage 
additional work effort and saving in a way that we capture in 
our models, and that are good for the economy, but the 
tremendous amount of extra borrowing crowds out private 
investment, and that is bad for the economy. In our modeling, 
using a range of assumptions, the effects of the extra debt 
dominates the effects of the lower tax rates by the end of the 
decade.
    Mr. Huelskamp. Even in the latter part of your comment 
about crowding other investments, you would say that even in 
light of Mr. Bernanke's statement that we are going to have 
massively low borrowing cost for the foreseeable future, and 
does that not play a significant role in trying to predict what 
would occur, and that is a question I will ask Mr. Bernanke 
openly in the next day or so?
    Mr. Elmendorf. Yes, and I am curious to hear his answer. 
Certainly the low borrowing cost is part of what we have in our 
baseline projections, but it still may be the case, and we 
think it would be the case that relative to what would happen 
with a debt that was this big, having a debt of this big will 
raise interest rates, so that increase was coming from a lower 
baseline level than as often been the case, but we think that 
extra demand for credit will still push up the cost of credit.
    Mr. Huelskamp. And another question, I appreciate that. I 
ask my staff regularly when they think the debt limit increase 
will be needed, and they have been saying it would be kind of 
March, but with the new higher deficit figures, another 
trillion dollars for the fourth year in a row, just 
unbelievable. What is your latest estimate for when the federal 
government will run out of money without using extraordinary 
means like is continually discussed?
    Mr. Elmendorf. So we do not try to track Treasury's cash 
flows on a monthly basis, so we are not the people to come to 
for a specific prediction at any point of when a date might be.
    Mr. Huelskamp. I would say going to the Treasury for a 
specific prediction would be problematic as well. On the day 
they said they would run out of cash in August 2nd, they 
actually had another 10 days worth of resources. I appreciate 
that, but just big picture, will we get to 2013 or will we run 
out of money before a new president takes office?
    Mr. Elmendorf. So under current law, we think that, yes, 
the government can get to 2013 without raising the debt ceiling 
or going to the extraordinary measures that you mentioned, but 
that is quite uncertain. It depends on our economic projection; 
it also depends, of course, on the actions that Congress takes.
    Mr. Huelskamp. Okay. I appreciate, and lastly, one quick 
question: last summer we had an exchange about which government 
programs created economic growth, went back and forth with your 
office, I know that is difficult to pull out, and looking at 
the effective unemployment rate of 10 percent, and the anemic 
economic projections, is it fair to say the tremendous run-up 
in government spending of 2009 did not benefit the economy in 
the long run?
    Mr. Elmendorf. The extra government spending from the 
Recovery Act in 2009 boosted the economy in the short-term, but 
we believe yes, unless there are offsetting changes made, that 
pay off the extra debt that was incurred, the economy will be 
worse off as a result by the time we get back to potential 
output and full employment later in the decade.
    Chairman Ryan. Mr. Rokita.
    Mr. Rokita. Thank you, Mr. Chairman. Dr. Elmendorf welcome, 
thank you for being here. You and I always seem to talk about 
this time in the day. Part of being a new member, that is the 
last name with the letter ``R.''
    Mr. Elmendorf. Happy to be here.
    Mr. Rokita. I heard your testimony with the chairman, when 
you had a discussion about un-sustainability, and I heard you 
just say it is not Medicare, and I want to clear this up 
because this was my impression, it is not Medicare that is 
causing the un-sustainability, we have a mix of policies that 
need to be worked on.
    Mr. Elmendorf. Yes, I said what made the alternative fiscal 
scenario unsustainable in the long run, is the combination of 
policies, it is the growth, certainly, of Medicare, other 
federal health programs, Social Security set against taxes that 
remain close to their historical average share.
    Mr. Rokita. So I want to be clear, for the record, for my 
own understanding, for the American people, that you are not 
saying that we do not have to reform Medicare or are you? If we 
were to adjust all the other parts of that mix, and not touch 
Medicare, is this country okay in the long run?
    Mr. Elmendorf. So, in our projections from last summer for 
2035, we have Medicare being about two percent of GDP larger 
than it is today, so that alone can be accommodated through 
other changes in policy. I do not think Medicare has to be 
changed over the next 25 years that we focus on here, but 
something has to be changed from current policies.
    Mr. Rokita. So seniors going on Medicare now might use it 
for the next 25 years, so I need a longer term view than that. 
I want to talk about my 2-year-old, my 4-year-old, I want to 
talk about their kids.
    Chairman Ryan. Will the gentleman yield for a second? So 
just looking at the CBO's long term budget outlook, to answer 
your question because we have it right here, Medicare, 
Medicaid, the health care entitlements, plus the interest on 
debt at that time, will equal federal revenues. That means no 
other program in the federal government outside of the health 
care programs and the interest on the debt will be paid for by 
any revenues in 2034.
    Mr. Elmendorf. That is right, but as you know, the debt 
service that we are paying at that point arises from the 
combination of policies we have had in the intervening years. 
So again, I think it is a judgment that you all need to make 
about whether you want to have a country with historical levels 
of revenues and changes in Social Security, Medicare programs 
to come down to that level, or the programs as they are 
currently structured, and increases in revenues to come to up 
that level, or some combination of policies.
    Mr. Rokita. I just think when you are talking about a 
program that is going to be 14 percent of GDP and has no 
interest in plateauing from there; it is going to keep going 
and going; you have got to if you are going to have an honest 
discussion with us, the American peoples, understand that this 
is part, the centerpiece, perhaps, of the problem.
    Mr. Elmendorf. Again, Congressman, I think I have been very 
clear here and in many other times that it is the aging of the 
population and the rising cost of health care that is putting 
this unbelievable pressure on the federal budget, but there are 
different ways to respond to that and it is not our place to 
endorse.
    Mr. Rokita. Yeah, I understand that you said that a few 
times too, but when you say mix of current policies, you are 
endorsing something. That is what I want to be clear about, 
that Medicare reform is part of this mix, and that it has to be 
reformed or not. So that is what I want to get to.
    Mr. Elmendorf. Right, so I do not think that one can say 
that any single piece has to be reformed; it is the combination 
of policies that have to be pursued.
    Mr. Rokita. All right, well thatis on record. All right, 
let me go here. When Ms. Castor was asking you some questions 
about growing out of this deficit, I want to be clear for the 
record that you mean to say that we can have policies that 
create growth, whatever we agree them to be, that could help 
reduce the deficit, that has nothing to do with reducing the 
debt. By definition, if you do not wipe out the deficit year to 
year, you cannot start attacking the debt; so you cannot grow 
your way out of the debt we are in, and the debt that is coming 
down the road alone. Just by growing the economy, all the dials 
not touched, you cannot grow your way out of this debt. In a 
first world mature economy.
    Mr. Elmendorf. In our baseline, our current law 
projections, debt continues to rise because we continue to have 
deficits, as you are saying, it falls slowly relative to GDP 
because the debt is rising more slowly than GDP by the second 
