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



 
                                                                                                            
      THE HISTORY AND DRIVERS OF OUR NATION'S DEBT AND ITS THREATS

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



                                HEARING

                               before the

                         JOINT SELECT COMMITTEE 

                          ON DEFICIT REDUCTION

                     CONGRESS OF THE UNITED STATES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 13, 2011

                               __________

                                     
                                     

 Printed for the use of the Joint Select Committee on Deficit Reduction




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              JOINT SELECT COMMITTEE ON DEFICIT REDUCTION

                 PATTY MURRAY, Washington (D) Co-Chair

                   JEB HENSARLING, Texas (R) Co-Chair

XAVIER BECERRA, California (D)       JON KYL, Arizona (R)
FRED UPTON, Michigan (R)             MAX BAUCUS, Montana (D)
JAMES CLYBURN, South Carolina (D)    ROB PORTMAN, Ohio (R)
DAVE CAMP, Michigan (R)              JOHN KERRY, Massachusetts (D)
CHRIS VAN HOLLEN, Maryland (D)       PAT TOOMEY, Pennsylvania (R)

                      Mark Prater, Staff Director

                   Sarah Kuehl,Deputy Staff Director

                                  (ii)


                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page
Murray, Hon. Patty, a U.S. Senator from Washington, co-chairman, 
  Joint Select Committee on Deficit Reduction....................     1
Hensarling, Hon. Jeb, a U.S. Representative from Texas, co-
  chairman, Joint Select Committee on Deficit Reduction..........     2
Becerra, Xavier, a U.S. Representative from California...........     3
Kyl, Jon, a U.S. Senator from Arizona............................     4
Baucus, Max, a U.S. Senator from Montana.........................     5
Upton, Fred, a U.S. Representative from Michigan.................     6
Clyburn, James, a U.S. Representative from South Carolina........     6
Portman, Rob, a U.S. Senator from Ohio...........................     7
Kerry, John, a U.S. Senator from Massachusetts...................     9
Camp, Dave, a U.S. Representative from Michigan..................    10
Van Hollen, Chris, a U.S. Representative from Maryland...........    10
Toomey, Pat, a U.S. Senator from Pennsylvania....................    11

                                WITNESS

Elmendorf, Dr. Douglas W., Director of the Congressional Budget 
  Office.........................................................    12

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Max:
    Opening statement............................................     5
    Prepared statement...........................................    53
Becerra, Xavier:
    Opening statement............................................     3
    Prepared statement...........................................    54
Camp, Dave:
    Opening statement............................................    10
Clyburn, James:
    Opening statement............................................     6
    Prepared statement...........................................    55
Elmendorf, Dr. Douglas W.:
    Testimony....................................................    12
    Prepared statement...........................................    56
    Responses to questions from committee members................   133
Hensarling, Hon. Jeb:
    Opening statement............................................     2
    Prepared statement...........................................   137
Kerry, John:
    Opening statement............................................     9
    Prepared statement...........................................   138
Kyl, Jon:
    Opening statement............................................     4
Murray, Hon. Patty:
    Opening statement............................................     1
    Prepared statement...........................................   139
Portman, Rob:
    Opening statement............................................     7
    Prepared statement...........................................   141
Toomey, Pat:
    Opening statement............................................    11
Upton, Fred:
    Opening statement............................................     6
    Prepared statement...........................................   143
Van Hollen:
    Opening statement............................................    10
    Prepared statement...........................................   145


      THE HISTORY AND DRIVERS OF OUR NATION'S DEBT AND ITS THREATS

                              ----------                              


                      TUESDAY, SEPTEMBER 13, 2011

                        United States Congress,    
                                 Joint Select Committee    
                                      on Deficit Reduction,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:33 a.m., in Room 
SH-216, Hart Senate Office Building, Hon. Patty Murray [co-
chairman of the committee] presiding.
    Present: Senator Murray, Representative Hensarling, Senator 
Baucus, Representative Becerra, Representative Camp, 
Representative Clyburn, Senator Kerry, Senator Kyl, Senator 
Portman, Senator Toomey, Representative Upton, and 
Representative Van Hollen.

