[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
THE CONGRESSIONAL BUDGET OFFICE'S
2012 LONG-TERM BUDGET OUTLOOK
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HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
HEARING HELD IN WASHINGTON, DC, JUNE 6, 2012
__________
Serial No. 112-28
__________
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 KAREN BASS, California
TODD C. YOUNG, Indiana SUZANNE BONAMICI, Oregon
JUSTIN AMASH, Michigan
TODD ROKITA, Indiana
FRANK C. GUINTA, New Hampshire
ROB WOODALL, Georgia
Professional Staff
Austin Smythe, Staff Director
Thomas S. Kahn, Minority Staff Director
C O N T E N T S
Page
Hearing held in Washington, DC, June 6, 2012..................... 1
Hon. Paul Ryan, Chairman, Committee on the Budget............ 1
Prepared statement of.................................... 2
Hon. Chris Van Hollen, ranking member, Committee on the
Budget..................................................... 3
Prepared statement of.................................... 4
Douglas W. Elmendorf, Director, Congressional Budget Office.. 5
Prepared statement of.................................... 7
THE CONGRESSIONAL BUDGET OFFICE'S
2012 LONG-TERM BUDGET OUTLOOK
----------
WEDNESDAY, JUNE 6, 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, Cole, Price, McClintock,
Stutzman, Lankford, Black, Flores, Mulvaney, Huelskamp, Young,
Van Hollen, Doggett, Blumenauer, McCollum, Castor, Bonamici.
Chairman Ryan. The hearing will come to order. The
committee will come to order. Welcome everybody to the Budget
Committee. The purpose of this hearing is to review the Long-
Term Budget Outlook, which CBO just recently released, and
unpack the fiscal and economic damage in challenges facing our
nation.
We are joined today by, no stranger to this committee, Doug
Elmendorf, director of the Congressional Budget Office. I want
to thank you again for testifying today, Doug, and for the work
your team has done in putting together this report. The report
is sobering and the warnings are dire. You write in the report,
quote, ``Growing debt would increase the probability of a
sudden fiscal crisis, during which investors would lose
confidence in the government's ability to manage its budget,
and the government would thereby lose its ability to borrow at
affordable rates,'' close quote. What is causing this growing
debt? Government spending is on a breakneck pace. By 2025,
according to this report, health spending, including Medicare
and Medicaid, Social Security and interest on the debt will
consume 100 percent of revenues, tax revenues that continue to
increase each and every year. The problem, of course, is
unsustainable increases in government spending. Our entitlement
programs, in particular government spending on health care are
the core drivers of the debt. As your report makes clear, the
health care law fails to address the cost problem, and instead
adds new liabilities to an already bankrupt future. Those
unwilling to structurally reform a structurally broken
government repeat the same calls for ever higher taxes to chase
ever higher spending. On the question of taking more from
hardworking taxpayers, CBO's report is clear, writing that
that, quote, ``The extent that additional tax revenues were
generated by boosting marginal tax rates, those higher rates
would discourage people from working and saving, further
reducing output in income,'' close quote. CBO, like all non-
partisan experts, has again warned of delay in solving our
fiscal problems. Unfortunately, the administration has no
definitive solution to the problem we face, but merely
obstruction for those who do put forth good faith solutions.
The Senate, of course, has not passed a budget in more than
three years. House Republicans refuse to accept the European-
style debt crisis which promises harsh austerity. We reject the
empty promises and continued inaction in the face of a crisis.
Cranking up tax rates that further stifle growth and harsh
disruptions to beneficiaries is what Europe is doing right now.
This does not have to be our fate. This is why we continue to
advance gradual, common sense reforms to lift the debt,
strengthen core priorities, and spur job growth. We still have
a window of opportunity that will require us to come together
to solve this problem. CBO has presented us with their
analysis, but it is incumbent upon policymakers to respond to
their findings with principled solutions. It is our moral
responsibility to work together to chart a sustainable fiscal
path, to revitalize economic growth and to expand opportunity
now and for generations to come.
I want to thank you for coming again today Doug, we look
forward to your testimony, and lots of questions for the
members, and with that, I will yield to the Ranking Member, Mr.
Van Hollen.
[The prepared statement of Paul Ryan follows:]
Prepared Statement of Hon. Paul Ryan, Chairman, Committee on the Budget
Welcome all to the House Budget Committee.
The purpose of this hearing is to review the Long-Term Budget
Outlook, and unpack the fiscal and economic challenges facing our
nation.
We are joined today by Doug Elmendorf, Director of the
Congressional Budget Office. I want to thank you for testifying today,
Doug--and the work of your team in putting together this report.
The report is sobering and the warnings are dire. You write, quote:
``Growing debt would increase the probability of a sudden fiscal
crisis, during which investors would lose confidence in the
government's ability to manage its budget and the government would
thereby lose its ability to borrow at affordable rates.''
What is the cause of this growing debt? Government spending is on a
breakneck pace. By 2025, health spending, including Medicare and
Medicaid, Social Security and interest on the debt will consume 100
percent of revenues--tax revenue that continues to increase every year.
The problem of course is the unsustainable increase in government
spending. Our entitlement programs--in particular government spending
on health care--are the core drivers of the debt. As your report makes
clear, the health care law fails to address the cost problem, and
instead adds new liabilities to an already bankrupt future.
Those unwilling to structurally reform a structurally broken
government repeat the same calls for ever-higher taxes to chase ever-
higher spending. On the question of taking more from hardworking
taxpayers, CBO's report is clear, writing that to ``the extent that
additional tax revenues were generated by boosting marginal tax rates,
those higher rates would discourage people from working and saving,
further reducing output and income.''
CBO, like all non-partisan experts, has again warned of delay in
solving our fiscal problems. Unfortunately, the Administration has no
definitive solution to the problem we face, but merely obstruction to
those who do put forth good faith solutions.
The Senate, of course, hasn't passed a budget in more than three
years. House Republicans refuse to accept the European-style debt
crisis--which promises harsh austerity.
We reject the empty promises and continued inaction in the face of
a crisis. Cranking up tax rates that further stifle growth and harsh
disruptions to beneficiaries is what Europe is doing now. This does not
have to be our fate.
This is why we continue to advance gradual, common-sense reforms to
lift the debt, strengthen core priorities, and spur job growth. We
still have a window of opportunity that will require us to come
together to solve this problem. CBO has presented us with their
analysis, but it is incumbent upon policymakers to respond to their
findings with principled solutions.
It is our moral responsibility to work together to chart a
sustainable fiscal path, to revitalize economic growth and to expand
opportunity--now and for generations to come.
Thank you, and with that, I yield to the Ranking Member, Mr. Van
Hollen.
Mr. Van Hollen. I thank you Mr. Chairman, I want to join
the chairman in welcoming you Dr. Elmendorf and two weeks ago,
you and your colleagues at the Congressional Budget Office
released an analysis of the economic impact of the so-called
fiscal cliff, painting a very somber picture of what might
happen if Congress fails to address expiring tax cuts and the
looming automatic spending cuts that occur at year's end. You
predicted a possible recession early next year and millions
more out of work if we were to actually go over that fiscal
cliff. Yet your long-term outlook, CBO's long-term outlook,
which we are discussing today, also confirms that continuing to
do business as usual, extending all current tax and spending
policies will produce unsustainable deficits and debt, which
will also hurt the economy in the long run. Taken together, the
two CBO reports reinforce the fact that Congress must adopt a
two track strategy of one, acting now to boost a fragile
economy and help put more Americans back to work, and number
two, acting now to put in place a balanced approach to long-
term deficit reduction that does not take resources out of the
economy in the near term. This is the opposite approach of
those who advocate for immediate, steep austerity measures. The
type of measures that have been pushed by some of our European
partners like the UK and put them back into a recession. On the
first step, putting Americans back to work, we need to enact
the President's jobs plan that the White House sent to Congress
nine months ago. That proposal includes significant new
investment in building roads, bridges, transit ways and other
needed infrastructure. At a time of over 14 percent
unemployment in the construction industry and super low
interest rates, this should be a no-brainer. We call upon
Speaker Boehner to put the President's job proposal to a vote
on the floor of the House. The second step is for lawmakers,
the Congress, the President, to adopt the plan to reduce the
deficit By applying the kind of framework of spending cuts and
revenues generated by eliminating certain tax breaks, that has
been recommended by bipartisan groups, like Simpson-Bowles.
That plan should extend taxually for working families and
replace the sequester with a balanced approach to deficit
reductions so our economy does not go over the fiscal cliff.
Unfortunately the Speaker's threat to let the nation to default
on its debt if Republicans cannot impose their European-style
austerity plan is cementing the view in capital markets that
lawmakers will fail to reach an agreement before the end of the
year. That manufactured crisis creates uncertainty that will
undermine confidence and weaken the economy. The Standard &
Poor's downgrade of the U.S. credit rating last year was due to
forecasts of continued political gridlock. And yet for many in
the House of Representatives compromise remains a dirty word.
Mr. Chairman, we look forward to having a willing partner
willing to make the necessary compromises to both make sure our
economy kicks into full gear and also develops a balance plan
to reduce the deficit over the long term. Thank you.
[The prepared statement of Chris Van Hollen follows:]
Prepared Statement of Hon. Chris Van Hollen, Ranking Member,
Committee on the Budget
Thank you, Mr. Chairman, and welcome, Dr. Elmendorf.
Two weeks ago, the Congressional Budget Office (CBO) released an
analysis of the economic effects of the 'fiscal cliff,' painting a
somber picture of what might happen if Congress fails to address
expiring tax cuts and the looming automatic spending cuts that occur at
year's end: a possible recession early next year and millions more
people put out of work. Yet, CBO's long-term budget outlook released
yesterday also confirms that continuing to do business as usual--
extending all current tax and spending policies--will produce
unsustainable deficits and debt, which would also hurt the economy in
the long run. Taken together, the two CBO reports reinforce the fact
that Congress must adopt a two-track strategy of: 1) acting now to
boost our fragile economy and help put more Americans back to work, and
2) acting now to put in place a balanced approach to long-term deficit
reduction that doesn't take resources out of the economy in the near
term. This is the opposite approach to those who advocate for
immediate, steep austerity measures--the type of measures that have
pushed some of our European partners like the United Kingdom back into
recession.
The first step is to put Americans back to work. So we need to
enact the President's job proposals that the White House sent to the
Congress nine months ago. That proposal includes significant new
investment in building roads, bridges, transit ways, and other needed
infrastructure. At a time of 14.2 percent unemployment in the
construction industry and super-low interest rates, this should be a
no-brainer. I again call on Speaker Boehner to put the President's jobs
proposals to a vote on the House floor.
The second step is for lawmakers to adopt a plan to reduce the
deficit in a balanced way, by applying the kind of framework of
spending cuts and revenues generated by eliminating certain tax breaks
that has been recommended by bipartisan groups such as Simpson-Bowles.
That plan should extend tax relief for working families and replace the
sequester with a balanced approach to deficit reduction so that our
economy never goes over the fiscal cliff. Speaker Boehner's threat to
let the nation default on its debt if Republicans can't impose their
European-style austerity plan is cementing the view in capital markets
that lawmakers will fail to reach an agreement before the end of the
year. That manufactured crisis creates uncertainty that will undermine
confidence and weaken the economy. The Standard and Poor's downgrade of
the U.S. credit rating last year was due to forecasts of continued
political gridlock. Yet for many in the tea party movement, compromise
remains a dirty word.
We've already enacted $1 trillion in spending cuts under the Budget
Control Act and Democrats support additional, targeted spending cuts--
provided these are accompanied by eliminating tax breaks for
millionaires, Big Oil companies, and other special interests. In
contrast, Republican budget proposals would hurt seniors and the most
vulnerable while expanding tax breaks to the wealthy and fail any test
of balance and responsibility.
We are told that within the next few months Republicans will vote
to extend all of the Bush-era tax cuts, including those for
millionaires. CBO's analysis shows that extending all of the cuts,
including tax breaks for millionaires, will increase the long-term
deficit and reduce long-term growth. Democrats support extending tax
cuts for over 99 percent of Americans filing tax returns, while letting
tax cuts for millionaires expire. Combined with additional loophole
closing and base-broadening at the top, this proposal could reduce
deficits by nearly a trillion dollars over this decade and by much,
much more over the long haul.
CBO's long-term outlook shows that the aging of the population
drives nearly 70 percent of the cost of Social Security, Medicare, and
Medicaid. The Republican budget addresses federal spending by ending
the Medicare guarantee for seniors, unloading the financial risk of
future health care cost growth onto elderly and disabled individuals--
all so they can expand tax breaks for the wealthiest individuals.
Unfortunately, we have yet to find a willing partner in our
Republican colleagues. This is evidenced by Speaker Boehner's refusal
to take up the President's jobs bill, the insistence on holding tax
relief for 99 percent hostage to tax breaks for the top 1 percent, and
the Speaker's threat to default on the obligations of the U.S. if we
don't adopt the European-style austerity approach to the budget.
It's time for the GOP to put the needs of all American families
ahead of millionaires and Big Oil companies, and meet Democrats half
way to boost our economic recovery and get our fiscal house in order.
Chairman Ryan. Thank you, thank you Mr. Van Hollen. And I
also ask that unanimous consent members have five legislative
days to insert their statements in the record if they choose to
do so. Dr. Elmendorf, the floor is yours.
STATEMENT OF DOUGLAS W. ELMENDORF, DIRECTOR,
CONGRESSIONAL BUDGET OFFICE
Mr. Elmendorf. Thank you Chairman Ryan, congressman Van
Hollen, to all the members of the committee, I am pleased to be
back today with you to talk about the Long-Term Budget Outlook.
In the report that CBO released yesterday, we assessed that
outlook under two very different sets of assumptions about
future tax and spending policies. The extended baseline
scenario reflect the assumption that current laws generally
remain unchanged. That assumption implies that law makers will
allow tax and spending policy changes that are scheduled to
occur to actually do so.
In contrast, the extended alternative fiscal scenario
incorporates the assumptions that certain policies that have
been in place for a number of years will be continued. And that
some provisions of law that might be difficult to sustain for a
long period will be modified. Thus the scenario maintains what
some analysts might consider current policies as compared with
current laws. The budgetary and economic outcomes under these
two scenarios would be starkly different. Under the extended
baseline scenario, that is current law, federal debt would
decline gradually relative to GDP over the next 25 years. From
an estimated 73 percent this year to 53 percent by 2037. Though
the outcome would not be dramatically different from our
current situation, there would be a sharp change from the
nation's historical patterns of taxes and spending. Revenues
would rise steadily relative to GDP, owing to several factors.