half of the decade under these current law projections.
    Mr. Rokita. But if you are eliminating the deficit, you are 
not reducing the debt.
    Mr. Elmendorf. You are not reducing the dollar value of the 
debt.
    Mr. Rokita. So growth alone will not do this. Regarding the 
extended payroll tax cut, I understood that the cost of the tax 
cut, if extended this year, would be about $100 billion, and 
you indicated that that is better for the near term economy 
than the Bush tax cuts.
    Mr. Elmendorf. Dollar for dollar that we estimate that 
lower payroll taxes has a stronger stimulative effect than a 
broad based.
    Mr. Rokita. And you also would agree that of that $100 
billion has be paid for by future generations? But for our near 
term economic bump, other future generations need to pay for 
that?
    Mr. Elmendorf. Well, or this generation a few years later, 
but yes, it has to be paid for by somebody.
    Mr. Rokita. Right. With a small amount of time I have left, 
John Maynard Keynes, what do you believe he got right and what 
do you not subscribe to?
    Mr. Elmendorf. I think it is a widespread view among 
macroeconomists today that over the medium or long run, 
economies are what we call classical or neoclassical, so that 
the constraint on output and incomes is the supply of the 
factors of production, labor supply saving and so on, but also, 
I think, a view of most economists who are thinking about 
business cycles, is that in the short-term, then a very 
important determinant of the level of output and the level of 
employment is the demand for goods and services, and that is, 
at its heart, a Keynesian idea. The actual models we use, the 
way this is structured has evolved a tremendous amount in the 
75 years, but that view that in the short run the economy has 
what people think of as Keynesian properties, in the medium and 
long run it does not have those Keynesian properties. That is, 
I think, a consensus view that you will find in leading 
textbooks. Not everybody shares it, I do not want to say that, 
but I think it is a consensus view that you will find in 
leading textbooks and a lot of the writings of people over the 
past few years, with a range of political views and a range of 
views about whether the right way to proceed in the country is 
to change taxes or spending and so on.
    Mr. Rokita. And my time is expired. Thank you. I will call 
the office from time to time.
    Mr. Elmendorf. Please do.
    Chairman Ryan. Thank you, Mr. Woodall.
    Mr. Woodall. Thank you, Mr. Chairman, and thank you Dr. 
Elmendorf for staying with us throughout the morning. Just so 
you know, I tremendously appreciate the work you and your team 
does; I know we are here to talk about your latest body of 
work, but I want to talk a little bit about a publication you 
all do every so often, the Historical Effective Federal Tax 
Rates, just love this publication. As I turn to your most 
recent addition, I see this: that if you were in the bottom 40 
percent of income earners in this country, you actually profit 
from the American income tax system. That almost half this 
country, and I am not talking about the refund check you get in 
April, I am talking about the tax code, the tax collection 
system in this country sends you more money than you send to 
it. The privilege of being American citizen is profitable 
through the income tax code for the bottom 40 percent of all 
Americans. I do not think we think about that, we all think 
that we are paying our fair share, that somebody else needs to 
pay a share. You know, I am a proponent of the fair tax, that 
is HR 25 here in the House, it abolishes the entire income tax 
code, and I look to your report that tells me for 40 percent of 
Americans, the income tax does not collect taxes, it 
distributes largesse. As evidence, the income tax code has lost 
its way.
    I also look at your Trends in Federal Tax Revenues and Tax 
Rates, love that publication as well, and what I see, 
particularly when I combine with figure 4.1 from your economic 
outlook today, I look back during the Carter years, the Ford 
years, the 1970s, where the highest ordinary income rate in 
this country was 70 percent. The income tax rate was 70 percent 
in this country, but I look at your CBO baseline of revenues, 
and I see that revenues during that time were right there at 
historical averages, maybe a little lower. I fast forward to 
1986 and the income tax reformsthat Tip O'Neill and Ronald 
Reagan put into place, I see the lowest ordinary individual 
income tax rates on record, but then I go to your figure 4.1 
again, the CBO baseline, and I find out that during those years 
revenues were a little higher than the average revenues. So the 
higher tax rates lead to lower revenues, and the lower tax 
rates correspond to higher revenues; and as a freshman I 
appreciate you being able to educate me in that way.
    What has really gotten me confused, though, is going back 
to figure 4.1, I see you have a CBO baseline projection and 
alternative fiscal scenario, and the alternative fiscal 
scenario assumes that President Bush's tax cuts, President 
Obama's tax cuts, all of those tax cuts stay in place. Is that 
correct?
    Mr. Elmendorf. All the expiring tax provisions are extended 
with the exception of the payroll tax.
    Mr. Woodall. So according to what I see here in figure 4.1, 
if we leave every single tax cut in place, in fact if we even 
bring back the tax cuts that expired in 2011, revenues will 
still be higher than the 50 year historical norm. We leave 
every tax cut in place, federal revenues will be higher in this 
10 year window than the 50 year norm, am I reading that chart 
correctly?
    Mr. Elmendorf. By the end of the decade they would be 
higher than the average of the previous 50 years, yes. That is 
right Congressman.
    Mr. Woodall. But I have heard my colleagues talk about that 
revenue is an important component of our deficit crisis, and 
that the deficit is caused by these tax cuts, so I go to your 
CBO baseline proposal that assumes all of these tax cuts 
expire, and what I see is that if we allow these tax cuts to 
expire, federal revenues as a percent of GDP will rise to the 
highest levels in 50 years? Is that right? I only see a 50 year 
window here; it is the highest level on the chart. Is that 
correct?
    Mr. Elmendorf. It is the highest on the chart, I cannot 
speak to the longer history off-hand.
    Mr. Woodall. So if we allow those tax cuts to expire, and 
we allow federal revenues to rise to the highest level in 50 
years, are we able to start paying down debt?
    Mr. Elmendorf. If the tax cuts expire, as under current 
law, and you keep to current law in spending, then the debt 
continues to rise.
    Mr. Woodall. So the highest tax rates over the last 50 
years do not pay down any debt, but do they eliminate our 
annual deficits?
    Mr. Elmendorf. No, again, if the rest of current law 
remains in place, then we continue in our current law 
baselines, those continue to deficits.
    Mr. Woodall. If we allow all the tax cuts to expire, if we 
allow federal revenues to rise to the highest level in the last 
50 years, we do not pay down a penny in debt, we do not 
eliminate our national deficit and we continue to accumulate 
that. What that tells me, Dr. Elmendorf, is that clearly 
revenues are not the challenge in this scenario, it is spending 
that is the problem and I know that folks back home are 
wondering when we allow revenues to rise to their highest 
levels in 50 years, what they are getting for that money.
    Mr. Elmendorf. But the short answer to that, Congressman, 
is there will be far more people collecting Social Security 
checks in 2022 than any point in the past 50 years. There will 
be far more people collecting Medicare benefits in 2022 than in 
the preceding 50 years. More elderly people collecting benefits 
for long-term care through Medicaid than in the preceding 50 
years. So the American people are receiving benefits whether 
you and they view those benefits as worth that cost is the 
judgment that you and they have to make.
    Mr. Woodall. Well, I guess that goes to my colleague and 