  OPENING STATEMENT OF HON. PATTY MURRAY, A U.S. SENATOR FROM 
  WASHINGTON, CO-CHAIRMAN, JOINT SELECT COMMITTEE ON DEFICIT 
                           REDUCTION

    Chairman Murray. Good morning. This hearing of the Joint 
Select Committee on Deficit Reduction will come to order.
    As my co-chair, Representative Hensarling, mentioned at our 
meeting on Thursday, we have agreed to alternate chairing these 
hearings, with him chairing the hearings that are held on the 
House side, and I will be doing the ones here in the Senate.
    I want to recognize and thank all of our fellow committee 
members for being here today, as well as our witness, Dr. 
Elmendorf, for joining us today.
    And I want to thank all the members of the public who are 
here today as well. We appreciate your presence and ask that 
you help us maintain decorum by refraining from any displays of 
approval or disapproval during this hearing.
    Before I start, I do want to announce that the joint select 
committee's Web site is now up and running. Members of the 
public can go to http://www.deficitreduction.gov/, where they 
can provide us input and ideas to this committee and where all 
public hearings will be streamed live, starting today.
    Today, we are going to start off with brief opening 
statements from committee members--15 minutes for Democrats and 
15 minutes from the Republican side. We will then hear from Dr. 
Elmendorf. And following his testimony, we will have some time 
for questions and answers.
    The topic of today's hearing is ``The History and Drivers 
of Our Nation's Debt and Its Threats.'' I think this is a 
fitting opening for us for the difficult work this committee 
has ahead of us. We are tasked with tackling a problem that 
wasn't created overnight and that didn't come about just in the 
last few years.
    Our debt and deficit problems have a lengthy and complex 
history, and we will not be able to truly address them without 
a deep and honest understanding of the policies and 
circumstances that have led us to where we are today.
    The challenges that we face are real, and our task will not 
be easy. But I am confident we can get it done because we have 
done it before.
    Like a number of my fellow committee members, I was here 
back in the '90s, when we were facing serious deficits and a 
mounting public debt. I was proud to work with President 
Clinton and Republicans in Congress to balance the budget in a 
way that truly worked for the American people, a way that made 
smart cuts to Government spending that were desperately needed, 
included revenues, and continued to make the strong investments 
in healthcare, education, and infrastructure that helped lay 
down a strong foundation for economic growth.
    The balanced and bipartisan work we did not only balanced 
the budget and it not only helped set our country up to create 
millions of new jobs, but it also put us on track to completely 
pay down our debt by 2012, which was a great accomplishment.
    But as we all know, a lot has changed since then. For many 
reasons, our deficit and debt have exploded in the years since. 
Some of these reasons have to do with Government policies here 
at home, some with decisions made regarding our policies 
overseas, and others due to the financial and economic crisis 
that has devastated families and businesses here over the last 
few years.
    I am looking forward to hearing more about the scope and 
drivers of our deficit and debt from Dr. Elmendorf today. And I 
am confident the members of this committee can help bring our 
Nation together once again around a balanced and bipartisan 
path to fiscal health and economic growth.
    [The prepared statement of Chairman Murray appears in the 
appendix.]
    Chairman Murray. With that, I will call on my co-chair, Mr. 
Hensarling, for his opening statement.

OPENING STATEMENT OF HON. JEB HENSARLING, A U.S. REPRESENTATIVE 
  FROM TEXAS, CO-CHAIRMAN, JOINT SELECT COMMITTEE ON DEFICIT 
                           REDUCTION