The schedule of expiration, of cuts in individual income taxes
enacted since 2001, the growing reach of the alternative
minimum tax, the tax provisions of the Affordable Care Act, the
way in which the tax systems interacts with economic growth,
demographic trends and other factors. Altogether, revenues
would reach 24 percent of GDP by 2037, much higher than has
been seen in recent decades. At the same time, federal spending
on everything other than the major health care programs, Social
Security and interest would decline to the lowest percentage of
GDP since before the Second World War. That significant
increase in revenues and decrease in the relative magnitude of
other spending would more than offset the dramatic rise in
spending on health care programs and Social Security. That is
why debt would decline relative to GDP under current law.
In contrast, the outlook for debt is much bleaker under the
extended alternative fiscal scenario. As I said, in that
scenario, the assumption is that government maintains the kind
of tax and spending policies that we have been accustomed to.
In that scenario, all expiring tax provisions with the sole
exception of the current reduction in the payroll tax rate are
assumed to be extended through 2022. And after 2022, revenues
are assumed to remain at their 2022 mark of 18.5 percent of
GDP, just a little above the average of the past 40 years. On
the outlay side, this scenario assumes that the automatic
reductions in spending required by last year's Budget Control
Act will not occur, that certain scheduled reductions in health
care spending will not occur. And that federal spending on
everything other than the major health care programs, Social
Security, and interest would return to its average share of GDP
during the past two decades.
Altogether, in the extended alternative fiscal scenario,
revenues would be much lower, and non-interest outlays somewhat
higher than in the extended baseline scenario. As a result,
federal debt would grow rapidly from its already high level,
exceeding 90 percent of GDP in 2022, and approaching 200
percent in 2037 because the extended alternative fiscal
scenario is roughly representative of the fiscal policies that
are now or have recently been in effect. The explosive path of
federal debt under that scenario underscores the need for large
and timely policy changes to put the federal budget on a
sustainable course. I would like to take a few more minutes to
highlight two specific implications of these projections.
First, it is not possible both to keep taxes at their
historical average share of GDP and to keep the laws unchanged
for Social Security, Medicare, and Medicaid. The reason we
cannot repeat that historical combination of policies is that
the aging of the population and rising cost for health care
have made those large entitlement programs much more expensive
than they used to be. It is possible to keep taxes at their
historical average share of GDP. But only by making substantial
cuts relative to current law in the large entitlement programs
that benefit a broad group of Americans at some point in their
lives.
Alternatively, it is possible to keep the laws for the
large entitlement programs unchanged, but only by raising taxes
substantially on a broad group of Americans. Changes in other
federal programs, besides the large entitlements can affect the
magnitude of the changes needed in taxes or the large
entitlements, but they cannot eliminate the basic tradeoff I
have just described. Even if spending on all of those other
programs, including national defense, and wide variety of
domestic programs, fell with smaller share of GDP than we have
seen since before the Second World War, debt would still be on
an unsustainable upward trajectory without substantial changes
in taxes, the large entitlement programs, or both.
The second implication of the projections that I would like
to emphasize, is they are keeping federal deficits and debt no
larger than we would project under current law would involve
difficult policy tradeoffs. Under current law, as captured by
the extended baseline scenario, we expect that debt will
decline slowly relative to GDP in 2015 and beyond. Such a path
for debt would gradually reduce the crowding out of private
investment caused by high debt. It would restore lawmakers
ability to use in spending policies to respond to unexpected
domestic or international challenges. And it would reduce the
risk of a sudden fiscal crisis, during which investors would
lose confidence in the government's ability to manage its
budget and the government would lose its ability to borrow at
affordable rates. But even on that path, debt in 2037, 25 years
from now, would still be larger relative to GDP than any year
between 1956 and 2008.
So that path for federal debt might not be optimal. In
fact, analysts do not know what level of debt is optimal. But
it is one path that might be considered a plausible goal for
federal policy. Obtaining that goal though would pose some
significant tradeoffs. Tradeoffs that are exemplified by the
decisions confronting you as the various provisions of law
expire or take effect at the end of this year. To keep the
nation on that current law path of declining debt, any actions
by the Congress that would significantly worsened the budget
outlook relative to current law would need to be offset or paid
for by other actions that would improve the budget outlook by a
comparable amount.
For example, removing the automatic spending reductions
under the Budget Control Act would raise deficits by about a
trillion dollars over the next decade. And extending all of the
2001 and 2003 tax cuts and indexing AMT for inflation would
raise deficits by about $4.5 trillion over the next decade.
Both figures excluding the effects on debt service, I should
say. Making such changes to current law while maintaining the
same path of declining debt as under current law would require
other changes in policy that would reduce deficits by roughly
$1 trillion or $4.5 trillion. To be sure, the Congress might
not enact those changes in law, or it might choose to allow
more debt that would occur under current law, or alternatively,
to reduce debt more quickly relative to GDP than would occur
under current law.
There are many possible combinations of policies you might
pursue, and CBO will make neither recommendations nor
predictions about them. My point is simply that the path of
debt under current law would still leave debt at a historically
high level relative to GDP. And yet, achieving even that path
would require very large changes in current policies. You and
your colleagues, and all of us, as American citizens, face hard
choices. Thank you, I am happy to take your questions.
[The prepared statement of Douglas Elmendorf follows:]
Prepared Statement of Douglas W. Elmendorf, Director,
Congressional Budget Office
Chairman Ryan, Congressman Van Hollen, and Members of the
Committee, thank you for inviting me to testify on the Congressional
Budget Office's (CBO's) most recent analysis of the long-term outlook
for the budget and the economy. My statement summarizes the report The
2012 Long-Term Budget Outlook, which CBO released yesterday.
In the past few years, the federal government has been recording
the largest budget deficits since 1945, both in dollar terms and as a
share of the economy. Consequently, the amount of federal debt held by
the public has surged. At the end of 2008, that debt equaled 40 percent
of the nation's annual economic output (gross domestic product, or
GDP)--a little above the 40-year average of 38 percent. Since then, the
figure has shot upward: By the end of this year, CBO projects, federal
debt will exceed 70 percent of GDP--the highest percentage since
shortly after World War II. The sharp rise in debt stems partly from
lower tax revenues and higher federal spending caused by the severe
economic downturn and from policies enacted during the past few years.
However, the growing debt also reflects an imbalance between spending
and revenues that predated the recession.
Whether that debt will continue to grow in coming decades will be
affected not only by long-term demographic and economic trends but also
by policymakers' decisions about taxes and spending. The aging of the
baby-boom generation portends a significant and sustained increase in
the share of the population receiving benefits from Social Security and
Medicare, as well as long-term care services financed by Medicaid.
Moreover, per capita spending for health care is likely to continue
rising faster than spending per person on other goods and services for
many years (although the magnitude of that gap is uncertain). Without
significant changes in government policy, those factors will boost
federal outlays relative to GDP well above their average of the past
several decades--a conclusion that holds under any plausible
assumptions about future trends in demographics, economic conditions,
and health care costs.
According to CBO's projections, if current laws remained in place,
spending on the major federal health care programs alone would grow
from more than 5 percent of GDP today to almost 10 percent in 2037 and
would continue to increase thereafter.\1\ Spending on Social Security
is projected to rise much less sharply, from 5 percent of GDP today to
more than 6 percent in 2030 and subsequent decades. Altogether, the
aging of the population and the rising cost of health care would cause
spending on the major health care programs and Social Security to grow
from more than 10 percent of GDP today to almost 16 percent of GDP 25
years from now. That combined increase of more than 5 percentage points
for such spending as a share of the economy is equivalent to about $850
billion today. (By comparison, spending on all of the federal
government's programs and activities, excluding net outlays for
interest, has averaged about 18.5 percent of GDP over the past 40
years.) If lawmakers continued certain policies that have been in place
for a number of years or modified some provisions of current law that
might be difficult to sustain for a long period, the increase in
spending on health care programs and Social Security would be even
larger. Absent substantial increases in federal revenues, such growth
in outlays would result in greater debt burdens than the United States
has ever experienced.
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\1\ The major health care programs consist of Medicare, Medicaid,
the Children's Health Insurance Program, and health insurance subsidies
that will be provided through the exchanges created by the Affordable
Care Act, which comprises the Patient Protection and Affordable Care
Act (Public Law 111-148) and the health care provisions of the Health
Care and Education Reconciliation Act of 2010 (P.L. 111-152).
---------------------------------------------------------------------------
long-term scenarios
In this report, CBO presents the long-term budget outlook under two
scenarios that embody different assumptions about future policies
governing federal revenues and spending:
The extended baseline scenario, which reflects the
assumption that current laws generally remain unchanged; that
assumption implies that lawmakers will allow changes that are scheduled
under current law to occur, forgoing adjustments routinely made in the
past that have boosted deficits.
The extended alternative fiscal scenario, which
incorporates the assumptions that certain policies that have been in
place for a number of years will be continued and that some provisions
of law that might be difficult to sustain for a long period will be
modified, thus maintaining what some analysts might consider ``current
policies,'' as opposed to current laws.\2\
Those scenarios span a wide range of possible policy choices, and
neither represents a prediction by CBO of what policies will be in
effect during the next several decades. Because budget projections of
this type are inherently uncertain and become more so as they extend
farther into the future, the report focuses on the next 25 years rather
than a longer horizon.\3\
---------------------------------------------------------------------------
\2\ The two scenarios are extensions of CBO's 10-year projections,
as reported in Congressional Budget Office, Updated Budget Projections:
Fiscal Years 2012 to 2022 (March 2012).
\3\ Because considerable interest exists in the longer-term
outlook, figures showing projections through 2087 and associated data
are available on CBO's Web site (www.cbo.gov).
---------------------------------------------------------------------------
the extended baseline scenario
Under the extended baseline scenario, debt would decline slowly
from its high current levels relative to GDP.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Federal debt held by the public would drift downward from an
estimated 73 percent of GDP this year to 61 percent by 2022 and 53
percent by 2037 (see Figure 1). That outcome would be the result of two
key sets of policy assumptions:
Under current law, revenues would rise steadily relative
to GDP because of the scheduled expiration of cuts in individual income
taxes enacted since 2001 and most recently extended in 2010; the
growing reach of the alternative minimum tax (AMT); the tax provisions
of the Affordable Care Act; the way in which the tax system interacts
with economic growth; demographic trends; and other factors. Revenues
would reach 24 percent of GDP by 2037--much higher than has typically
been seen in recent decades--and would grow to larger percentages
thereafter.
At the same time, under this scenario, government spending
on everything other than the major health care programs, Social
Security, and interest--activities such as national defense and a wide
variety of domestic programs--would decline to the lowest percentage of
GDP since before World War II.
That significant increase in revenues and decrease in the relative
magnitude of other spending would more than offset the rise in spending
on health care programs and Social Security.
the extended alternative fiscal scenario
The budget outlook is much bleaker under the extended alternative
fiscal scenario because of the changes in law that are assumed to take
place. The changes under this scenario would result in much lower
revenues and higher outlays than would occur under the extended
baseline scenario. In particular:
Almost all expiring tax provisions are assumed to be
extended through 2022. Specifically, for this scenario, CBO assumed
that the cuts in individual income taxes enacted since 2001 and most
recently extended in 2010, which are now scheduled to expire at the end
of calendar year 2012, would be extended; relief from the AMT for many
taxpayers, which expired at the end of 2011, would be extended; the
2012 parameters of the estate tax (adjusted for inflation) would
continue to apply, preventing increases in rates and in the share of
assets that is taxable; and all other expiring tax provisions (with the
exception of the current reduction in the payroll tax rate for Social
Security) would be extended.
After 2022, revenues under this scenario are assumed to
remain at their 2022 level of 18.5 percent of GDP, just above the
average of the past 40 years.
This scenario also incorporates assumptions that through
2022, lawmakers will act to prevent Medicare's payment rates for
physicians from declining; that after 2022, lawmakers will not allow
various restraints on the growth of Medicare costs and health insurance
subsidies to exert their full effect; that the automatic reductions in
spending required by the Budget Control Act will not occur (although
the original caps on discretionary appropriations in that law are
assumed to remain in place); and that, as a percentage of GDP, federal
spending for activities other than Social Security, the major health
care programs, and interest payments will return to its average level
during the past two decades (rather than fall significantly below that
level, as it does under the extended baseline scenario).
Under those policies, federal debt would grow rapidly from its
already high level, exceeding 90 percent of GDP in 2022. After that,
the growing imbalance between revenues and spending, combined with
spiraling interest payments, would swiftly push debt to higher and
higher levels. Debt as a share of GDP would exceed its historical peak
of 109 percent by 2026, and it would approach 200 percent in 2037.
Many budget analysts believe that the extended alternative fiscal
scenario is more representative of the fiscal policies that are now (or
have recently been) in effect than is the extended baseline scenario.
The explosive path of federal debt under the alternative scenario
underscores the need for large and timely policy changes to put the
federal government on a sustainable fiscal course.
the impact of growing deficits and debt
In fact, the projections discussed above understate the severity of
the long-term budget problem under the extended alternative fiscal
scenario because they do not incorporate the negative effects that
additional federal debt would have on the economy. In particular, large
budget deficits and growing debt would reduce national saving, leading
to higher interest rates, more borrowing from abroad, and less domestic
investment--which in turn would lower the growth of incomes in the
United States. Taking those effects into account, CBO estimates that
gross national product (GNP) would be lower under the extended
alternative fiscal scenario than it would be if debt remained at the 61
percent of GDP it would reach in 2022 under the extended baseline
scenario.\4\ The reduction in GNP would lie in a broad range around 4
percent in 2027 and in a broad range around 13 percent in 2037. (Under
the extended baseline scenario, GNP would be nearly identical to what
it would be if the nation's debt burden remained constant.)
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\4\ GNP differs from GDP primarily by including the capital income
that residents earn from investments abroad and excluding the capital
income that nonresidents earn from domestic investment. In the context
of analyzing the impact of growing deficits and debt, GNP is a better
measure because projected budget deficits would be partly financed by
inflows of capital from other countries.