Mr. Rokita's point, if we can allow revenues to rise to the 
highest level in 50 years, and that still does not solve the 
problem, we better focus on the spending side of the ledger. I 
appreciate your bringing that to us today, thank you again for 
spending so much time with us.
    Mr. Elmendorf. Thank you, Congressman.
    Chairman Ryan. Thank you. Let me just conclude by just 
going to the outstanding work you do in your summer long-term 
budget outlook, which the June budget outlook, and I just 
simply want to impress upon the point that I think members here 
are trying to make, which we tried, at the beginning of the 
hearing. In 2034, using your numbers, spending on entitlement 
health care programs plus interest exceeds all federal revenues 
in 2034. In the end of the century, 2085, Medicare goes from 
where it is now, approximately three percent of GDP to 14 
percent of GDP. All health care entitlements, Medicare, 
Medicaid, CHIP and the exchange subsidies, just those programs 
right there exceed our revenue trend, so before the end of the 
century, before our kids and our grandkids are raising their 
families, all federal revenue that comes into the government 
will not be enough to cover our health care entitlements. Sure, 
I know you cannot give us policy recommendations or you do not 
give us policy recommendations or value judgments, it is 
obvious in your numbers that this path is unsustainable. I 
mean, we cannot just be a government that only provides health 
care benefits. We have national defense, we have education 
concerns, we have environmental concerns, we have Social 
Security, and so the sooner we recognize that the path we are 
on is ruinous, which is what you are showing us in these long-
term numbers, the tax rates that you tell us that we need to 
have, if we want to finance this through income taxes: the 
bottom tax bracket is 25 percent, the middle income tax bracket 
is 66 percent, the top tax rate is 88 percent, we will not have 
an economy. Your own model breaks down, I think, in 2027 
because of debt burdens. So I think we need to be a little more 
candid about the absolute un-sustainability of it and it is not 
simply a question of cutting back a little bit here on 
discretionary spending or trimming this program over here; this 
is all so unsustainable. It is the fault of both political 
parties and the sooner we recognize that the better off we are 
going to be, not only in keeping commitment to people who have 
organized their lives around these programs, but for our 
economy as well, and that is the point we are trying to make.
    Mr. Elmendorf. Mr. Chairman, as you know, you are fonder of 
our very long-term projections than we are when we talk with 
our panel of health advisers for their guidance in setting the 
very long term projections. They do not really talk with us 
about it, they think it is a silly question to ask, so we do 
provide them out the full 75 years, as the Social Security, 
Medicare actuaries do, we do the same thing for our long-term 
Social Security, Medicare projections, but if you look back 75 
years ago, and picture what people in 1935 would have done in 
trying to project health spending in 2010, you can see why that 
is a very perilous business. So we try to focus, as we have, in 
this long-term budget outlook, on the next 25 years. What I 
think is there is an absolute trade-off between putting 
revenues above their historical average share of GDP and 
cutting Social Security and the federal health care programs.
    Chairman Ryan. Are they being cut in real terms in what we 
are talking about, are rates of growth going down?
    Mr. Elmendorf. Let's actually be careful. Cut relative to 
what will occur under current law, and we said this, as you 
know, time and time again, that the Congress will need to 
either raise revenues well above what has been the historical 
average share of GDP, or make fundamental changes in the large 
entitlement programs, or some combination, even if one reaches 
for a combination, the changes to both revenues and these large 
entitlements will each need to be large because the scale of 
the problem, the gap between the revenues we are used to 
sending to the government and the benefits that we are used to 
getting from the government is getting so large.
    Chairman Ryan. And the largest one is the health care 
entitlements, correct?
    Mr. Elmendorf. The fastest growing programs are the health 
care entitlements. Medicare is a little smaller than Social 
Security even 25 years from now, but Medicare and Medicaid 
together are larger than Social Security by the end of the 
decade.
    Chairman Ryan. And this is why the point I tried to make 
earlier about getting better data in research and analytical 
tools on ideas and reforms on bending the cost curves of health 
care is really crucial because if we can get at the root cause 
of health inflation, that is one of the smartest, best things 
we can do to deal with this situation because I think as you 
have shown in your analysis the kinds of tax rates that this 
country would have to absorb, would be growth destroying if we 
actually went down that path.
    Mr. Elmendorf. And, as you know, that work is a very high 
priority for us.
    Chairman Ryan. All right. Thank you.
    Mr. Honda. Mr. Chairman, if I may just have a closing 
comment also?
    Chairman Ryan. Okay. I will get the last word, you know.
    Mr. Honda. Well, you are the chair. There are a couple 
comments I will make that I just needed to just respond to in 
terms of highest income in past 50 years, or expenditures that 
we see on the chart. The charts are kind of static in that we 
have to take them in the context of other dynamics. I think 
this is what is trying to be impressed upon by Dr. Elmendorf.
    In terms of the highest income or highest expenditure in 
last 50 years, 50 years ago I was probably making around $200 a 
month, take home, and today, 50 years later, I have the highest 
income that I could ever have imagined or ever dreamed of, but 
it is because of the way the economy has changed, the cost of 
living has changed, and things like that, so to compare 
yesterday from today has to be taken in context of a lot of 
information. So in terms of numbers and budget and projection 
and things like that, the science and the art, if you will, of 
budgeting and trying to make the right decisions for the future 
and for our country has to be a thoughtful process, through 
dialogue and debate, and I think that that is why I appreciate 
today's session and, Mr. Chairman, you may have the last word.
    Chairman Ryan. Okay. No, I am just having fun with you, but 
I actually will. It is a technical question I am going to have 
to ask you for the record. According to the March 2011 
baseline, limiting spending to gas tax levels would result in 
spending that would be in average of $13 billion per year below 
current levels. Has that changed under the new baseline?
    Mr. Elmendorf. So that number is one, I think, is one I am 
not familiar with, but I can give you the current number.
    Chairman Ryan. Okay.
    Mr. Elmendorf. We estimate, I think this is the answer to 
your questions which I was helpfully provided with late last 
night.
    Chairman Ryan. That is, I think, why we are asked to ask 
you this right now.
    Mr. Elmendorf. Over the coming decade, we estimate on 
average annual outlays from the highway account, or the highway 
trust fund, will be about $8 billion more than revenue and 
interest credited to the account, although of course that gap 
varies by year over the coming decade.
    Chairman Ryan. So that is the change from last year's 
baseline to this year's baseline? What is the delta?
    Mr. Elmendorf. I do not have a number for last year, so I 
do not know what it used to be, all I know is what it is now.
    Chairman Ryan. Okay.
    Mr. Elmendorf. And our current projection, on average, over 
the coming decade, between the outlays and revenues is $8 
billion per year.
    Chairman Ryan. Okay, okay, all right. I think that answers 
my question. Thank you.
    Mr. Elmendorf. Okay. Thank you all.
    Chairman Ryan. The hearing is adjourned.
    [Questions submitted for the record and their responses 
follow:]