    Co-Chair Hensarling. Thank you, Madam Co-Chair.
    The purpose of today's hearing is to really highlight the 
unsustainable nature of our Nation's debt. And I believe the 
term ``unsustainable,'' frankly, is understated.
    I certainly want to welcome Dr. Doug Elmendorf, head of the 
CBO, who, when I was a member of the Budget Committee, I have 
had an opportunity to work with, truly a professional in this 
town. Sir, I look forward to your testimony.
    In the last organizational meeting we had, I mentioned the 
work by Professors Carmen Reinhart and Kenneth Rogoff, ``This 
Time Is Different.'' Through their historical study of 
financial crisis, they indicated that letting debt rise above 
90 percent of GDP was, frankly, a recipe for bad things to 
happen to a nation.
    Well, this year, our Nation has raced past that tipping 
point. Our gross debt has now surpassed 100 percent of GDP. And 
I believe there are two crises in our Nation--not just the debt 
crisis, but the jobs crisis--and they are clearly connected. 
The explosive growth in our Nation's debt hampers our job 
creation today.
    Last week, I quoted a small business person from the 5th 
District of Texas on the subject. Today, I want to quote from a 
few more, names you may be more familiar with.
    Bernie Marcus, former chairman and CEO of Home Depot, which 
employs 255,000. ``If we continue this kind of policy, we are 
dead in the water. If we don't lower spending and if we don't 
deal with paying down the debt, we are going to have to raise 
taxes. Even brain dead economists understand that when you 
raise taxes, you cost jobs.''
    Mike Jackson, CEO, AutoNation, 19,000 employees. ``The best 
thing that this town could do to help this economic recovery 
become sustainable is to deal with the deficit and to see tax 
reform.''
    Jay Fishman, chairman and CEO of Travelers Insurance 
Company. ``What is really weighing on their minds is not 
knowing how the coming explosion in Federal debt is going to 
affect their borrowing costs, liquidity, cost of doing 
business, and prices.''
    Finally, 2 or 3 months ago, the U.S. Chamber came out with 
a survey, their small business survey, 83 percent of 
respondents said that America's debt and deficit have a 
negative impact on their business.
    So I would make the point, Madam Co-Chair, that a path to 
credible deficit reduction is a jobs program, and we should not 
be deterred in that mission. We have a spending-driven debt 
crisis. The deficit reduction will be a jobs plan.
    And I look forward again to hearing the comments of our 
colleagues as we go about this important work and of the 
testimony of Dr. Elmendorf. And I yield back.
    Thank you.
    [The prepared statement of Co-Chair Hensarling appears in 
the appendix.]
    Chairman Murray. We will now turn to our members, beginning 
with Representative Becerra.

           OPENING STATEMENT OF HON. XAVIER BECERRA, 
             A U.S. REPRESENTATIVE FROM CALIFORNIA

    Representative Becerra. I thank the two co-chairs and thank 
Dr. Elmendorf for being with us.
    The creation of this Joint Select Committee on Deficit 
Reduction is the direct result of legislative policies and 
economic recessions that have hit us over the last 10 years and 
that have caused the Congressional Budget Office's 10-year 
estimated $5.6 trillion surplus in 2001 to turn into a more 
than $6 trillion deficit that we see today. So to know where to 
go with the work that we have to do, you have to know from 
where we came.
    Today, we will hear about how we lost our way. What we will 
hear is that a select few in this country enjoyed the 
additional Government spending that occurred in those 10 years 
while the rest of Americans are being confronted with paying 
the tab.
    In January 2001, CBO's assessment in its yearly Budget and 
Economic Outlook report was this, ``The outlook for the Federal 
budget over the next decade continues to be bright. Assuming 
that current tax and spending policies are maintained, CBO 
projects that the mounting Federal revenues will continue to 
produce growing budget surpluses for the next 10 years.''
    But as we all know, current tax and spending policies were 
not maintained. Dr. Elmendorf, it is exactly these policies 
that induced the Federal deficit, which I want to explore in my 
questioning with you today.
    Decisions were made to extinguish a $5.6 trillion surplus. 
The individual and groups who received the most benefits should 
be willing and ready to ante up, to meet their patriotic duty 
to contribute revenues and necessary spending decisions to heal 
this country's long-term fiscal situation.
    We need to ask ourselves was it the senior citizen, the 
student, or the Wall Street banker who received the benefit of 
this spending binge? When we have our answer, we should ask the 
appropriate person or group to pay their fair share to right 
the wrong of running up the Government's debt.
    I look forward to working with my colleagues to take the 
responsibility of improving job creation in this country and 
fixing the long-term deficits that we face by ensuring that 
those responsible for our deficits pay their fair share.
    And with that, I yield back the balance of my time.
    [The prepared statement of Representative Becerra appears 
in the appendix.]
    Chairman Murray. Thank you very much.
    Senator Kyl?