---------------------------------------------------------------------------
Rising levels of debt would have other negative consequences beyond
those estimated effects on output:
Greater debt would result in higher interest payments on
that debt, which would eventually require higher taxes, a reduction in
government benefits and services, or some combination of the two.
Rising debt would increasingly restrict policymakers'
ability to use tax and spending policies to respond to unexpected
challenges, such as economic downturns or financial crises. As a
result, the effects of such developments on the economy and people's
well-being could be worse.
Growing debt also would increase the probability of a
sudden fiscal crisis, during which investors would lose confidence in
the government's ability to manage its budget and the government would
thereby lose its ability to borrow at affordable rates. Such a crisis
would confront policymakers with extremely difficult choices. To
restore investors' confidence, policymakers would probably need to
enact spending cuts or tax increases more drastic and painful than
those that would have been necessary had the adjustments come sooner.
The aging of the U.S. population and the rising costs for health
care mean that the combination of budget policies that worked in the
past cannot be maintained in the future. To keep deficits and debt from
climbing to unsustainable levels, as they will if the set of current
policies is continued, policymakers will need to increase revenues
substantially above historical levels as a percentage of GDP, decrease
spending significantly from projected levels, or adopt some combination
of those two approaches. In fact, the current laws that underlie CBO's
baseline projections provide for significant changes of those kinds in
coming years. As projected under the extended baseline scenario,
revenues would reach the historically high level of 24 percent of GDP
in 2037, and spending for programs other than the major health care
programs and Social Security would reach the lowest level relative to
GDP since before World War II. Of course, many other approaches to
constraining future deficits are possible as well.
Policymakers face difficult trade-offs in deciding how quickly to
implement policies to reduce budget deficits. On the one hand, cutting
spending or increasing taxes slowly would lead to a greater
accumulation of government debt and might raise doubts about whether
longer-term deficit reduction would ultimately take effect. On the
other hand, abruptly implementing spending cuts or tax increases would
give families, businesses, and state and local governments little time
to plan and adjust, and would require more sacrifices sooner from
current older workers and retirees for the benefit of younger workers
and future generations. In addition, immediate spending cuts or tax
increases would represent an added drag on the weak economic
expansion.\5\
---------------------------------------------------------------------------
\5\ For discussion of the trade-offs policymakers face in deciding
how quickly to implement policies to reduce budget deficits, see
Congressional Budget Office, Economic Effects of Reducing the Fiscal
Restraint That Is Scheduled to Occur in 2013 (May 2012).
Chairman Ryan. Thank you. Okay, so first, I think it is
very constructive that we have what we call an alternative
fiscal scenario because that sort of more reflects current
policies, but just to get it clear when we talk about current
law base line, the extended base line, that assumes a 30
percent cut to doctors starts January. The discretionary caps
stay in place and the sequesters enacted on top of that and a
$4.4 trillion tax increase occurs in January as well.
Mr. Elmendorf. It includes the expiration of all the
programs that expire under current law, and the imposition of
all the new things that will happen under the law
Chairman Ryan. So, it is not very realistic, so it is very
helpful to have this AFS, the Alternative Fiscal Scenario, and
as we look at this Alternative Fiscal Scenario on your Table
2.1 and Figure 2.1, when we are doing real GNP per person, and
long term budgetary analysis and real GNP and GDP. You have a
range of estimates, and I am very intrigued with this range of
estimates. First of all, on one of them over on your GNP per
person, that is what basically measure standard of living, you
know.
Mr. Elmendorf. Yes.
Chairman Ryan. How much does the economy grow per person in
the future, and what is great about our nation is we have
always had an increase in standard of living. We have always,
always given the next generation a better standard of living,
better growth. I am looking at your lower estimate, which shows
in the 2030s, that goes away, and down in your footnote, and we
have looked at your models on this before, you said we would
reach 250 percent of GDP by 2035. Under these assumptions,
CBO's model cannot reliably estimate output after debt reaches
that amount in the agency's judgment, which means the model
cannot measure the economy going on beyond that point. Was it
not at 200 percent of GDP in your assumptions a year ago? Where
is the difference? Because if I recall when we had these
conversations with your predecessor and with yourself, I know
this is not a technical thing, but I am just curious, where do
you lose competence in measuring the economy going forward once
debt reaches these kinds of levels, and did you not move that
out to 250 from 200?
Mr. Elmendorf. No, sir, we did not change that, Mr.
Chairman. If you will look in last year's Long-Term Budget
Outlook, we show the effects of, again, the alternative
scenario on GNP out at that point to 2035, and in 2035, we
thought that including the dynamic effects of rising debt on
the economy, and thus on the budget the debt would be 250
percent of GDP, and we show that on page 32 of last year's
report. There is no magic point at which the model stops
working.
Chairman Ryan. It just loses credibility after a certain
point.
Mr. Elmendorf. Right, so estimated based on historical
experience, and at some point, our debt, under these scenarios,
would move so far out of historical experience that we do not
trust the model to be reliable. It is also true that in various
parts in the reports we just cut off the vertical axis, we cut
off the picture at 200 to 250 percent of poverty, because we do
not think it conveys usable information.
Chairman Ryan. 250 percent of GDP you mean.
Mr. Elmendorf. Of GDP, I mean. I am sorry, GDP.
Chairman Ryan. Right.
Mr. Elmendorf. We do not think it conveys useful
information to you, even if we can in a sense run the
calculator with a route.
Chairman Ryan. So what that means is, in the 2030s, we do
not think we can measure the economy going forward because the
debt burdens. With any degree of confidence.
Mr. Elmendorf. By the end of the 2030s, yes, beyond the
middle of the 2030s, that is right, Mr. Chairman.
Chairman Ryan. Okay, now then let me ask you about interest
rates. You know, first of all, our 10 year, you know, the yield
curve is incredible these days, and part of that, I think,
people would say, is because we are sort of the port in the
storm, we are the safe haven. I think the 10 year note went
down as much as 1.5. You predict interest rate increases, but
those long-term rates are still under the past trends. What
happens if rates do not stay as low as you are projecting? What
is the kind of rule of thumb you have used on a rolling average
of, say, a 10 year basis if rates do not stay as low as you are
predicting? That is one of my biggest fears is: interest rates
rise whenever, medium, long-term, above trend like they did in
the 1980s, or even at the 1990s levels, and what does that do
to us? And how does that move those dates up?
Mr. Elmendorf. So, at the end of the first chapter of the
report, we talk about a collection of risks that surround these
projections, and you should take that uncertainty very
seriously. And one source of risk we point to, as the chairman
is mentioning, is the risk of much higher interest rates; it is
also possible rates would be lower than we project. We note
here that if interest rates under this extended alternative
fiscal scenario, net interest would be 27 percent of all
federal outlays by 2037 in our projections here. But if
interest rates were even half a percentage point higher on a
sustained basis, then the debt service costs would be even
higher. So, for example, we think that federal debt would be
215 percent of GDP in 2037, not the 199 percent of GDP that we
showed given the interest rate path we have assumed.
Chairman Ryan. Now, I was intrigued also with your comments
on marginal tax rates. You are saying that the higher marginal
tax rates go, the less output in economic growth we get. So is
a good combination of fiscal policies, in your judgment, based
upon what we are seeing here, lower debt levels which increases
output and keeping marginal tax rates low? If they are not a
trade-off, and meaning if we get savings which reduces the debt
from entitlement reforms and other reforms, and better economic
growth is that not the virtuous cycle we want to get on? And I
am not asking you to give me a policy judgment, but I am asking
you: in your judgment, do we get better economic growth for the
lower tax rates and lower debt levels?
Mr. Elmendorf. Yes, so all else equal lower tax rates mean
more economic output. All else equal lower debt means lower
economic output. Whether all else is equal, of course, depends
on the combination of policies that Congress would adopt. The
alternative fiscal scenario has lower tax rates than the
baseline, but much more debt.
Chairman Ryan. But much more debt.
Mr. Elmendorf. By our estimates, the much more debt is a
stronger negative force than the lower tax rates are a positive
force.
Chairman Ryan. Yeah, and that is basically the essence of
our approach, which is keep the tax rates low to maximize
economic growth, but deal with the spending drivers of our
debt, because as we can see here, even under the AFS, you know,
revenues go up. It says that spending goes up at such an
incredible clip because, as you mentioned, demographics, health
inflation, and the rest, if we can get that under control, then
we can grow. So if we keep our debt levels at or below where we
are over the long term and keep our tax rates at or below where
we are, we will avoid this kind of projection that you are
showing us in these various scenarios in the 2030, where debt
gets so high that you cannot track growth going forward. Dodge
this austerity bullet if those we get those two combination of
policies in place, is that not an accurate takeaway?
Mr. Elmendorf. So, I agreed with you up to the point about
dodging the austerity bullet, I think it depends whether you
[inaudible] to get there.
Chairman Ryan. I guess we defined austerity, right.
Mr. Elmendorf. But yes, you are right that if that stays at
or falls lower as a share of GDP and tax rates are lower, that
combination would be the best combination of those two features
of the budget for growth in the long run.
Chairman Ryan. Okay, let me get one more question on the
fiscal cliff. How much do you disaggregate between the
recession that you are projecting, which I believe you are
projecting at a two quarter drop in output, if the quote,
unquote fiscal cliff occurs. How much of that, in your
judgment, results from the tax side of that fiscal cliff versus
other parts of the cliff, the spending issues?
Mr. Elmendorf. Well, a larger share of the tightening of
fiscal policy between this year and next comes on the revenue
side. Now, the effects of specific changes in revenues in
spending will not be exactly the same on the economy in the
short run.
Chairman Ryan. Right.
Mr. Elmendorf. But altogether we think that the revenue
increases with a larger factor in restraining economic growth
and employment in the beginning of next year.
Chairman Ryan. Okay. Thank you, Mr. Van Hollen.
Mr. Van Hollen. Thank you, Mr. Chairman. Let me just pick
up first where the chairman left off with some of his
hypotheticals, because he asked you if you were able to keep
tax rates low given everything else being equal, what would be
the result, assuming also that debt remained low. But Dr.
Elmendorf as you said in your testimony, all this involves very
difficult trade-offs, so to the extent that we keep that low
and we reduce revenue, that means that we have to cut much more
deeply into other areas, is that right?
Mr. Elmendorf. Yes.
Mr. Van Hollen. And, given the fact that health care costs
are increasing rapidly, especially Medicare, it would mean that
we would have to come up with another way of dealing with
Medicare costs, is that right?
Mr. Elmendorf. Yes, that is right.
Mr. Van Hollen. Okay. And, you know, just to go back to the
CBO analysis of the House Republican plan with respect to
creating a Medicare voucher, premium support, whatever you want
to call it; my recollection is that the CBO analysis showed
that it really just shifted a lot of the rising health care
costs off the Medicare program and on to seniors, is that not
right?
Mr. Elmendorf. In the analysis we did a year ago of the
plan that the chairman preferred at the time, we did try to
offer some rough estimates of the shift of costs to
beneficiaries. But in this year we were not able to do that
kind of analysis; the plan was different and more complicated
and we have not been able to do that comparable analysis this
year.
Mr. Van Hollen. That is right, and I think in the
chairman's plan, he changed some of the things, which may have
somewhat softened the impact, but my understanding and reading
of the CBO analysis last time is the same dynamics are at play,
and while it may somewhat reduce the amount of reduce the
amount of risk and cost shift to seniors, it does not eliminate
that problem. Have you had the chance to look at that?
Mr. Elmendorf. We have not been able to analyze that plan.
Mr. Van Hollen. Okay. If I could just put up a chart,
because I think it is important as we discuss the deficit
challenge that we have an idea of what components are driving
it.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
And what you see here is this is the debt as a percentage
of GDP, and what you see is beginning in 2001, you have that
black bottom line going down very steeply. That was CBO's
projection of surpluses at the time; in fact about $5.6
trillion in projected surpluses. We know that by the end of
2011, we had one of the worst reversals in fiscal fortunes we
had ever seen, and you see the debt rising as a percent of GDP.
And what this chart shows is the different components of it
based off of the CBO numbers. The deep red being the result of
the recession, the economic downturn; the pink being the result
of the 2001, 2003 tax cuts. And Dr. Elmendorf, I am going to
have to ask you and your colleagues to take a look at this just
to confirm that this breakdown is accurate, but what it shows
is I think a very simple lesson, which is that in order to get
ourselves out of this long-term fiscal challenge, we not only
need to deal with the spending side of the equation, but as
your testimony makes clear, we should also deal with the
revenue piece. When is the last time we actually had a balanced
budget?
Mr. Elmendorf. I think that was 2000.
Mr. Van Hollen. 2000. And do you remember what revenues
were as a percentage of GDP in the year 2000?
Mr. Elmendorf. 20.6 percent.
Mr. Van Hollen. And what are revenues as a percentage of
GDP today?
Mr. Elmendorf. There are a little under 16 percent.
Mr. Van Hollen. Right, so almost a five percentage point
GDP swing, is that right?
Mr. Elmendorf. Yes, that is right.
Mr. Van Hollen. Okay. So, again, I want to get back to fact
we in the Democratic alternative budget proposed a balanced
approach that combines needed cuts, and I would remind my
colleagues that as part of the Budget Control Act, we cut a
trillion dollars over the next 10 years, but our proposal also
deals with the revenue side of the equation, because if we do
not get our fiscal house in order, as Dr. Elmendorf said in the
out years, you do have this crowding out effect, which slows
down the economy. In fact, Dr. Elmendorf, as you pointed out,
the alternative fiscal scenario has lower revenue, correct?
Excuse me.
Mr. Elmendorf. Much lower under the extended baseline.
Mr. Van Hollen. Under the extended baseline. And yet you
are projecting both higher deficits and slower economic growth,
is that right?
Mr. Elmendorf. Yes, that is right.
Mr. Van Hollen. Okay. If we could just go to this chart,
which is something CBO handed out, I think it should be in
everybody's packet.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
It is in your one-pager. Because it points out the
different components that make up the difference between your
extended baseline scenario and the extended alternative fiscal
scenario. And what I found interesting in this is that in this
comparison that you did, there is actually very little
difference in the major drivers of spending, in other words, if
you look at Social Security and health care spending under
scenario one and scenario two, it is only .7 percentage of GDP
difference. In the year 2037, even when you go way out there,
is that right?