           Chairman Ryan's Questions Submitted for the Record
                          and Their Responses

Changes in CBO's Estimated Impact of the 2009-Enacted Economic Stimulus 
        Legislation
    In a response to a question at our February 1, 2012 CBO Budget and 
Economic Outlook hearing, Director Elmendorf indicated that CBO 
estimates that the 2009-enacted economic stimulus legislation increased 
employment by between 0.7 million and 3.3 million people in 2010. The 
range he mentioned matches the low and high estimates for the 
legislation's employment impact in 2010 (calendar year average) 
published in CBO's November 2011 report on this subject (in the bottom 
portion of Table 1 on p 3.). I mention this because Table 1 in CBO's 
preceding August 2011 report displays an estimated employment increase 
of 1.3 million to 3.3 million people for 2010. In other words, as you 
know, CBO has significantly reduced the low estimate of employment 
increase due to the stimulus. More broadly, the November report (on 
page 8) confirms that CBO's low estimates of the stimulus legislation's 
effect on economic output and employment for each year are now smaller 
than its previous low estimates. A related footnote and Appendix in the 
November report reference a Valerie Ramey article ``Can Government 
Purchases Stimulate the Economy?'' published in the September 2011 
volume of the American Economic Association's Journal of Economic 
Literature as part of the basis for CBO's reduced low estimates. The 
report's discussion on this is helpful, but it is difficult to get a 
complete picture of the size of the changes in CBO estimates for real 
GDP, the unemployment rate, and employment for each of 2009-2012. To do 
this, it is necessary to compare the Table 1 estimates in the November 
report with those in the August report.