              OPENING STATEMENT OF HON. JON KYL, 
                  A U.S. SENATOR FROM ARIZONA

    Senator Kyl. Thank you, Madam Chairman.
    And welcome, Mr. Elmendorf.
    The subject of the hearing today is ``The History and 
Drivers of the Nation's Debt and Its Threats.'' Obviously, you 
need to know what the problem is before you can develop 
solutions.
    One of the things we will hear is that entitlement spending 
is a key driver of our debt. And I think there is a consensus 
about that on both sides of the aisle. The concern I have is 
that some people fear that that means that the solution has to 
be a cut in benefits or a cut in payments to providers for 
programs like Medicare and Medicaid, for example, and I would 
like to focus very specifically on a potential alternative to 
that.
    There may be very substantial savings that can be obtained 
from administrative efficiencies that would not involve cuts in 
these programs. That is one of the things that I will be 
talking to Dr. Elmendorf about today.
    We hear a lot of talk about waste, fraud, and abuse. It is 
a trite phrase, but the reality is there is a significant 
amount of truth to it. And I think, especially with regard to 
Medicare and Medicaid, we have to find ways to achieve these 
administrative savings.
    Let me just quote from one of the experts from Cato 
Institute, Mike Cannon. In a Forbes blog less than 2 months 
ago, he says, ``Judging by official estimates, Medicare and 
Medicaid lose at least $87 billion per year to fraudulent and 
otherwise improper payments, and about 10.5 percent of Medicare 
spending and 8.4 percent of Medicaid spending was improper in 
2009.''
    Others, like Harvard fraud expert Malcolm Sparrow, say 
actually that is low. He said loss rates due to fraud and abuse 
could be 10, 20, maybe even 30 percent in some segments.
    Obviously, this is an important subject to address. And in 
order to do that, we may have to spend a little bit more money 
on the front end for people who can review the claims that are 
filed and so on, in order to make sure that they don't pay 
improper claims.
    But at the end of the day, one of the reasons we haven't 
attacked this problem is that the CBO has had a very difficult 
time in scoring potential savings based upon potential 
approaches to the problem. And what I want to explore with Dr. 
Elmendorf today is how CBO can help our committee find ways to 
achieve administrative efficiencies, saving a lot of the money 
that we should not be spending, so that we do have the money to 
spend on the beneficiaries and the providers of important 
programs like Medicare and Medicaid.
    Madam Chairman, Mr. Chairman, thank you.
    Chairman Murray. Senator Baucus?

             OPENING STATEMENT OF HON. MAX BAUCUS, 
                  A U.S. SENATOR FROM MONTANA

    Senator Baucus. Thank you, Senator Murray.
    I want to begin just by echoing what Senator Kyl said. I 
think there is a lot of fraud and waste in the Medicare and 
Medicaid, which we don't properly attack, and much of that is 
due to scoring requirements that we have to adhere to. And I 
would hope that we could somehow create a way to get beyond 
that. It is an excellent point, and I am glad that he made it.
    One of our Founding Fathers, Patrick Henry, once said, ``I 
know of no way of judging the future, but by the past.'' And 
today, we examine the past for lessons to improve our economic 
future--to reduce the deficit, create jobs, and create the 
certainty our country needs to thrive in the global economy.
    The world is watching us. They are watching us closely. 
They are watching what we do and the next steps that we take as 
a country to confront our deficits. We can do this. We have 
already begun the process by cutting $900 billion. We have 
already done it. We have taken a first step.
    And while the road ahead will not be easy, we have a duty, 
I think, to think even bigger, aim higher, ensure our country 
is on sound fiscal footing for the long term. We have a duty, I 
think, to ensure that we approach these cuts in a balanced way 
that creates jobs.
    When I was home in Montana again last weekend, I heard over 
and over again, people said, ``Max, let's get it done. 
Appreciate you being on that committee. Get it done. We need 
our country to get it done.''
    I know every member of this panel hears the same comments 
from their constituents when they are home, just as every 
Member of Congress does. And I urge us to listen to the wishes 
of our employers.
    We are just the hired hands. We are just the employees. The 
people that we work for, the people that elect us or unelect us 
want us to get this done in a balanced, fair way.
    Today, we review the sources of our problem. It is obvious 
that the factors that created our current deficit are the cost 
of two wars; long-term healthcare costs, which we began to 
tackle in health reform; a stagnant economy, which increased 
spending; and reduced Federal revenues, which are at historic 
lows.
    Today, Federal revenues make up about 15 percent of GDP, 
compared to, for example, about 17 to 19 percent during the 
Reagan administration. A combination of factors created the 
deficit. It will take a combination of factors to resolve it. 
There is no silver bullet. So let's get together and get our 
work done.
    [The prepared statement of Senator Baucus appears in the 
appendix.]
    Chairman Murray. Thank you very much.
    Representative Upton?