Mr. Elmendorf. Yes, that is right.
Mr. Van Hollen. Okay. And if you look at the all other
federal spending, as I understand it, one of the big components
of that is that you assume we will not allow the sequester to
go into effect, nor will we replace the sequester with an
equivalent amount of deficit reduction, am I correct about your
assumption there?
Mr. Elmendorf. Yes, that is right.
Mr. Van Hollen. So, if you actually look at these drivers,
that component, assuming that we will not replace the sequester
and the gap in total revenues, plus the interest payments,
which result mostly, in this analysis, from increased debt as a
result of less revenue, are the major reasons for the
difference between your extended alternative scenario and the
extended baseline scenario, is that correct?
Mr. Elmendorf. I think that is right, congressman. Once the
debt starts to grow relative to GDP, it continues on that path,
then interest payments start to pick up in the same way, and it
snowballs in a very damaging way for the economy.
Mr. Van Hollen. Right. And in this chart, the major
difference, I mean, the number one driver, the top driver here
is the difference in revenues, correct?
Mr. Elmendorf. Yes, absolutely.
Mr. Van Hollen. And so, I want to make it clear, not
proposing that we adopt the revenue policies underlined the
extended baseline scenario, but I do think this chart as well
as the one I put up on the screen argue very strongly for
taking the kind of balanced approach that has been recommended
by groups like Simpson-Bowles, bipartisan groups. Let me just
ask you a question about the debt ceiling, which by most
forecasts we will hit possibly at the end of this year. What
would be the economic consequences if the United States did not
raise the debt ceiling?
Mr. Elmendorf. We think that a default on American debt
would be a devastating blow to the economy and the financial
system. It is hard to know, we have not done it, so we cannot
look to historical parallels in this country, really, in the
modern era, but if the default were to occur in a sustained
way, if the obligations that we have taken on really were not
honored that would be a shock to a financial system that is
already, in this country, and particularly overseas, in a
fragile state, and I do not know anybody who thinks we ought to
let that happen. I realize there are disagreements among
members of Congress about what else if anything should go along
with increasing the debt ceiling; I do not know anyone who
thinks that it would be useful to actually go and default on
that debt.
Mr. Van Hollen. No, I think that is right, but I do think
it is grossly irresponsible for anybody to threaten that the
United States will not meet its obligations unless we enact
somebody else's version of how to best reduce the budget. For
example, the Speaker has said that he would object to raising
the debt ceiling unless we reduced the deficit the way the
Speaker wants to do it. If I could just ask you Dr. Elmendorf,
have you had a chance to look at the House Republican budget?
Mr. Elmendorf. We do not analyze budget resolutions at CBO,
congressman. We have looked, because you know at the chairman's
own long-term budget proposal, we released our analysis of that
in March, but we have not looked at the budget resolution
itself.
Mr. Van Hollen. And do you know that the House Republican
budget would require, even if you adopted all their provisions,
which would still require approximately a $5.2 trillion
increase in the debt ceiling between now and 2022?
Mr. Elmendorf. I am not aware of that either way,
congressman. We have not studied that.
Mr. Van Hollen. Well, if you could just get back to us to
confirm that.
Chairman Ryan. Let me just do that for you; that will go up
in this country under any budget scenario by the factors we are
talking about here, right now. Right, demographics, and all
that.
Mr. Van Hollen. I just thought it was important to point
out that the Speakers made a big thing about using the debt
ceiling to achieve his political purposes that the Republican
budget that he supports would require a $5.2 trillion dollar
increase in the debt ceiling.
Chairman Ryan. And I introduced the Speaker's comments to
the record last week to just make sure his comments are
accurately reflected.
Voice. [inaudible]
Chairman Ryan. Okay, Doug, turn your mic on, or pull it
closer to you; I guess the sound people are not quite capturing
it.
Mr. Elmendorf. It is on.
Chairman Ryan. Okay, yeah, a little closer to you, then.
Mr. Elmendorf. Lean closer.
Chairman Ryan. Right up front sir. Mr. Campbell.
Mr. Campbell. Thank you, Mr. Chairman, Dr. Elmendorf. Just
in referring to something the ranking member mentioned about
tax rates revenues as the percent of GDP. In 2007, I believe,
under the current tax rates, revenues were 18.5 percent of GDP,
and they are down now under the same tax rates. So my question,
or point of this is that the amount of revenue as a percentage
of GDP is affected not just by rates but by economic
conditions.
Mr. Elmendorf. Absolutely, congressman.
Mr. Campbell. So, if we had a better economy today, we
would have a larger share of revenue even under the existing
tax rates?
Mr. Elmendorf. Yes.
Mr. Campbell. And 18.5 percent is fairly close to historic
average since World War II, is it not?
Mr. Elmendorf. Well, when CBO talks about the averages, we
generally use the last 40 years.
Mr. Campbell. Okay.
Mr. Elmendorf. The last 40 years' revenues have been
averaged 17.9 percent of GDP.
Mr. Campbell. Right, so under the existing tax rates in a
good economy, in 2007, we actually had a larger revenues as a
share of the economy, we are actually larger than the average
over the previous 40 years.
Mr. Elmendorf. Yes, that is right.
Mr. Campbell. Thank you. Next question, relative to what we
charitably call Obamacare, and on the other side they call it
the Affordable Care Act, all of your scenarios, both the
alternative scenario and the baseline scenario, include
Obamacare and that law being in effect, is that correct?
Mr. Elmendorf. So, we used the term Affordable Care Act
ourselves, congressman.
Mr. Campbell. I am sure you do.
Mr. Elmendorf. But I think a lot of the independent
analysts do. Under both of the scenarios, most of the
Affordable Care Act is included. There is one point a little
different in the extended alternative fiscal scenario; we turn
off a couple of the provisions that would reduce the growth of
health care spending in what was the second decade when the
Affordable Care Act was enacted. In particular, we do not allow
the continued reductions and the growth of payments to Medicare
providers to go on, and we turn off some of the extra indexing
of the thresholds for different size subsidies through the
insurance exchanges. So we take away a few of the features that
would create greater slowdown in federal costs in the second
decade.
Mr. Campbell. Why did you turn those off in your
alternative scenario?
Mr. Elmendorf. So, as we defined the scenario, we view it
as extending some policies that have been in place for a long
time, but also as modifying some policies that we would think
would be difficult to sustain for a long period of time, and
the cutbacks in payments to Medicare providers are sort of
incremental; every year is a lower growth rate. And as the
years go on, we think it becomes harder and harder.
Mr. Campbell. So you basically think that they kind of
would not work, so you take it back.
Mr. Elmendorf. We think it would be more difficult, and we
are trying to offer you an alternative perspective.
Mr. Campbell. Okay. And then under either of these
scenarios, then, total outlays of the health programs,
Medicare, Medicaid and the S-Chip Program would rise 78 percent
I have under the baseline scenario, and 93 percent over the
next 25 years as a share of GDP. So the medical entitlements
would rise by 78 percent as a percentage of GDP under the
baseline, and 93 percent under the alternative scenario. Those
figures sound correct?
Mr. Elmendorf. Yes, they sound right.
Mr. Campbell. Those are the biggest drivers of expense
increases in the budget by far, are they not?
Mr. Elmendorf. Yes, absolutely.
Mr. Campbell. Okay, and then in a letter to Chairman Ryan,
CBO was asked, What tax increases would be necessary if you are
going to pay for all this entirely with tax increases? And you
concluded that you would need 33 percent across the board rate
hike by 2023, 48 percent by 2030, and an 86 percent increase in
all tax rates by 2050 in order to just keep them a balanced
budged under the alternative
fiscal scenario going out.
Mr. Elmendorf. So you quote those numbers correctly,
congressman. I want to be clear what the experiment was; the
experiment we were asked to look at was a case where the
increase in tax revenue came entirely through increases in tax
rates.
Mr. Campbell. Right, no.
Mr. Elmendorf. Of course, a full other approach that was
involved broadening the tax base, that of course is being
discussed.
Mr. Campbell. No, I understand; I have lots more to say but
only 25 seconds to say it, so all I merely wanted to point out
from this is that you have these huge medical entitlement cost
drivers, and you cannot do an 86 percent increase in taxes; we
have to deal with these things, and we have to deal with them
quickly. We do not want to have the rapid changes that Europe
did. Europe's problems are because they let their European
socialism that they were not paying for go on too long so that
they had to try and fix it too quickly. We need to get on this
right away, so we have a slower glide path to correcting these
problems. Thank you.
Chairman Ryan. Mr. Doggett.
Mr. Doggett. Thank you, Mr. Chairman, and thank you Dr.
Elmendorf. As I read page four of your summary, and just
paraphrasing it: To keep deficits and debt from climbing to
unsustainable levels, policymakers will need to increase
revenues substantially, decrease spending significantly, or
adopt some combination of these two approaches, and that is
basically what your testimony has been this morning.
Mr. Elmendorf. Yes, exactly, congressman.
Mr. Doggett. And thus far, the Congress over the last year
has pursued the reducing spending significantly only. I believe
under the agreement that was reached last year, if fully
implemented, spending would be reduced by about $2 trillion, is
that right?
Mr. Elmendorf. Yes, that is right, congressman.
Mr. Doggett. No revenue increase at all, an entirely one-
sided approach to addressing this problem?
Mr. Elmendorf. The Budget Control Act focused on spending
cuts, exactly.
Mr. Doggett. And your testimony this morning is if we
continue to pursue that course of only cutting spending with no
additional revenues, we will have to substantially reduce
Medicare and Social Security, will we not?
Mr. Elmendorf. Yes, that is right, congressman.
Mr. Doggett. And each time that the Congress passes another
tax cut without paying for any of it, $46 billion in a recent
week for a business tax cut, $29 billion this week for a
medical device tax directed mostly at trying to weaken the
Affordable Health Care Act, but still $29 billion a year tends
to add up. Each time they pass one of these tax cuts without
paying for it, that adds to the debt, and would increase the
amount of spending that would have to be cut, directly
impacting Medicare and Social Security, does it not?
Mr. Elmendorf. Yes. Any increase in spending or reduction
in taxes that is not offset, that is not paid for if you some
other policy changed, is going to push our debt above this
trajectory we have under current law. And as I said, under
current law that only very gradually declines relative to GDP,
and even a quarter century from now would be exceptionally
large by US historical standards.
Mr. Doggett. And your testimony this morning is that if we
extend the Bush tax cuts and make the adjustments with the AMT
associated with those and do not pay for them, that is $4.5
trillion in additional debt.
Mr. Elmendorf. Yes, plus the debt service.
Mr. Doggett. Plus the debt service, which will add a
significant amount.
Mr. Elmendorf. Yes.
Mr. Doggett. So, though Congress has taken an approach of
cutting spending by $2 trillion, one of the alternatives being
advanced for approval in the House this summer, is that we have
unpaid for $4.5 trillion of less revenue. And the impact will
be to significantly increase the debt if that were to become
law, and to make it nearly certain that we would have to make
substantial cuts in Social Security and Medicare unless we
wanted to have uncontrollable debt.
Mr. Elmendorf. If those tax cuts were extended and no
others were made to fiscal policy, that would make the federal
budget outlook significantly worse, in the medium run and long
run, and it would worse the economic outlook in the medium run
and long run.
Mr. Doggett. Yes. My concern is that those who can continue
to preach what may be a good rhetoric at a political convention
that Washington does not have a tax problem and only has a
spending problem ignores the fact that we really have a little
of both, and that unless we have a balanced approach to trying
to get our budget in balance, we ensure that Medicare and
Social Security as generations of Americans have known them
will not be there for them, and that is, I think, a terrible
and unjustified cost to pay. As far as the spending side,
because we do have to focus on both, you have talked about the
fact that we do not just have a Medicare health problem or a
veteran's health problem, or a children's health insurance
health cost problem, we have a health cost problem generally.
And one of those areas that some folks suggested might help us
resolve that is to copy the federal employees' health benefit
program. From looking at that program, has it produced
substantial savings that would help us avoid these problems?
Mr. Elmendorf. CBO has written about this before,
congressman, I am not completely familiar with it, but I
believe our conclusion was that premium increases in federal
employees' program had been roughly comparable to increases
elsewhere in the health system.
Mr. Doggett. Exactly.
Mr. Elmendorf. And we show in our long term outlook rates,
comparative rates of cost growth, Medicare , Medicaid and then
the rest of the health care system for different periods of
time when certain pieces have outpaced other pieces. But, we
see in general as you commented across the board increases in
health care costs that have outpaced the growth in GDP, and
that is what creates this increasing bind for the federal
budget and for state local government budgets and for the
budgets of firms and households.
Mr. Doggett. Thank you. And just, finally, the experience
then with the federal health programs shows it is no panacea to
solve this rising health care cost.
Chairman Ryan. Thank you. The time for the gentleman has
expired. Dr. Price.
Mr. Price. Thank you Mr. Chairman and welcome again, Dr.
Elmendorf. The committee appreciates the long term projections
that you have made. I want to talk about a couple different
items. First, the debt ceiling. Our friends on the other side
oftentimes use the language that people are threatening to have
the United States not meet its obligations, you are not aware
of anybody that is threatening to have the United States not
meet its obligations are you?
Mr. Elmendorf. As you know, I try not to characterize the
comments of members of Congress. I said, I repeat, I do not
know of anybody who think we actually should default. I
recognize that this disagreement about what other policies if
any should be combined with an increase of the debt ceiling.
Mr. Price. I think that is fair. If we are talking about
the debt ceiling and if a debt ceiling increase is required,
and the options are to have no spending reduction and a debt
ceiling increase, or a debt ceiling increase accompanied with a
spending reduction, which has a more positive effect on
economic activity and output?
Mr. Elmendorf. Well, in the short term, congressman, we
think, as do most economists, that a cutback in government
spending will weaken the economy, will lower output and
employment. Over the longer term, if the reduction in
government spending is not accompanied by other changes and
thus leads to a reduction in the debt, then that would be good
for the economy.
Mr. Price. So, a decrease in the debt, as you mentioned
before, lower debt results in more economic activity, more
economic output.
Mr. Elmendorf. Yes, that is right.
