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



 
                   THE CONGRESSIONAL BUDGET OFFICE'S 
                     2012 LONG-TERM BUDGET OUTLOOK 

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

                                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

                               __________

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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.
---------------------------------------------------------------------------
    \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.)
---------------------------------------------------------------------------
    \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]

                                  
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