             OPENING STATEMENT OF HON. FRED UPTON, 
              A U.S. REPRESENTATIVE FROM MICHIGAN

    Representative Upton. Well, thank you, Madam Chair.
    And I intend to be brief. Chris Van Hollen reminded us last 
week that we had 77 days to get this thing done. That means we 
have about 72 days now, and we are going to leave some extra 
days, hopefully, for you, Dr. Elmendorf, to have your green 
eyeshade guys and women be able to put this package together 
for us to reach the goal.
    Last week, I sat with Chairman Camp and Chairman Baucus--
and Chairman Baucus, again, my folks in Michigan this last 
weekend assured me that they are rooting for us as well to get 
a solution to the problem that they all really do understand. 
And I know the three of us were on our feet when the President 
talked about entitlement reform, specifically Medicare and 
Medicaid. And I must say that I was disappointed that I did not 
see the President's written proposal come up like he did some 
others yesterday.
    So I just want to say I am looking forward to working with 
all my colleagues here. I am going to submit my full statement 
for the record so that we can go back, so that we, in fact, all 
can go to work to get this thing done.
    I yield back.
    [The prepared statement of Representative Upton appears in 
the appendix.]
    Chairman Murray. Thank you very much.
    Representative Clyburn?

            OPENING STATEMENT OF HON. JIM CLYBURN, 
           A U.S. REPRESENTATIVE FROM SOUTH CAROLINA

    Representative Clyburn. Thank you very much, Madam Chair, 
Mr. Chairman.
    Dr. Elmendorf, thank you for taking the time to talk with 
us today.
    I think it is appropriate that today's hearing is entitled, 
``The History and Drivers of Our Nation's Debt and Its 
Threats.'' If we want to solve the related problems of debt and 
joblessness, we need to know how these problems arose. In 2000, 
we had a $236 billion surplus and had begun paying down our 
National debt. The economy was booming for all Americans, 
unemployment was at 4 percent, and the poverty rate dipped to 
its lowest level since 1979.
    Instead of building on the policies that have served us so 
well, we embarked upon two wars, one of which was dubious at 
best. Using credit cards, we instituted two tax cuts, totaling 
$544 billion, which were tilted in favor of millionaires and 
billionaires. We created a new prescription drug benefit 
program, which CBO estimates will cost $967 billion over the 
next 10 years, and allowed mortgage lenders to gamble away the 
economic prosperity of millions of American families.
    And then it was declared that deficits don't matter. This 
special committee was created because deficits and debt do 
matter. Now we find ourselves with painfully slow growth, 
unacceptably high unemployment, deficits as far as our eye can 
see, and a mounting long-term debt burden.
    As we work together to achieve significant deficit 
reduction, it is important for us to remember how we got here. 
Many factors got us into this situation, and many factors are 
needed to get us out.
    We must balance the budget with a balanced approach that 
includes job creation, revenue increases, and smart spending 
cuts. Shared sacrifice will be required. We cannot solve the 
problem on the backs of the most vulnerable in our society who 
did nothing to cause the problem.
    I am willing to make tough compromises. I have said that if 
the distance between an opponent and me is five steps, I am 
willing to take three, as long as the opponent takes the other 
two.
    Dr. Elmendorf, thank you again for being here, and I look 
forward to discussing these issues with you in the Q&A period.
    Thank you, and I yield back.
    [The prepared statement of Representative Clyburn appears 
in the appendix.]
    Chairman Murray. Senator Portman?