Mr. Price. And a reduction in taxes, as you said earlier,
or lower taxes, results in more economic output and more
economic activity.
Mr. Elmendorf. Well lower marginal tax rates in particular,
as you know, many features of the tax code that effect the
economy but the lower tax rates on the margin can help
encourage additional work and saving and that is good for the
economy.
Mr. Price. Exactly, and that is what we have attempted to
include within our budgets. I want to talk about the economic
variables that you used in this long term forecast and it is my
understanding the average annual economic growth rate that is
utilized for the next few years is 3.1 percent?
Mr. Elmendorf. For the next five years, maybe congressman.
I do not know that number.
Mr. Price. I think that is accurate. And in the same time
frame you also forecast that the unemployment rate goes from
its current rate to 5.5 percent by 2018?
Mr. Elmendorf. Yes that is correct.
Mr. Price. And yet, last week your office warned that if
the current law stays in place and $500 billion in tax
increases go into effect in 2013 as scheduled that the United
States will likely go into a recession for a period of time
next year.
Mr. Elmendorf. Yes that is right.
Mr. Price. And so is it safe to say that a recession would
contract, decrease federal tax receipts similar to those levels
that we saw in 2007, 2009?
Mr. Elmendorf. It would certainly contract them. That was a
very severe recession that brought revenues as low as they were
a few years ago, we do not think they would fall as low again
because we would be predicting a mild recession but it is only
the direction that is the same, congressman.
Mr. Price. So, if the Congress does not act and the current
law is realized, would you expand on your perspective on how
this will impact the macro economy in terms of employment and
economic growth?
Mr. Elmendorf. Yes, we think that if the Congress allows
current law to unfold throughout the end of the year and into
next year, that the economy will contract in the first half of
next year and will grow only slightly over next year as a whole
and employment will be a good deal lower and unemployment
higher than would be the case if the federal budget were not
contracting in that way. As one goes later in the decade and
beyond then the path of smaller deficits would be good for the
economy and would strengthen outputs in incomes. That is what
the extended baseline scenario shows here over time relative to
the extended alternative fiscal scenario.
Mr. Price. So, the proposals that we have attempted to put
forward which are either keeping marginal rates as they are,
not increasing marginal rates on individuals and decreasing
spending at the federal level, decreasing debt, the slope of
the debt, would be a positive factor from an economic output,
economic standpoint?
Mr. Elmendorf. Yes, the lower tax rates and lower debt are
both good for the economy in the long run.
Mr. Price. In my short time remaining, would you care to
address the difference between tax rates, marginal rates, and
revenue to the federal government? Because our friends
oftentimes confuse those two or use those synonymously.
Mr. Elmendorf. So, in simple terms, the revenue the
government collects equal the tax rates times the tax base to
which those rates are applied. And our current tax base,
although we talk about the income tax as a lower tax on all
income at the individual or corporate levels. In fact, our tax
bases are a lot narrower than overall individual and overall
corporate income. And thus given the set of tax rate that we
had in place, we collect less revenue than we would if the
bases were broader. Raising tax revenue by raising tax rates
will tend to hurt the economy. Raising tax revenue by
broadening the base could help or hurt the economy depending on
the nature of the changes. So, some of the features, some of
the special deductions in credits and so on, are bad for the
economy because they distort an individual's behaviors. They
encourage certain things at the expense of other things in a
way that is not consistent with the market price signals, and
perhaps not consistent with our social aims. On the other hand,
there are features, credits and deductions and so on, that may
be helpful in offsetting distortions that exist in the private
markets or do help to achieve social gains. So it is very hard
to make any broad statements about whether broadening the tax
base would be good or bad for the economy. For particular sorts
of changes, we have the modeling capacity and our colleagues on
the staff of the Joint Committee on Taxation have the modeling
capacity to provide estimates to you and your colleagues about
the economic effects, but it is hard to make general statements
about the effects of broadening the tax rates.
Mr. Price. Thank you, sir. Thank you. Thank you Mr.
Chairman.
Chairman Ryan. Thank you. Mr. Blumenauer.
Mr. Blumenauer. Thank you. Doctor we appreciate your
patience and coming back again and carefully trying to parse
your words to be accurate and resist our efforts to use
portions of them to justify our heartfelt needs and sound bite
quota.
Mr. Elmendorf. I appreciate you understanding my
predicament, congressman.
Mr. Blumenauer. And I continue to marvel how well you do
it. I loved how you used earlier the term ``all things being
equal.'' Because this is the thrust of your analysis is to let
us know what is going to happen, all things being equal. I love
what you said a moment ago in terms of how do you structure the
tax provisions, because there can be some that can reinforce
productive activity, some can distort economic activity. That
could be the case for example for lavish agricultural subsidies
could it not? If these are borrowed dollars that distort the
marketplace that encourage over production of something that
may even have environmental damaging impacts and shortchange
things like nutrition support which, like food stamps, actually
helps sustain the economy. And this is one of the things the
CBO has ruled as a powerful stimulant. So for example, all
things being equal, if we had our agricultural subsidies
refined, that might be something that could save money and
improve productivity, could it not?
Mr. Elmendorf. It might be, congressman.
Mr. Blumenauer. And I am not asking you to walk that plank
right now, I just want you to help me with the hypothetical.
Done right we could reduce the deficit, improve productivity
and move forward.
Mr. Elmendorf. Potentially so, yes congressman.
Mr. Blumenauer. Likewise, were we to deal meaningfully with
reforming our military spending, some things like hundreds of
billions of dollars maintaining a nuclear arsenal that we are
not going to use, hopefully ever has less economic impact than
lowering the deficit, reducing potentially taxes or investing
in things like education and infrastructure. Is it not possible
that getting that right could boost our economy while reducing
the deficit? Is it not possible?
Mr. Elmendorf. There are a whole variety of possible
changes, congressman, and in federal programs that might be
good for the economy.
Mr. Blumenauer. But maintaining nuclear arsenal does not
have a ripple effect, does not strengthen other parts of the
economy. I mean, this is more of a drag on the economy that
investing in education, bridges or sewer systems, is it not?
Mr. Elmendorf. Well, in general congressman, we think that
when the federal government spends money, that in the short
term there is a positive multiplier effect to other things. If
the federal government pays my salary, I go buy some things at
the store, which helps people.
Mr. Blumenauer. I understand the principles. I am not
trying to trap you, I just want to put on the table that there
are some things that have less of a multiplier than investing
in our future. All things being equal.
Mr. Elmendorf. So, yes, in addition to the short-term
economic effects, where we talk about multipliers in
particular, different sorts of government spending could
represent investments in our future and others may be more for
current consumption.
Mr. Blumenauer. And I guess that is one of the things that
all things being equal, it would seem to me that if we were in
fact investing, as we used to do in this country, on things
like roads and bridges and transit, improving sewer and water
and environmental protection, these investments actually put
lots of people to work at family-wage jobs, have economic
benefits and avoid costs in the future. Is that not possible?
All things being equal?
Mr. Elmendorf. Yes congressman. We have written about the
economics of additional investment in transportation and water
infrastructure. We have noted, for example, that according to
the Federal Highway Administration, there are a large number of
highway projects that would have benefits the substantially
succeed their costs. They are not currently being funded and to
fund all of those, all of that infrastructure investment, it
would require a good deal more money from either the federal
government or other sources.
Mr. Blumenauer. Well, thank you. And I appreciate your
patience with us, and I guess that is the note that I would
conclude on because there are lots of things that people on
this committee in theirr heart-of-hearts could agree on,
whether it is refining agricultural investment at a time when
we have virtually zero interest rates that we could finance
long-term investments for infrastructure, could make a huge
difference in all our communities. And I hope we reach the
point, maybe the fiscal cliff helps us look at this in a more
comprehensive and thoughtful fashion in ways that will make a
long-term difference to our communities and our economy. Thank
you for your patience.
Chairman Ryan. Thank you, Mr. Flores.
Mr. Flores. I would like to put Van Hollen's chart put back
up on the screen if we can.
Okay. This chart I found to be interesting, there were two
factors I think in play here that were not discussed. Number
one is, in 2001 where the chart starts, we had an exogenous
factor come into play and that is when the war on terror
started, beginning with the attacks on 9/11. So, I think that
that particular fact was conveniently left out and if you move
over to 2007, well the political change that occurred, and that
was when the other party assumed control of Congress in both
houses and you can see the huge increases in spending that
occurred, and also the impact on the economy with the changes
in regulatory environment. Dr. Elmendorf, when the stimulus
bill was passed, it was widely believed that unemployment would
go down because of that stimulus program. But here we are three
and a half years later, and we had a peak to 10 percent
unemployment, we have had about 40 months of employment higher
than 8 percent. The other side of the aisle is proposing to
have another round of stimulus, they have changed the name to
investment, and saying that is going to be the panacea to solve
our deficits and to solve our debt problem that we have in this
country , that you have done a great job of explaining. My
question is this, can you explain in about 30 seconds or less
why the stimulus did not achieve its desired outcomes and what
inpact it has had on our debt and deficits?
Mr. Elmendorf. The economy has performed a good deal worse
than we expected and many forecasters expected a few years ago.
In our assessment and the assessment of most economists I
think, the Recovery Act created more output and more employment
than would have happened without it. But the underlying
weakness of the economy, not unusual in comparison to other
countries that have had financial crisis-induced recessions,
but unusual for us, the other underlying weakness of the
economy has more than offset the efforts of fiscal policy-
makers and monetary policy makers to put the economy back on a
strong course.
Mr. Flores. That takes us to the next question, and I have
asked this question before, but what is more efficient in terms
of causing increasing economic activity? Is it public sector
spending, or private sector spending? And in other words, it is
a choice between a Solyndra expenditure or a Keystone
expenditure, which of those is better for the economy?
Mr. Elmendorf. Well, we have not studied those two
particular types.
Mr. Flores. But they are the poster children, so let us
talk about it.
Mr. Elmendorf. In an economy where the constraint on output
in the employment is weak demand for goods and services, which
is the economy that we have been living through for the past
four and a half years, then additional demand from the private
sector or the government will raise output, raise employment
relative to what would otherwise occur.
Mr. Flores. And what causes that increased demand? What is
it, other than that thinking that public sector spending can
raise demand, I mean then you would have had a $4 trillion
stimulus or a $5 trillion stimulus, but of course the impact on
the economy would have been tragic because of its impact on
federal deficits and debt. So, is it not better to rely on
private sector spending to for economic stimulative activity.
Would you not want to do things that encourage private sector
investment and jobs in our economy and paychecks than public
sector spending?
Mr. Elmendorf. Well, congressman, we have been clear that
the extra debt was accumulated through the Recovery Act, if not
offset by other policy changes later will lead to an ongoing
level of higher debt that will in the medium-term and long-term
be a drag on the economy.
Mr. Flores. Correct, so we would not want it.
Mr. Elmendorf. I think policy makers have tried to both
stimulate private spending and to increase public spending.
Mr. Flores. So it would be inappropriate to double down in
terms of a failed program to continue. If the stimulus works,
the stimulus version 1.0 worked, why would stimulus version 2.0
work any better?
Mr. Elmendorf. congressman as you understand, and I
recognize you do not agree with us, but our position is that
the Recovery Act was not a failed program. Our position is that
it created a higher output in employment than would have
occurred without it. And we did analysis last fall and
testimony to the Senate Budget Committee of a collection of
alternative proposals. Some tax increases, some tax cuts, some
spending increases that we think would spur output in
employment.
Mr. Flores. What would have a higher impact, if you have
$700 billion of addition GDP from the private sector versus
$700 billion of GDP of spending from the public sector, which
would have a greater impact on the economy?
Mr. Elmendorf. Over the past few years, congressman, that
extra spending, wherever it came from, would have led to more
jobs. And there is no reason to think that the extra spending
on the private sector would lead to more additional jobs and
extra spending in the public sector. Over a longer period time,
the question is, what sorts of goods and services have been
purchased? And if the public sector was investing, then that
would be good, and if the private sector was investing, that
would be good in the long run.
Chairman Ryan. Thank you.
Mr. Flores. That was fascinating.
Mr. Elmendorf. We each have our own conclusion.
Chairman Ryan. Time is getting near. I would just say to
the gentlemen from Texas, we had that hearing on multiplier
effects where there is clearly a difference of opinion on
Keynesian multipliers and it maybe go back to that hearing. We
had Mr. Zandi who I think represented the CBO's position and we
had Mr. Taylor from Stanford who represented an alternative
position. That hearing probably kind of gives a little
illustration on this point. Ms. Bonamici.
Ms. Bonamici. Thank you Mr. Chair. Thank you Dr. Elmendorf
for your testimony. The cost of health care, as frequently
mentioned, is a significant factor in increased spending and
your testimony certainly reinforces that as well. And
traditional approaches to addressing rising costs have included
cutting people from care, cutting provider rates, cutting
services. And in my state of Oregon we have come together in
order to take a new approach, particularly regarding the
uninsured and our Medicaid dollars. It was actually quite
refreshing to see business, labor, Republicans, Democrats,
educators, all come together and work on this health care
transformation with a goal of improving care while costs,
integrating and coordinating services, including physical and
mental and oral health care.
The modeling that has taken place involves coordinating
physical and behavioral health care, better preventing and
managing chronic diseases, using patient-centered primary care
homes and improving and aligning care for individuals who are
dual-eligible. So the establishment of these coordinated care
organizations is projected to actually improve care while
reducing costs and increasing access, and in fact by
coordinating services Oregon projects a 4.9 to 9.7 percent
savings in the second year of implementation compared to
without the transformation to a 10 percent increase. And this
savings is expected to build over time. And I wonder if you
could talk a little bit about how this type of change would
impact the federal budget if a similar approach was implemented
in other states as well.