    Question: Can you provide a table that provides this comparison? In 
other words, a table that displays the low and high estimates and the 
differences between these estimates from the November 2011 and August 
2011 reports of the stimulus legislation's effect on real GDP, the 
unemployment rate, and employment for each of 2009-2012 (calendar year 
averages)?

    Answer: The first table below shows the change from August 2011 to 
November 2011 in CBO's estimates of the impact of the American Recovery 
and Reinvestment Act (ARRA) on output, the unemployment rate, 
employment, and full-time-equivalent employment. The related tables 
published in those reports are also reproduced below for your 
information.
    As discussed with additional detail on page 8 of the November 2011 
report, CBO's estimates of the impact of ARRA on output and employment 
differ from those CBO presented in August 2011 both because CBO 
adjusted its methodology for making such estimates and because CBO 
slightly revised its estimates of the timing of changes in federal 
spending as a result of ARRA.
    On the basis of its continuing review of relevant research, CBO has 
decreased the lower end of its range of indirect multiplier effects 
from 1.0 to 0.5, while leaving the upper end of the range unchanged at 
2.5. The indirect multiplier effect is applied to the direct effect of 
all changes in federal taxes and spending due to ARRA. As a result, 
CBO's low estimates of ARRA's effects on output and employment were 
smaller in November 2011 than in August 2011.