            OPENING STATEMENT OF HON. ROB PORTMAN, 
                    A U.S. SENATOR FROM OHIO

    Senator Portman. Thank you, Madam Chair.
    And welcome to Director Elmendorf. As you all know, this 
committee is going to be relying heavily on you for your 
analysis and for your scoring. And to you and your colleagues 
behind you, I thank you in advance for the many hours that you 
will put in. Our success or failure will depend in large 
measure on your good work. So we need you and look forward to 
your responses to our many requests.
    I listen to my colleagues' comments this morning, and I 
must say I am delighted that you are here today because we need 
to have a little objective analysis of how we got to where we 
are, and I know you will provide that. I hope you will also 
talk about the appropriate baseline for us to use to examine 
our proposals.
    When measuring new proposals, the baseline questions help 
us determine ``compared to what,''--whether it is a spending 
issue or revenue issue. And as you know, I have some concerns 
about the current law baseline because I don't think it is 
realistic. And I want you to address that today, if you could. 
Is the current-law or current-policy baseline more realistic? 
Or is there another one like the long-term extended baseline, 
alternative fiscal scenario? All these questions matter greatly 
in our work.
    We have a $1.5 trillion task over the next 10 years. This, 
of course, is a huge challenge. But I would also like your 
analysis of how that compares to what you see as the real 
fiscal challenge over the next 10 years and the real economic 
challenge we face.
    As many of the colleagues on the committee have mentioned 
this morning, obviously our economy is directly linked to what 
we do. And we will hear about this today from you. We will see 
how we got in this situation we are in, largely because of 
economic conditions. Just as in the late '90s because of the 
growing economy we were able to come to a unified balanced 
budget faster than anybody expected.
    Using your data and the current policy baseline, as I look 
at $1.5 trillion, I think it is about 4 percent of projected 
spending over the next 10 years. So, in that sense, $1.5 
trillion seems realistic. It is also, as I look at it, based 
on, again, your data and the current policies, less than 20 
percent of the projected increase in the deficit over the next 
10 years.
    So $1.5 trillion seems to me to be something we should be 
doing at the very least. Again, I look forward to your insights 
on that and what is the most realistic baseline.
    I hope you and your colleagues will also help us better 
understand the impacts of policy choices over the coming 
decades. As I look at your projections, it seems to me that 
deficit and debt levels would be devastating to our economy 
over the second, third, and fourth 10 years if we don't do 
something about the longer-term impact.
    So while we could within this budget window find ways to 
get to $1.5 trillion, it will not be something that markets 
will react to well, in my view, unless we also are looking at 
long-term impacts. I would love to have your view there.
    The long-term budget estimates are so unsustainable that 
your alternative budget scenario simply stops calculating the 
national debt after 2036 because it is so unsustainable. We 
will have crossed into totally unchartered territory.
    Clearly, entitlement spending is driving those long-term 
deficits to impossible levels. I am interested in hearing what 
reforms you think can protect those in need, which we must do, 
while at the same time modernizing these programs and placing 
them on a sustainable path for future generations.
    Again, thank you for being before us. And more importantly, 
thank you for all the hard work you will be doing with us over 
the next several weeks.
    [The prepared statement of Senator Portman appears in the 
appendix.]
    Chairman Murray. Thank you.
    Senator Kerry?

             OPENING STATEMENT OF HON. JOHN KERRY, 
               A U.S. SENATOR FROM MASSACHUSETTS

    Senator Kerry. Madam Chairwoman, thank you.
    We all agree that we are facing an unsustainable financial 
future, and under the CBO's alternative fiscal scenario, the 
debt is going to reach 82 percent of GDP by 2021. That is 
higher than any year since 1948, and we all agree we can't let 
that happen.
    But to avoid that dismal scenario, we are going to have to 
be pretty clear-eyed about the way that we got here and the 
forces that keep us on this dangerous trajectory. I think it is 
factual to say that this road began now more than a decade ago. 
Some would argue even longer.
    But you have economic meltdown, two wars, rounds of the 
largest tax cuts in history that did not produce the jobs that 
were predicted, and then efforts to forestall larger economic 
collapse more recently. All of these contributed.
    Demographic challenges loom large in the outyears, and it 
is more than just a spending problem, narrowly defined. And I 
think we do the dialogue a disservice by oversimplifying it 
because if it was a mere spending issue, it would be a lot 
easier to solve. But also because many tax expenditures are a 
form of spending in disguise.
    Now while there may be partisan interpretations of how we 
got here, there is a bipartisan consensus not just about the 
urgency of action to dig us out of this mess, but about the 
approach that it requires. When I say bipartisan, three 
bipartisan groups that looked at the problem in recent months--
Rivlin-Domenici, Simpson-Bowles, and the so-called Gang of 
Six--have all said--all, unanimously--that any real solution 
needs to be balanced with a mix of revenues and spending cuts 
and long-term reforms.
    Now we benefit from their guideposts, and we also benefit 
from the cautionary lessons, important cautionary lessons of 
other countries. That means not fixating on austerity measures 
alone, particularly in the short term.
    We have seen the damage that they have caused across 
Europe, and we can't put our own fragile economy in jeopardy by 
taking actions that will slow economic growth and decrease job 
creation. We need growth, not just revenue and not just cuts. 
And any economist worth their salt, any business person in 
America today will tell us creating jobs today helps reduce the 
deficit tomorrow.
    Last week, the Committee for a Responsible Budget, a 
bipartisan organization including some of our country's leading 
experts on budget issues, including the co-chairs of the fiscal 
commission, recommended that this committee go big, go long, 
and go smart. I think Director Elmendorf's testimony today 
helps solidify the reality that we need to go big and reap 
savings of more than $1.5 trillion to address long-term 
deficits. We need to go long and address our long-term budget 
issues. And most importantly, we need to go smart and address 
the budget without preconceived dogmas or political agendas.
    So I look forward to delving into these issues today with 
you, Dr. Elmendorf, and thank you for coming here to help us 
shape fair, balanced, thoughtful recommendations for this 
committee.
    [The prepared statement of Senator Kerry appears in the 
appendix.]
    Chairman Murray. Representative Camp?