Mr. Elmendorf. Well I think, Congresswoman, there are a
tremendous amount of experimentation going on in different
states and different private providers of care and private
insurers and in effort to get more value for our health care
dollars. And I think the ferment of experimentation is a very
positive factor. But it is also true that a number of
experiments that have been tried over the years have not worked
as well as advocates hoped, and even those that have worked
have proven in some cases more difficult to expand across
different provider settings, across different states health
care systems. We did a long and careful review of a collection
of Medicare demonstration projects in both value-based payment
methods and in disease management and care coordination. And
these were Medicare demonstrations, we wrote about this last
year, and the set of demonstrations that Medicare has tried
have found that when there is a direct interaction between a
care manager and physicians and then in-person interaction with
patients, where there really is a lot of effort, a lot of
energy being focused on this care coordination, that that sort
of model is more likely to reduce spending, gross spending, but
it also had its own costs in terms for paying for these
interactions. So, in Medicare, there has not yet been a model
that is been used in any widespread way that has had the
effects that people are looking for, of higher quality care and
lower cost at the same time. It doesn't mean that it cannot
happen, probably it can happen, but people are still trying to
figure out just how to do it and, just how to do it, as I have
said, in different sorts of settings.
Ms. Bonamici. Right.
Mr. Elmendorf. So, the Affordable Care Act introduces a lot
of different programs, in particular the Center for Medicare
and Medicaid Innovation, as you know, that is designed to do
more experiments faster, to reach conclusions more rapidly and
then to be able to extend the successful programs across the
system more rapidly. And we think that will have some positive
effects, but how large those effects will be and just what
arrangements will turn out to be most effective, we do not know
yet.
Ms. Bonamici. Well, thank you for your testimony and I know
that we will all be watching what is happening in my home state
as well as those other states, because until we can increase
access and start addressing the high costs of chronic care, we
are going to be increasing those costs and we need to be
keeping people out of emergency rooms. So, I appreciate your
testimony and I yield back my time.
Chairman Ryan. Thank you, Mr. Lankford.
Mr. Lankford. Thank you. Thank you as well for being here.
Let me talk a little about page 35 of your report. You have an
interesting section of something I have talked a lot about as
well, and that is the effect of government borrowing. And what
effect that really has on the economy as a whole and just this
top paragraph in the right-hand column there. ``Increased
government borrowing generally draws money away from or crowds
out private investment and productive capital, leading to a
smaller stock of capital and lower output in the long run that
would otherwise be the case. Deficits generally have that
effect of private investment because the portion of people's
savings used to buy government securities in not available to
finance private investment. The description that you made
there, I have talked about before and I know you spoken about
it often as well, and that is this effect that the more that we
borrow the more that we require of capital that would otherwise
be invested into productive things, rather than just sovereign
debt. That is occurring worldwide currently. This trend as you
said, I am going to ask you, that some of you want to talk
about it or not, but we have got that issue happening in
Europe, other parts of the world as well as here. What do you
think that effect is currently of the crowding out of
investment worldwide based on sovereign debt?
Mr. Elmendorf. Well the countries in Europe have a
collection of overlapping problems, as you know. They have a
banking crisis, they have a fiscal crisis, they have a growth
crisis. And, as we wrote in an issue brief a few years ago
about the risk of a fiscal crisis in the United States, once
one ends up in that situation, then there are no good options.
Countries that are unable to borrow at affordable rates feel
the need to cut back on their borrowing, at the same time
cutting back on spending, or increase in revenues, tends to the
slow economy which then worsens their budget situation, and it
really is a vicious circle. We think the European economic
situation is weighing on the U.S. economy now and has the
potential to be a much more significant negative force if they
do not find a way to keep their system going.
Mr. Lankford. But it also is a benefit to us in that it
keeps our interest rates low because people do not invest in
their sovereign debt, did invest in ours. And so, it is this
double-edged sword that yes, it is slowing down our economy,
but yes it is actually helping us in keeping our interest rates
low on our debt.
Mr. Elmendorf. Yes, it is pushing down treasury interest
rates.
Mr. Lankford. Right.
Mr. Elmendorf. Because people are engaged in this flight to
relative safety. But it is probably weighing on other parts of
our financial system and that is, I think, where the biggest
risk lies. If they have a larger collapse in their financial
system, their potential of very large negative spill over to
ours.
Mr. Lankford. Right, you have mentioned often as well about
tax rates and marginal rates and such, and that a lower
marginal rate tends to increase productivity or at least
activity in the economy. Can you factor in certainty and
uncertainty in the last several years as well? There has been
this constant ``We do not know what the rate is going to be
next year'' mentality, that is happening. Rates seem to be
tweaked out every single year. Can you factor in the difference
between certainty and uncertainty and marginal rates?
Mr. Elmendorf. It is very difficult to quantify. We think
that the uncertainty about federal policies on a whole variety
of areas, including the tax code, is weighing on the economy.
It is a negative factor in the current economy, a whole bunch
of factors, it's very hard to know.
Mr. Lankford. As we walk through this year, once we get
near the end of the year there is common discussion about all
this expiration on all of these tax rates from 2001 and 2003.
Better to resolve those earlier, or better than to resolve
those later? We have got about six months to do either of
those, so it is not exactly early even at this point.
Mr. Elmendorf. Earlier is better. No doubt.
Mr. Lankford. Okay Do you think it is possible to address
our national debt burden, our deficits at all, without dealing
with the major entitlement programs?
Mr. Elmendorf. Well, congressman, as I have said at the
beginning, it is possible to maintain Social Security,
Medicare, Medicaid, as they are under current law, but only by
substantially raising taxes on a broad group of Americans. And
similarly, it is possible to maintain taxes at their historical
share of GDP, but only by making substantial cuts relative to
current law in large entitlement programs that benefit a broad
section of Americans at some point in their lives. That is what
makes this choice that you and your colleagues face and that we
as American citizens face so difficult. One can pick to hold
one part of the budget as it would otherwise be, but given the
gap between revenues and spending on foreign policies, then one
has to make even larger, even more dramatic changes in the
other part of the budget. And you can see that in our extended
baseline scenario here, what happens under current law, which
is a very large increase in tax revenue. And one can see an
alternative vision in Chairman Ryan's long-term proposal that
we analyzed in March, which holds revenues down and makes very
large cuts in a number of federal programs.
Mr. Lankford. Either way, earlier is better to resolve
this.
Mr. Elmendorf. But certainly, for those longer term issues
as well, earlier is much better because it gives people time to
plan and adjust. It gives you a chance to phase in changes
gradually, and yet have them take effect in a way that is
important in dollar terms before the debt gets even larger than
it is today.
Mr. Lankford. Thank you, I yield back.
Chairman Ryan. Thank you, Ms. McCollum.
Ms. McCollum. Thank you, Mr. Chair. Director Elmendorf,
this is interesting, we talk about cuts in entitlement programs
a lot, but, I would like to talk about another program and your
assumptions on that in your two scenarios. What were your
assumptions for defense spending as a percentage of GDP?
Mr. Elmendorf. Defense spending?
Ms. McCollum. Defense spending.
Mr. Elmendorf. So, I am, so what we do for our long term
scenarios is we just take the set of all programs.
Ms. McCollum. I understand, I just have a few minutes if
you could just tell me what it is.
Mr. Elmendorf. We do not have an explicit projection for
defense spending.
Mrs. McCollum. You do not, okay.
Mr. Elmendorf. Beyond the ten-year budget window. In the
window, we had a specific base-line projection.
Mrs. McCollum. And that is?
Mr. Elmendorf. And, I, that I am not sure.
Mrs. McCollum. Well, then you would have to look for that.
So, maybe you could get back to us if you cannot answer this
question. Mr. Romney, who is the Republican nominee for
president soon-to-be, has proposed to never allow defense
spending to go below 4 percent of GDP. What would be the impact
of such a sustained elevated level of spending over the
remainder of the decade? And that is, you know, he just said
never go below, he did not say anything, he did not put any
qualifiers for global security environment. What would that
have on the effect of domestic discretionary spending under
your two scenarios?
Mr. Elmendorf. Well, see in our baseline Congresswoman,
this all-other category is only 7.3 percent of GDP in 2022, so
if defense spending were 4 percent of GDP, that would leave to
just a little over a 3 percent of GDP for all domestic programs
apart from this handful of large entitlement programs. And that
would be a dramatic reduction relative to their historical
average.
Ms. McCollum. So, there is a plan on the table from Mr.
Romney and I mentioned his decision to never allow defense
spending to go below 4 percent of GDP and he also talks about
cutting revenues of $6 trillion over the decade by making the
Bush tax cuts permanent, cutting the corporate rate from 35 to
25 percent, eliminating the state tax, capital gains tax, taxes
on dividend earnings along with other tax breaks, so when you
add the increase to defense spending, what would be the impact
on the deficit with all the other cuts to revenue that he is
talking about having? And what effect would it have on the
safety net in the entitlements?
Mr. Elmendorf. Congresswoman, I am sorry, we have not
analyzed Mr. Romney's plan, nor do we ever analyze the plans of
candidates for office.
Ms. McCollum. Well, you have two scenarios.
Mr. Elmendorf. I cannot speak to a collection of things
that he particularly would do.
Ms. McCollum. Okay, but you have two scenarios. One in
which you have the tax cuts not happening the sequestration
happening. Mr Romney's talking about undoing that and then
increasing defense spending. I mean, what would be the effect
on the safety net in the entitlement program? Because you do
have one scenario in which the Bush tax cuts expire, the
corporate rate doesn't change. He is talking about undoing
that.
Mr. Elmendorf. Right, so if you extend all of the tax
policies that are expiring, as we do in our alternative
scenario, but then that by itself would put that on this steep
upward trajectory. If one then wants to maintain the slight
downward trajectory of that under current law, then one leads
to other parts of the government by trillions of dollars.
Ms. McCollum. So, that, it would be that scenario plus more
spending for defense.
Mr. Elmendorf. And if one increased defense spending
relative to what is in current law, and it is still wanted to
keep dead on the downward trajectory, then one would have to
make probably larger cutbacks in other domestic programs.
Mrs. McCollum. Thank you. Thank you, Mr. Chair.
Chairman Ryan. Mr. Stutzman.
Mr. Stutzman. Thank you Mr. Chairman, and thank you Mr.
Elmendorf, Dr. Elmendorf for being here. I always enjoy your
analysis and your testimony. I would like to talk about
interest rates and then segue that into taxes. On page 32, one
of your points under interest rates says ``an increase in
government debt tends to raise interest rates by leading people
to allocated a larger portion of their savings to the purchase
of government security, such as Treasury bonds, thereby
crowding out investment in productive capital goods such as
factories and computers.'' Does your report here touch on why
our interest rate is at record low levels right now?
Mr. Elmendorf. We do not talk about that here, congressman.
We will in our August regular forecast update. The principal
factors seem to be weak economy, and thus weak private credit
demands and a flight to relative safety from financial markets,
particularly in Europe, that are in an especially fragile state
right now.
Mr. Stutzman. QE1, QE2, that is obviously playing a part of
that. If that expires, are we going to see interest rates
increasing in the near future?
Mr. Elmendorf. Well, there are certainly for sure rates
that are important, I was more focused on the longer run rates.
And the actions of the Federal Reserve have brought down longer
term rates. So if one looks at financial markets out beyond the
next few years, out, say, later in the decade, they are
expecting those to increase in interest rates, short-term and
long-term interest rates, and our economic forecast has
included in it those increases in short-term and long-term
interest rates. Later in the decade, we are looking for a
short-term rate close to 4 percent and a 10-year rate at about
5 percent, and that is roughly consistent with the readings in
financial markets.
Mr. Stutzman. Okay, and then on page 43, under the bullet
point of the need for higher taxes or less spending on
government programs. Am I correct, from what you stated
earlier, you talked about rates versus base, because there is a
lot of rhetoric here in Washington about that Republicans are
against revenue increases when, in fact, in our own budget we
address the tax policy and suggest that we go to two tax rates,
at 10 percent and a 25 percent tax rate. Is it clear that you
are discussing one scenario versus the other, where there is a
tax rate increase, which you are discouraging with the
expiration of the tax rates? Or in your alternative scenario, a
broadening of the base. Do you discuss any of those in the
report?
Mr. Elmendorf. No, we do not. I mean, we are not trying
here to particularly explore the details of alternative tax
policies. I mean, current law would have a certain set of
things occur, which we try to capture in the extended baseline
scenario. And then the alternative scenario tries to capture
the extension of a variety of expiring provisions. So it turns
out that, under this alternative scenario, given the
provisions, if one extends the expiring provisions that
marginal tax rates are kept low and the base does not change,
really. And it also turns out that under current law, there is
some effective broadening of the base because more and more
income would be taxed under the alternative minimum tax, which
just has a broader base than the regular individual income tax.
Mr. Stutzman. So broadening the base would not hurt the
economy the way that raising the rates, current rates, would
affect the economy, is that correct?
Mr. Elmendorf. That is generally true, but again, the
effects of broadening the base depends a lot on the nature of
the broadening. And particular provisions that might be
broadened in say tax reform plan that Congress considered, we
would have to look at the specific provisions, and we are
prepared to do that, and talk with you about that comment and
the effects of those.
Mr. Stutzman. Okay. Thank you, Mr. Chairman, I yield back.
Chairman Ryan. Thank you, Ms. Schwartz. Oh wait, I am
sorry, Ms. Castor, my apologies. Ms. Castor, you were here
first.
Ms. Castor. Thank you, Mr. Chairman. Thank you Dr.
Elmendorf for being here today. If we had more people working
across America, would our debt and deficit situation be
improved?
Mr. Elmendorf. Yes, absolutely.
Ms. Castor. Can you tell us if the unemployment rate was 1
percent lower, how much lower our debt and deficit situation
would be? Or 2 percent?
Mr. Elmendorf. I did not bring that magic table. This is
now the second time I wish I had. We wrote a letter to
congressman Van Hollen a few months ago that talked about the
effects on the budget if the economy were stronger. I think we
said about a third of the current deficit would go away if the
economy were somehow immediately put back close to full
employment.
Ms. Castor. See, that is one of the frustrations because
there is absolutely no dialogue from my friends on the other
side of the aisle as job creation as part of debt reduction and
deficit reduction. We could really give a boost to this
improving economy if we could do some things on jobs. I mean,
here are the positive signs, we have had 27 straight months of
private sector job growth, manufacturing employment continues
to trend upwards, consumer confidence is up, the median home
price, the sales figures are up, corporate profits are up. So,
things are trending in the right direction and here the
Congress could be really helpful in job creation and in deficit
reduction if we could come together to do some things on jobs,
but unfortunately my friends on the other side of the aisle
blocked a jobs plan put forth last year that said, you know,
let's rebuild schools across America, that would put a lot of
people in construction back to work and leave us with better
facilities for students. They have stalled the transportation
bill. I mean, look at this transportation bill. When do you
have 75 votes out of the United States Senate on bipartisan
bill, and yet that has been sold for months and months and
months. And I heard your earlier comment, when it comes to
infrastructure, you said oftentimes the benefits, the benefits
exceed the costs, is that correct?