      DIFFERENCE BETWEEN THE AUGUST 2011 AND NOVEMBER 2011 REPORTS



                 TABLE 1 FROM THE NOVEMBER 2011 REPORT



                  TABLE 1 FROM THE AUGUST 2011 REPORT



Highway Trust Fund
    Question: The January 2012 baseline estimates the Highway Trust 
Fund (HWTF) is now set to become insolvent in 2013 instead of the 
second half of 2012. What is the reason for this brief reprieve and 
does it materially change the financial status of the Highway Trust 
Fund (including both the Highway and Transit accounts)?

    Answer: CBO's January 2012 estimates of Highway Trust Fund (HWTF) 
spending and revenue include minor technical changes from our earlier 
estimates related to the expected pace of spending and the collection 
of revenues. For example, in August 2011, CBO estimated that the trust 
fund would have a balance of about $9 billion at the end of fiscal year 
2012, while our January 2012 baseline reflects an estimated balance of 
$12 billion at the end of the current fiscal year. The changes between 
the August and January projections do not materially alter the 
fundamental disparity between projected revenues to the fund under 
current tax rates and projected spending if annual obligations are 
continued at the current level. Spending from the fund totaled about 
$45 billion in fiscal year 2011, while revenues deposited into the fund 
last year totaled about $37 billion.

    Question: On May 17, 2011, CBO Assistant Director for Microeconomic 
Studies, Joseph Kile, testified before the Senate Finance Committee 
stating that limiting spending in the Highway Trust Fund (including 
both the Highway and Transit accounts) to the amount that is collected 
in current taxes on fuel and other transportation activities would 
result in spending that would be about $13 billion per year below the 
current amount. Has this estimated average changed under the January 
2012 baseline?

    Answer: No, that estimate has not changed appreciably. Under CBO's 
January 2012 baseline estimates, projected spending from the HWTF would 
be greater than the revenues credited to it by around $13 billion a 
year over the 2012-2022 period. But because the HWTF is not authorized 
to borrow additional funds or incur a deficit, that level of spending 
cannot be sustained in after 2013, according to CBO's estimates of fund 
revenues and spending.

    Question: If Congress did limit spending to gas tax revenue in the 
Highway Trust Fund, how much lower, on average, would annual spending 
be below the current amount in the Highway Account? What about the 
Transit Account?