             OPENING STATEMENT OF HON. DAVE CAMP, 
              A U.S. REPRESENTATIVE FROM MICHIGAN

    Representative Camp. Thank you, Madam Chair.
    There has been a lot of important things already said this 
morning. Our time is short today. Both in the committee and as 
Mr. Upton pointed out, our time is short in terms of trying to 
meet the responsibilities we have been given under the Budget 
Control Act.
    So I look forward to hearing from Mr. Elmendorf. I think it 
is important that we just get down to business. So I will yield 
back the balance of my time.
    Chairman Murray. Thank you.
    Representative Van Hollen?

          OPENING STATEMENT OF HON. CHRIS VAN HOLLEN, 
              A U.S. REPRESENTATIVE FROM MARYLAND

    Representative Van Hollen. Thank you, Madam Chairman.
    Yesterday, there were two important developments that 
relate to our work. First, the President submitted to the 
Congress a jobs plan that is fully paid for over 10 years. 
Every day that Americans are out of work is another day that 
the country is hurting and the deficit is growing.
    The fastest and most effective way to reduce the deficit in 
the short term is to put Americans back to work. I hope this 
committee will address that reality in our work as we move 
forward.
    Second, yesterday, as Senator Kerry mentioned, the co-
chairs of the Bipartisan National Commission on Fiscal 
Responsibility, Alan Simpson and Erskine Bowles, called upon 
this committee to ``go big,'' urging us to use this unique 
opportunity to develop a plan to reduce the deficit by about $4 
trillion over 10 years, including the almost $1 trillion in 
savings from the Budget Control Act. They are right. I believe 
we should proposal a plan of that size.
    The bipartisan Simpson-Bowles commission, the bipartisan 
Rivlin-Domenici commission, as well as the Gang of Six, have 
provided us with a framework of how to achieve that goal. What 
is clear in all of them is that we need a balanced approach to 
reduce the deficit, one that contains savings achieved from 
modernizing certain programs, as well as savings gained by 
simplifying and reforming the tax code in a way that generates 
revenue.
    Addressing a problem of this magnitude requires shared 
responsibility in order to grow our economy and reduce the 
deficit. The testimony we will hear today from Mr. Elmendorf 
demonstrates why such a balanced approach is necessary. It 
vividly illustrates the policy choices driving our deficit are 
the significant cuts made to revenue, combined with increasing 
retirement and healthcare costs due to the retirement of the 
baby boomers.
    Let's not duck those realities. Let's follow the advice of 
the three other bipartisan commissions and go big. I don't 
agree with every one of their proposals, but those three groups 
have provided this bipartisan group with a framework from which 
to start.
    Time is short. The clock is ticking. I hope we will get to 
work and follow that balanced framework approach that has been 
set by, again, three other bipartisan groups that look to 
tackle the issues that this committee is asked to address.
    Thank you, Madam Chairman.
    [The prepared statement of Representative Van Hollen 
appears in the appendix.]
    Chairman Murray. Thank you.
    Senator Toomey?