Mr. Elmendorf. Yes, that is right. It depends a lot on the
specific project, but there are a lot of projects that are not
being done, on the highways for example, where the benefits to
the economy would be a lot greater than the costs.
Ms. Castor. And then when you factor in the Republican
budget that was passed, that is a prescription for disaster
when it comes to the future plans for this country because they
so slash the important investments that government and the
private sector work on together, whether it is in scientific
research, or it is in infrastructure, in education. And I think
their one-sided unbalanced approach is really going to cause
great damage. I think it is causing damage now because we could
come together now to take a good whack at the debt and deficit
if we could do some things on jobs. So I am hopeful, there is
still time to do it, but I hear your message loud and clear,
sooner rather than later. Thank you, and I yield back.
Chairman Ryan. Thank you, Ms. Black.
Ms. Black. Thank you, Mr. Chairman, Mr. Elmendorf I always
appreciate your reports, I do read those and highlight them and
learn so much by them, so thank you for your work. I was not
going to go in this direction, but I just have to address what
the gentlelady from Florida was talking about, that there are
ways to raise revenues, one is to tax people more and the other
is to have those that are employed paying those taxes, which
then raises revenue. And I cannot let this go by to say to say
that as I am visiting with my job creators in my community that
what they tell me is that there is so much uncertainty out
there, this is why they are not growing.
The uncertainty really creates paralysis, and certainly
what you are saying on the budget outlook and helping us to
understand where the debt drivers are helps us to make those
decision on policies but we have got 30 pro-job creator bills
laying there that have not been handled by the Senate, so let
me just go to the area, though, when we look at those areas
that are driving our debt and the long-term debt of our
country, what would you say the significant drivers are?
Mr. Elmendorf. Well, the feature of the budget that is
becoming much different than it was in the past, it is spending
on the health care programs, and in some extent, spending on
Social Security because of the rising costs of health care and
the aging of the population.
Ms. Black. So those two drivers that are most significant
that we continue to hear about in the budget forecast that you
give to us in other ways are Social Security, Medicare, and
Medicaid. Would you say those are the biggest drivers?
Mr. Elmendorf. Those are the big changes. What you decide
to in response to those is, of course, up to you.
Ms. Black. If we could bring up the first chart that is
taken from the CBO report but put into a chart that, I think,
is easy to take a look at, we see historical average versus no
changes in any of these programs, what will happen under the
current law.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
So we see what has been the historic level spending on
these two areas. Mr. Elmendorf.
Mr. Elmendorf. I cannot check the exact numbers.
Ms. Black. Okay.
Mr. Elmendorf. But I can certainly capture the gist of the
point, Congresswoman, which is that Social Security and health
care spending are on track to be much larger shares of the
economy than they are today and there are a larger share today
than there were over the past several decades.
Ms. Black. So, if we just take a look at really these two
categories, we see they represent about a quarter, about 25
percent of GDP, and then if we look at it historically and
where it will go, we are going to go up to 60, so we see here
our total revenues. There is not a whole lot of room left for
anything else in the budget, would you agree with that?
Mr. Elmendorf. Yes, now I should say, in that picture, I
think Congresswoman the 2037 under current law, you have to set
revenues just above 18 percent of GDP. So, to be clear, that is
actually under our extended alternative fiscal scenario. Under
current law, revenues rise a good deal more. But I think what
you have done here is to extrapolate what we might think of as
current policies.
Ms. Black. Right.
Mr. Elmendorf. And hold revenues at that share of GDP. And
certainly if revenues are held at that share of GDP, as they
have been historically, then the dramatic rise in cost for
other programs makes the budget completely untenable and that
is why ultimately you and your colleagues face this choice of
pushing that left bar down or that right bar up.
Ms. Black. And so, I think we just have to admit we cannot
stay where we are. There have got to be policy changes so, if
we could go to the next chart, and I think this is even more
devastating if we look at current policy and we do not do
anything, we keep sticking our head in the sand and saying,
``Oh, we will just wait and wait.''
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
We see here that by 2037, our total spending far, far
outpaces our total revenues and we see how our debt continues
to grow. And I think that these charts, as we put these out
there for people to see rather than these reports, are so
instructive and if we have time to read these, that is great,
but when we just take a flash, and we take a look at these in a
chart form, it has got to wake us up to say there have got to
be some changes as we move forward into the future.
Mr. Elmendorf. That is absolutely right, Congresswoman. We
cannot go back to the combination of policies in the past. I am
just noting about this chart, again, to be more clear, this
under current law is actually under the alternative scenario.
Moreover total spending is that high in large part because of
an explosion of interest payments, reflecting the gap between
the non-interest spending and revenues for all the years
between now and 2037. Non-interest spending would itself be a
good deal higher in 2037 than it has been historically, but not
as much higher than our historical average is showing in this
picture.
Ms. Black. So, I mean, you can take a lot of these
scenarios and do different things with these charts, but I
think that the most important thing is that when we take a look
it in a chart form such as this, it has got to be just striking
to us that we have go to act on this and we do have some
alternatives out there and hopefully we will get serious and
get out of the politics and get down to the policy and address
these and get it done for the American people. Thank you very
much.
Mr. Elmendorf. Thank you Congresswoman.
Chairman Ryan. Thank you, and now we, last but not least
Ms. Schwartz.
Ms. Schwartz. Thank you very much. And I appreciate your
testimony and your patience. Actually it was a good to follow
Ms. Black. I was really interested in your answer response on
her charts, because you just spent just about two hours telling
us that it is not just spending, it is also revenue. And that
last chart really ignores the fact that we can do something
about revenue. I was surprised that you did not say that ``Yes,
it is not just spending,'' because you had just said it many
times that the problem we are facing in terms of deficits and
the dramatic increases in deficits and the national debt relate
to both spending and reductions in revenue. That is true.
Mr. Elmendorf. Yes, yes, the unsustainability of fiscal
policy is the gap between spending and revenues, the gap under
current policies and whether you choose to resolve that by
raising tax revenue or cutting spending is a choice that you
can make.
Ms. Schwartz. And that last chart that was shown is based
on the fact that they will continue to be the lower revenues
built on the fact that there are as an insistence on the
Republican side instead of looking at both spending and
revenues and recognizing that given the economic concerns about
deficit, we cannot ignore the revenue side. Now, you have
pointed out how we do that is for us to decide. But whether we
maintain those tax deductions for our largest corporations,
whether we can afford to do that, is completely ignored by that
chart. And I just wanted to have you make absolutely clear that
that is a choice the Republicans are making, to only looking at
the spending side and refuse to look at the revenue side. And
in fact, reduced revenues, that they want to continue, they are
making a choice to continue reduced revenues, refusing to raise
any revenues. They have said only discussion about tax policy
as if it is revenue neutral. No new revenues. Even if those tax
deductions are not contributing to economic growth, even if
they do not anything.
Chairman Ryan. Will the gentlelady yield?
Ms. Schwartz. No. Would you answer that, I mean, would you
just speak to that?
Mr. Elmendorf. You are certainly, you are certainly right,
Congresswoman, that the explosion of debt and explosion of
interest payments that we show under the extended alternative
scenario, could be addressed either by reductions in spending
relative to that scenario or increases in revenues.
Ms. Schwartz. Or a combination.
Mr. Elmendorf. Or through a combination.
Ms. Schwartz. One of the things we have put forward and I
contend this all the time that budgets are bad choices. We have
put forward, the Democrats have put forward, a budget that is
clear about our insistence, that yes, we are going to deal with
the deficit, we are going to create that certainty, we are
going to do it in a way that does not hurt our fragile economic
recovery. We have seen economic growth, but we want to see
more. And the only way we are going to do it, and every
bipartisan commission has said it has got to be both looking at
the revenue side, getting rid of tax deductions that do not
grow the economy, in spite of the other side saying they are
job creators, they have not created jobs. Now, you know, the
provisions that do not create jobs, that do not create economic
growth, that we can get rid of those. That we can see something
on the side of revenues. But of course we are going to cut
spending, we have already, we have made that commitment. A
trillion dollars this year, a trillion plus at the end of this
year in tough ways. This is really about choices that we are
making and it is about choices of whether we take all of it out
of the spending side, that we walk away from our commitment to
our seniors on Medicare, which is of course, the Republicans
have voted for time and time again, that we walk away from
investments in education and innovation and growth industries
and yes, this was just pointed out on our side, walk away from
potential of public investments now such as in transportation,
infrastructure, that not only grow jobs right now but actually
help economic growth in the private sector by creating demand
and creating an environment that grows jobs and encourages
companies to stay here, invest here, and grow jobs in the
private sector. It is certainly possible and in your testimony
for the past two hours have suggested we have got to take the
approach for balanced approach and we have got to do it sooner
than later.
Mr. Elmendorf. As you know Congresswoman, I cannot tell you
what approach you should take, but you are absolutely right
that you and your colleagues and we as citizens face
fundamental choices about the rule of the government in our
society, what we want to do collectively versus what we want to
do privately. And the choices are forced upon us because we
have a set of programs that are becoming muchmore expensive
than they used to be.
Ms. Schwartz. And reduced revenues
Mr. Elmendorf. Everything else has to adjust.
Chairman Ryan. Thank you. Mr. Huelskamp.
Mr. Huelskamp. Thank you Mr. Chairman. Doctor, I appreciate
you being here. I had a couple follow up questions on earlier
discussion and I think from one of my colleagues in reference
to the stimulus package and why it did not work and you had
some comments, but I want to refresh your memory. The
administration, and I presume the CBO, had predicted the same
outcome, or similar outcome, predicted that the unemployment
rate today would be 5.7 percent. If that had worked as the
economists, or most economists I guess in town, that were
promoting that, of course today it is 8.2 percent is the actual
unemployment rate. The delta of the difference is 13 million
Americans are not working today . You said that the economic
recession was worse than was figured. Well, can you tell me
what numbers were missed? The reason I am asking this, this is
not a gotcha question, I am trying to find out who in this town
actually does an accurate job of predicting, because the folks
that said we need to spend more money were very, very wrong.
And can you tell me where you and others were wrong as far as
the economic figures you were using for that type of
projection?
Mr. Elmendorf. Yes, congressman. Those are good questions.
Economic forecasting is very hard. We release a regular update
of our success at that, and I think a good way to summarize
that is that we are no worse than other economic forecasters.
But to put it that way deliberately it is very hard to do. I
think in our case and for many people, for many forecasters,
the U.S. has not experienced a recession of the magnitude of
the one we have just lived through since the Depression. We
have become used to having infrequent and fairly mild
recessions, and we and other forecasters expected this to be
like that. In fact, people who had studied more carefully
downturns of other countries following financial crises were
saying from the beginning that in this sort of situation we
should be looking for a much longer and more pronounced
downturn in this country. And they turned out to have been
right. I want to be clear about the effects of the Recovery
Act. There is disagreement, as the chairman noted, among
economists about the size of these multipliers. And reflecting
that disagreement, we show ranges of estimates. But there is
only a small fraction of the profession so that the Recovery
Act was not good for the economy.
Mr. Huelskamp. And doctor, I appreciate that. But what
particular figures, just in general, you are saying that most
economists were generally wrong, or were there specific
indicators that were missed? And this gets pretty political
because we have folks suggesting, and maybe yourself, that it
was not big enough, that we should be spending more money. And
actually according to your report on page 34, you suggest that
if we could just spend some more money somehow that is going
grow the economy some more. And after spending $880 billion
with a $1.1 trillion cost to pay it back, I just cannot figure
out what economic indicators were missed to suggest that we
should have another stimulus to this, or a bigger stimulus to
this, or just spend more money of any type and somehow that is
going to grow the economy. What did you and other economists
miss, specifically, that led to this huge jobs deficit between
what was projected by the folks that produced the stimulus? I
mean we are talking 13 million Americans would like an answer
to say, ``Okay, where did Washington mess up?'' because you say
most economists think it should have worked. It did not.
Chairman Ryan. Can you, can the gentleman yield for a
second? So, yes, sir. So the question is, if I am mistaken
Doug, whether the multiplier is above one or below one, and
that is where very, very few people say it is below one. Is
that not the case? And then, what was the Bernstein multiplier?
Mr. Elmendorf. The question of whether the Recovery Act was
good for the economy is the question whether the multiplier is
above or below zero.
Chairman Ryan. Zero, yeah, excuse me. Zero.
Mr. Elmendorf. And so, can I just put into the transcript
on this regard, there was a question of economists at the
University of Chicago that do a regular survey of distinguished
economists of leading universities on issues of public policy
to show where the agreements lie.
Chairman Ryan. Whether a dollars of spending produces more
than a dollar's worth of economic output, or less. Right? That
is basically the question here?
Mr. Elmendorf. So, I will read you the specific question
they asked: Because of the American Recovery and Reinvestment
Act in 2009, the U.S. unemployment rate was lower at the end of
2010 than it would have been without the stimulus bill. Can I
answer that question?
Chairman Ryan. Oh, sorry, I thought you did.
Mr. Elmendorf. That was the question, with a question mark
at the end. They phrased it as a statement, I am just quoting
it directly. ``Because of the Recovery Act, the unemployment
rate was lower at the end of 2010 than it would have been
without of the stimulus bill. 80 percent of the respondents
agreed or strongly agreed with that statement.
Chairman Ryan. Right.
Mr. Elmendorf. Only 4 percent disagreed or strongly
disagreed.
Chairman Ryan. Right, meaning positive number versus
negative number. 80 percent.
Mr. Elmendorf. And I am not sure if John Taylor is in this
group, if he were, I would presume he would be in the 4
percent. But that is a distinct minority.
Chairman Ryan. Right. So here's what I think he is getting
at.
Mr. Elmendorf. Consistent with the consensus in the
profession.
Chairman Ryan. What was the multiplier, I think it was the
Bernstein, Romer, I cannot recall who came up with the
multiplier to generate those stimulus projections. What was
that multiplier they used to generate those projections? Was it
2.-something, was it not?
Mr. Elmendorf. I do not know what they did.