    Answer: Over the 2012-2022 period, spending from the highway 
account would need to be at least $9 billion lower each year and 
spending from the transit account would need to be at least $5 billion 
lower each year--relative to the baseline extrapolation that assumes 
that future annual obligations from those accounts remain constant in 
real terms. Those projected reductions in spending incorporate the need 
for the Department of Transportation to maintain a cash balance in the 
HWTF in order to meet obligations in a timely manner.
Student Loans
    In 2007, the College Cost Reduction and Access Act (CCRA) became 
law which temporarily lowered, for four years, subsidized Stafford 
student loan rates from 6.8% to 3.4%. Some in Congress are calling for 
a continuation of this lower rate that is set to expire later this 
year. I have some questions about this last-minute call for action.

    Question: Does the January 2012 baseline reflect this coming 
increase in interest rates?

    Answer: Yes, the January 2012 baseline reflects the scheduled 
increase in interest rates because that increase will occur under 
current law.

    Question: Did any of the ``savings'' associated with the shift to 
100% direct lending in the Health Care and Education Reconciliation Act 
of 2010 come from the assumption that interest rates would rise to 6.8% 
later this year? If so, how much?

    Answer: None of the savings in CBO's estimate of the budgetary 
impact of moving student loans to 100-percent direct lending came from 
the scheduled increase in interest rates. At the time that the Health 
Care and Education Reconciliation Act was being considered by the 
Congress, that scheduled rate increase was already included in the 
baseline for both the guaranteed loan and direct loan programs; thus, 
moving to 100-percent direct lending did not affect those interest 
rates.

    Question: Since most of the ``savings'' in the Health Care and 
Education Reconciliation Act of 2010 went to offset the cost of the 
Pell program and other new spending. Is it fair to say that the savings 
generated from the 6.8% interest rate have already been spent?

    Answer: Public Law 107-139, which set a fixed interest rate of 6.8 
percent on all newly disbursed Stafford loans (both subsidized and 
unsubsidized) beginning on July 1, 2006, was enacted in February 2002. 
Henceforth, following the law, CBO's baseline included that 6.8 percent 
interest rate for all Stafford loans (guaranteed and direct) after July 
1, 2006. The College Cost Reduction and Access Act (CCRA) temporarily 
lowered that rate for five years for new subsidized Stafford loans made 
to undergraduate students; under the CCRA, that lower rate does not 
apply to new loans disbursed on or after July 1, 2012. Therefore, all 
of CBO's baseline projections following enactment of CCRA have 
reflected the scheduled increase in interest rates to 6.8 percent for 
new subsidized Stafford loans disbursed on or after July 1, 2012. 
Accordingly, none of the savings in the Health Care and Education 
Reconciliation Act of 2010 were related to that scheduled increase.

    Question: How much would it cost to continue the 3.4% interest rate 
for one year? What about for four more years?

    Answer: Under CBO's January 2012 baseline, we estimate that 
extending the interest rate of 3.4 percent for one year would cost 
about $5.9 billion over the 2012-2022 period (with most of that cost 
falling in fiscal years 2012 and 2013). Under the January 2012 
baseline, we estimate that extending the interest rate of 3.4 percent 
for four years would cost about $19 billion over the 2012-2022 period 
(with most of that cost falling in the first half of that period).

Poverty Trap
    Question: This question pertains to antipoverty programs and their 
potential impact on work incentives. Outside analysis has shown that 
for lower-income individuals at certain segments of the earnings scale 
(i.e. between $15,000 and $30,000) there can be a financial 
disincentive to work. For instance, as these individuals earn more 
income, their transfer payments and subsidies from the government (i.e. 
EITC, food stamps, housing vouchers, etc.) decline and their marginal 
tax rates jump. As a result, after-tax income plus government transfers 
and subsidies may actually stay flat or even fall for some individuals 
as their earnings increase. This disincentive to work and earn more has 
been dubbed ``the poverty trap.'' Can CBO do an analysis which shows 
(in chart form) earned income less taxes plus government transfers and 
subsidies for a few hypothetical households (e.g, a family of 3 and a 
single mother) as these households move up the earnings scale?

    Answer: Low-income individuals and families may be eligible to 
receive cash or in-kind assistance through various government transfer 
programs. In addition, they may also be able to claim refundable tax 
credits. With refundable credits, eligible individuals receive the 
entire amount of the benefit even if it exceeds the income tax 
liability they would have otherwise. Both transfer programs and 
refundable tax credits increase an individual's or family's resources.
    Over some earning ranges, the amount of a transfer or a refundable 
tax credit neither rises nor falls as income increases. But over other 
earning ranges, transfer or credit amounts do rise or fall. Because the 
refundable earned income tax credit (EITC) and the partially refundable 
child tax credit initially increase as earnings rise, those provisions 
reduce marginal tax rates for very low-income workers and may encourage 
work. However, to reduce the cost to the government of various tax 
credits and transfer programs, benefits often limit eligibility to 
individuals and families with incomes below a threshold or phase out as 
earnings continue to rise. Those phaseouts increase effective marginal 
tax rates and may reduce incentives to work--as do payroll taxes and, 
in some cases, state income taxes that people owe as their earnings 
rise.
    The phaseouts of transfer programs do not affect marginal tax rates 
of all low-income families. Not all families are eligible for those 
transfer programs, and not all eligible families participate in the 
programs. Data from a nationally representative household survey show 
that the majority of working families headed by non-elderly and non-
disabled individuals with incomes below 250 percent of the federal 
poverty level (FPL) do not receive a means-tested transfer--and, of 
those who do, the majority participate in only one program (see Table 
1). Although program participation tends to be underreported in survey 
data, researchers using administrative data have also found low rates 
of participation in multiple programs among low-income working 
families.\1\
---------------------------------------------------------------------------
    \1\ See Stephen D. Holt and Jennifer L. Romich, ``Marginal Tax 
Rates Facing Low and Moderate Income Workers Who Participate in Means-
Tested Social Programs,'' National Tax Journal, vol. 60, no. 2 (2007), 
pp. 253-276.
---------------------------------------------------------------------------
    CBO calculated the relationship between a family's earnings and its 
disposable income--the income it has after paying taxes and receiving 
government transfer benefits--as earnings increase from zero to 250 
percent of the FPL. Figures 1 to 3 display that relationship for three 
hypothetical families in 2012: a single parent with one child, a 
married couple with two children, and a single person without children.
    In this analysis, taxes include federal income taxes, state income 
taxes, and the employee's share of payroll taxes (calculated at the 
temporary lower rate in effect for 2012). The transfer programs used in 
the analysis include Temporary Assistance to Needy Families (TANF), 
Housing Choice Vouchers, and the Supplemental Nutrition Assistance 
Program (SNAP).\2\ Because participation in SNAP is more common than 
participation in TANF, the following examples show disposable income 
for families that participate only in SNAP (panel A of each figure) and 
for families that participate in all three programs (panel B of each 
figure).
---------------------------------------------------------------------------
    \2\ CBO calculates disposable income using Pennsylvania's state 
income tax rates and TANF rules because its income tax rates and rules 
for means-tested transfer benefits are similar to those found in other 
states. CBO also uses the median housing costs and median family 
incomes in Pennsylvania in estimating transfer benefits, where 
relevant. In Pennsylvania, households with gross incomes below 160 
percent of the FPL are eligible for SNAP.
---------------------------------------------------------------------------
    The figures show that:
     For either a single parent with one child or a married 
couple with two children, transfer programs and refundable tax credits 
initially raise disposable income above earnings--especially for 
families with very low earnings who receive TANF and housing vouchers. 
The change in disposable income associated with an increase in earnings 
fluctuates because tax and transfer benefits phase in and phase out at 
varying rates across the range of earnings.\3\ For earnings between 
about 100 percent and 150 percent of FPL, disposable income increases 
very little (and in some ranges not at all) as earnings increase, 
because tax and transfer benefits phase out.
---------------------------------------------------------------------------
    \3\ Sharp drops in disposable income can occur when earnings rise 
above thresholds for eligibility for certain transfer programs, because 
once earnings exceed the threshold, the benefit ceases. If, however, 
benefits phase out completely before earnings reach the threshold, 
disposable income changes gradually as earnings cross that threshold.
---------------------------------------------------------------------------
     As earnings rise above 150 percent of the federal poverty 
level, disposable income falls below earnings because income and 
payroll tax liabilities (before credits are included) exceed the sum of 
transfer payments, the EITC, and child tax credits. (After families 
stop receiving the transfer payments, either because they lose 
eligibility or benefits phase out completely, disposable income is the 
same as after-tax income.)
     In contrast, because the EITC for a single person without 
children phases in at a lower rate and has a smaller maximum amount 
than for taxpayers with children, the EITC only slightly boosts 
disposable income above earnings. In particular, because of the 
temporarily lower payroll tax rate in 2012, the EITC exceeds payroll 
taxes over a narrow range of earnings. Taxpayers without children are 
eligible for SNAP and housing vouchers, which raises their disposable 
income, though their benefits from these programs are generally less 
than those of larger families.

    [Whereupon, at 12:35 p.m., the Committee was adjourned.]

                                  
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