Chairman Ryan. No, I know, what he is getting at is, how
did they get it so wrong off their projections, and my question
is what was the multiplier that they used and was that
multiplier not outside of the realm of what most economists
thought it would have been.
Mr. Elmendorf. So, I just do not know what they used. I
know what we did. We went through the literature, we look at a
set of multipliers from the evidence the economists generated.
We reported what those multipliers are.
Chairman Ryan. And yours was 1.-something, right?
Mr. Elmendorf. Well, for every sort of provision, every
multiplier is different. I mean, we have talked about the
differences. I think for the Recovery Act as a whole, and of
course a part of the Recovery Act was tax cuts.
Chairman Ryan. Right.
Mr. Elmendorf. It was not all spending increases, I think
in the end we thought the multiplier on average across those
provisions was about one.
Chairman Ryan. Right.
Mr. Elmendorf. In very rough terms. And that is what we
have been reporting in our regular reports.
Chairman Ryan. And his point, I am doing this off the top
of my head, if I am not mistaken, it was that the Bernstein
Romer multiplier, I think it was Bernstein. That was 2-
something, was it not? Joyce, do you know the answer to that?
No.
Mr. Elmendorf. It may have been, it may have been, I just
do not know.
Chairman Ryan. I think that is what he is trying to get.
Mr. Elmendorf. We are not trying to rebut what they do, we
did our own analysis and I can speak to that, I cannot speak to
what the administration did.
Mr. Van Hollen. But Mr. Chairman just since we are now over
the time.
Chairman Ryan. Yeah.
Mr. Van Hollen. And the question is pretty simple, the
question is whether or not the recovery bill, the stimulus
bill, helped the economy relative to not doing a stimulus, and
the answer from CBO and 80 percent of economists is that it
helped the economy.
Chairman Ryan. Right and what Mr. Huelskamp is getting is
the claims that were used to sell the stimulus were based on a
multiplier that clearly did not materialize, which was much
higher than what CBO claimed it would be. We will go to the
record and figure out what that was. I think it was 2.1 or
something like that.
Chairman Ryan. We are not suggesting you are selling
anything, we are suggesting the administration was selling
something and they oversold it.
Mr. Van Hollen. We should just invite everybody to look at
the Congressional Budget Office analysis on this exact issue
that has been raised a couple times, which may clear that as a
result of the recovery bill, we have saved or created over
three million jobs. They talk about it on a year-by-year basis,
and for those people that have those jobs, it is pretty
meaningful .
Chairman Ryan. And the administration claimed unemployment
would never get above 8, that millions more jobs would have
been created, and they plugged in a multiplier that very few
economists support or justify it. Mr. McClintock.
Mr. Elmendorf. Can I say one more thing?
Mr. Van Hollen. Not on my time.
Mr. Elmendorf. Congressman Huelskamp, we are doing a report
right now on the slow recovery. We are trying in fact ourselves
to understand better where we went wrong in an effort to
improve our forecast going forward, and we are writing this up
in a way that it will be available to you and your colleagues I
hope within a few months, as part of our preparation for our
August forecast update.
Mr. Huelskamp. Mr. Chairman, I request 30 seconds to close.
Chairman Ryan. No, I actually started the mantra after your
time expired.
Mr. Huelskamp. No, no, you did not. I gave you my time.
Chairman Ryan. Oh, you are right. Okay, go ahead, go ahead.
Sorry.
Mr. Huelskamp. I appreciate that. And, you know, I was not
around here, and I am going with the numbers that were provided
by the administration, says it is 5.7 percent, that is in
writing. So far often there have been different multipliers.
But as we go forward, and I look forward to that report, one
thing I will ask is well to put in the report if you can make
an estimate as Ms. Black indicated, what is the economic impact
of uncertainty because I am hearing that from job creators, and
that is nowhere in your report. And that is a difficult thing
to measure. With that I yield back my time.
Chairman Ryan. Thank you, and I apologize. Thanks for being
the indulgence. Mr. McClintock.
Mr. McClintock. That reminds me, the economists who said,
well that might be true in practice, but how does it work in
theory? I think we have run a follow of McClintock's first law
of political physics which is the more we invest in our
mistakes the less willing we are to admit them. A corollary
event is the conceit of the left that somehow a consensus
determines science or economics. The sad fact of the matter is
if 80 percent of the economists turn out to be wrong, the fact
that it was 80 percent of them does not make it right, it is
still wrong. And that has been the experience that we have had
and why your testimony is being greeted with a certain degree
of skepticism now. With respect to the question of default,
does not the secretary of the Treasury have the authority to
prioritize payments to assure the timely payment of the
government's sovereign debt obligations?
Mr. Elmendorf. I think that is right congressman.
Mr. McClintock. I think it is too, so does the GAO, in
fact, I think it is invented in the original act that
established the Department of the Treasury. So, sovereign debt
default then would not be an act of the Congress, it would be a
malfeasance of the executive and not prioritizing payments to
ensure a timely payment of the sovereign debt obligations.
Mr. Elmendorf. I am sorry congressman I cannot speak to the
legalities of this. I can speak, I think, to our sense of the
economic consequences.
Mr. McClintock. Ms. Castor called the budget passed by the
house last year a disaster. I recall Standard & Poor's warning
that a deficit reduction of $7 trillion dollars in the baseline
over the next 10 years was what was necessary to preserve the
AAA credit rating of the United States government. I
specifically asked the head of their sovereign debt division if
the budget adopted by the House last year, the so-called Ryan
budget, would have preserved the AAA credit rating of the
United States government. His answer was it would have. Do you
have any reason to contradict that?
Mr. Elmendorf. I have no view on that one way or another
congressman.
Mr. McClintock. So, we could have preserved the AAA credit
rating of the United States government, but I have some friends
on the left who seem to think that it is a disaster. Let me
talk about the relationship between tax and deficit if I could.
Tax has often been put forward as an antidote to deficits, you
have essentially said that in your testimony. But are not taxes
and deficits basically the same thing, I mean, is not a deficit
simply a future tax? Are not taxes and deficits the only two
possible ways for paying for spending?
Mr. Elmendorf. I think that is right, congressman.
Certainly, as you know, in the long run one cannot just
continue to run up deficits either, in the long run we need to
bring our spending and our taxing into rough correspondence
with each other.
Mr. McClintock. But the deficits are future taxes. Whether
you are taxing today, or you are taxing tomorrow, which is what
we call a deficit, you are still taxing and those are the two
ways that you pay for spending. So it seems to me, that with
apologies to the Clinton campaign, it's the spending, stupid.
Mr. Elmendorf. Well, congressman, I think that when we run
up the debt today that those commit us to do either more
taxation or less spending in the future. But which of those it
is depends on the decisions of the Congress.
Mr. McClintock. Can you offer us any examples of a nation
that has ever spent and borrowed and taxed its way to
prosperity?
Mr. Elmendorf. Well, I am not sure what you mean by that,
congressman. I mean, prosperity comes ultimately from the
ability of an economy to produce goods and services, it is from
the amount and quality of the labor force, it is the amount and
nature of the capital stock, it's productivity, and so on.
Those are the drivers for productivity.
Mr. McClintock. But going from theory to actual practice, I
would look back over the 20th century and the beginning of the
21st century and I see Harding reducing spending as percentage
of GDP in the early 20s, Truman reducing it in the mid-1940s,
Reagan reducing it in the mid 1980s, and Clinton reducing it in
the mid-1990s, and each period follows or is followed by a
rather dramatic expansion of the nation's economy. And yet I
see, when spending is dramatically increased, Hoover in the
late 20s/early 30s, Roosevelt throughout the 30s, Bush in the
2000s, the economy has languished. What are we to draw from the
practical experience that is quite consistent over the past
century?
Mr. Elmendorf. I think the practical experience is harder
to interpret than you are suggesting, congressman. If one looks
across, for example, across European countries, you asked, I
know, different countries and how they perform. A table in
front of me. Germany, which is one of the stronger European
economies being relied on by others in Europe today, they have
a much larger share of GDP collected in tax revenue before this
downturn.
Mr. McClintock. But again, tax revenue, that is not what I
am talking about. I am talking about spending percentage of
GDP.
Mr. Elmendorf. Well, they have higher spending than we do,
there are countries in Europe that have all sorts of different
spending and tax policies.
Mr. McClintock. Actually, I think I just saw a chart that
actually measured in per capita dollars of per capita spending
in the United States is higher than it is in those European
countries.
Mr. Elmendorf. We are richer than they are. So, share of
our GDP goes further in dollars.
Mr. McClintock. We continue these policies, we can fix that
in a hurry, I am afraid.
Chairman Ryan. Thank you. Mr. Guinta.
Mr. Elmendorf. Can I?
Chairman Ryan. Go ahead.
Mr. Elmendorf. I know I am using your time, Mr. Chairman.
Can I just say, you refer, congressman, to whether people
invest in errors and then are not willing to admit them. I am
not sure if you are referring to our analysis or to policy-
making. But I would like to say on behalf of our analysis, that
we continue to read the literature and we have in fact adjusted
our range of estimates of the effects of the Recovery Act in
response to what we have learned throughout that process. But
we have not adjusted the range to include effects below zero,
because we do not think that is consistent with the evidence,
and only 4 percent of the economists seem think it is, and 80
percent in this survey that it is not. So again, although we do
respond to the evidence, and are not afraid to admit that, we
are very clear when we change our views and why. We think,
again, with the great majority of economists, the Recovery Act
was, on net, good for the economy on the past few years.
Chairman Ryan. Thanks. Mr. Guinta.
Mr. Guinta. Thank you, Mr. Chairman. Was the stimulus bill,
Recovery Act, the only way that we could have helped the
economy?
Mr. Elmendorf. No, congressman, I mean there are a whole
collection of possible alternative policies that could have
been, could have been enacted. And we have been asked a number
of occasions now by the Senate Budget Committee to look at
alternative ways of providing a boost to the economy, we have
offered a menu of options and we have discussed what we think
the likely effects would be and the pros and cons of different
ways of perceiving. So there are many, many policies.
Mr. Guinta. And is it also fair to say the Recovery Act
could add to the deficit?
Mr. Elmendorf. Yes. That is right.
Mr. Guinta. And it did add to the debt?
Mr. Elmendorf. Yes. That is right.
Mr. Guinta. Okay. So, what is the effect of borrowing
money, going into debt and deficit, have on private sector
capital?
Mr. Elmendorf. Well over the medium term and long term,
that extra debt will crowd out private capital formation as we
have said, and we said this in February of 2009, that the
Recovery Act that was then was being discussed would be good
for the economy in the short run, but absent other changes
would be a drag later on.
Mr. Guinta. So then as I look at the President's budget
proposal for the next decade, I seem to recall seeing, I think,
every year for the next 10, our deficit exceeds $1 trillion,
and then our long-term debt continues to grow. Now I do not
know what percentage of GDP is off the top of my head. So, to
your point that at some point in the long term, which is what
this report talks about, we do have to change, as you said, the
ratio debt to GDP and we have got to change our tax revenue to
our expenditures. Now, it is suggested by some that the way to
do that is to increase taxes. If we increase taxes, let us say
that we increase every single tax rate, does that necessarily
suggest we are going to have more long-term revenue to the
Treasury?
Mr. Elmendorf. Well, in general, congressman, higher tax
rates will lead to more revenues. Not proportionately higher,
because there will be some effect on people's behavior, but in
general, from the levels the U.S. is starting from today, or
has been talking about the next decade, increases from that
point to revenues in general. Now, could we find specific taxes
where that was not true? Perhaps, I do not know, we have not
checked in that way.
Mr. Guinta. So there is an alternative than to just raising
tax rates to trying to fix and solve this problem. We have,
what is our revenue today? $2.2 trillion?
Mr. Elmendorf. You would think I would know that,
congressman, but I do not. We think this year the revenues will
be about $2.5 trillion.
Mr. Guinta. $2.5 trillion. But we will spend $3.5, $6
trillion?
Mr. Elmendorf. Spend about $3.5 trillion.
Mr. Guinta. Okay.
Mr. Elmendorf. About $3.5, a little over, trillion dollars.
Mr. Guinta. So we are still looking at a trillion dollar
deficit.
Mr. Elmendorf. We are. We do not think that will persist at
that level under current law, or in fact under the President's
budget. But the President's budget does have larger deficits
than under current law.
Mr. Guinta. And one of the things that I do want to get on
the record and you may talked about it before, and I apologize
if you have, in terms of health care entitlements, the CBO
reports as 5.4 percent GDP of that spending in 2012 which goes
up to 12 percent of GDP by 2050, so that is clearly a driver of
our long term fiscal problems, is it not?
Mr. Elmendorf. Well, that is the thing that is different
from the past. That is the part that means that we cannot
repeat the policies of the past. Again, whether that is
addressed by you and your colleagues through changes in those
programs in spending or other taxes is up to you. But the
fiscal problem in balance just comes from the gap, not the
tidbit from either side or the other.
Mr. Guinta. However is we were to eliminate 100 percent of
discretionary spending, we would still have a current deficit,
and we still have long-term debt problem
Mr. Elmendorf. Like I said, I have not tried the complete
elimination but, as I said congressman, when I started, changes
one makes in programs outside the health care program and
Social Security can affect the magnitude of the changes needed
in taxes or the large entitlement programs. But it does not
eliminate the basic tradeoff that we need to either change
taxes relative to their historical performance, change these
programs relative to current law, or reduce some combination of
those.
Mr. Guinta. Would you be able to comment on what the
unfunded liability numbers are on the mandatory side?
Mr. Elmendorf. I do not know congressman. We do not
calculate unfunded amounts in dollar terms like that, we
generally show projections as shares of GDP, and we show some
imbalances in the Social Security trust fund, and we show a
fiscal gap that the economy as a whole, but it is not, that is
just the gap between spending revenues, it is not meant to
capture the present value of all future spending or all future
revenues.
Mr. Guinta. Okay. Thank you very much, I yield back.
Mr. Elmendorf. Thank you congressman.
Chairman Ryan. Thank you very much. I think that concludes
all member questions. Dr. Elmendorf, again, thank you and your
team, Joyce and your team, for all your hard work in putting
together this very insightful, very harrowing report together
and this hearing is adjourned.
[Whereupon, at 11:58 a.m., the committee adjourned]