             OPENING STATEMENT OF HON. PAT TOOMEY, 
                A U.S. SENATOR FROM PENNSYLVANIA

    Senator Toomey. Thanks, Madam Chair.
    And Dr. Elmendorf, thank you. I look forward to working 
with you as well.
    Just a couple of points I wanted to stress. I think the 
point has been made, but I want to underscore that the problem 
that we face is, of course, much worse than what the current 
law baseline would seem to suggest. That is not a criticism. It 
is simply an observation.
    The current law baseline is not meant to be a predictor of 
the future. If it were, it would be a really bad one, as we 
know.
    In addition, some things have changed since you did that. 
The economy has gotten weaker. I would argue the sovereign debt 
crisis in Europe has gotten worse. So these things have 
aggravated the situation.
    And then there is the fact that I think the risks are 
greater for downside surprises than upside surprises, if you 
will--things like the contingent liabilities that are lurking 
out there, which could come home to roost at any point in time.
    The assumptions that you make about interest rates are not 
necessarily unreasonable. But if they are wrong, it is most 
likely that rates will be much higher rather than lower, 
significantly aggravating our problem. So I want to underscore 
that I think we should be striving to do every bit as much as 
we possibly can.
    I hope that we will be able to dwell somewhat today on just 
how significant the big entitlement programs are the long-term 
drivers of this problem. And I hope we will be able to discuss 
what I see as a real danger in taking the approach that I think 
you might be advocating, although I am not entirely clear--the 
danger of delaying the spending cuts for fear that we will 
weaken a fragile economy.
    On page 29 of your testimony, you do go through a list of 
the risks associated with delaying spending cuts now. I would 
argue that if we tolerate or aggravate the current deficit 
problem with the promise that we will work it all out in the 
future, that is a very, very dangerous direction to head in. 
And at the end of the day, there is no free lunch, and a 
Government spending expansion here is actually going to do more 
harm than good.
    So, finally, the one point that I really want to underscore 
is just the importance of growth. If we can have policies that 
will encourage maximizing economic growth, all problems are 
easier to solve with a strong, growing economy. And I think 
that should guide our decisions.
    With that, Madam Chair, I yield the balance of my time.
    Chairman Murray. Thank you very much.
    With that, we will turn to our witness for today. Dr. 
Douglas Elmendorf is the eighth Director of the Congressional 
Budget Office. His term began on January 22, 2009.
    Before he came to CBO, Dr. Elmendorf was a senior fellow in 
the Economic Studies Program at Brookings Institution. As the 
Edward M. Bernstein Scholar, he served as co-editor of the 
Brookings Papers on Economic Activity and the Director of the 
Hamilton Project, an initiative to promote broadly shared 
economic growth.
    He has served as an assistant professor at Harvard 
University, a principal analyst at the Congressional Budget 
Office, a senior economist at the White House Council of 
Economic Advisers, a Deputy Assistant Secretary for Economic 
Policy at the Treasury Department, and an Assistant Director of 
the Division of Research and Statistics at the Federal Reserve 
Board. In those positions, Dr. Elmendorf has gained a wide 
range of expertise on budget policy, Social Security, Medicare, 
national healthcare reform, financial markets, macroeconomic 
analysis and forecasting, and many other topics.
    So I am very glad that he has agreed to join our committee 
here today. Dr. Elmendorf, thank you so much for taking the 
time and for helping us get through this. And we would look 
forward to your testimony.

            STATEMENT OF DOUGLAS ELMENDORF, PH.D., 
             DIRECTOR, CONGRESSIONAL BUDGET OFFICE

    Dr. Elmendorf. Thank you, Senator Murray, Congressman 
Hensarling, and all the members of the committee.
    I appreciate the invitation to talk with you today about 
the economic and budget outlook and about CBO's analysis of the 
fiscal policy choices facing this committee and the Congress.
    The Federal Government is confronting significant and 
fundamental budgetary challenges. If current policies are 
continued in coming years, the aging of the population and 
rising costs for healthcare will push up Federal spending 
measured as a share of GDP well above the amount of revenue 
that the Federal Government has collected in the past. As a 
result, putting the Federal budget on a sustainable path will 
require significant changes in spending policies, significant 
changes in tax policies, or both.
    Addressing that formidable challenge is complicated by the 
current weakness of the economy and the large numbers of 
unemployed workers, empty houses, and underused factories and 
offices. Changes that might be made to Federal spending and 
taxes could have a substantial impact on the pace of economic 
recovery during the next few years, as well as on the Nation's 
output and people's income over the longer term.
    I will talk briefly about the outlook for the economy and 
the budget and then turn to some key considerations in making 
fiscal policy. The financial crisis and recession have cast a 
long shadow on the U.S. economy. Although output began to 
expand 2 years ago, the pace of recovery has been slow, and the 
economy remains in a severe slump.
    CBO published its most recent economic forecast in August. 
That forecast was initially completed in early July and updated 
only to incorporate the effects of the Budget Control Act. In 
our view, incoming data and other developments since early July 
suggest that the economic recovery will continue, but at a 
weaker pace than we had anticipated.
    With output growing at only a modest rate, CBO expects 
employment to expand very slowly, leaving the unemployment 
rate, as depicted by the dots in the figure, close to 9 percent 
through the end of next year. I should say all these figures 
are taken from the written testimony and nearly in the order in 
which they appear in the testimony.
    As a result, we think that a large portion of the economic 
and human costs of this downturn remain ahead of us. The 
difference between output and our estimate of the potential 
level of output, shown by the gap between the lines in the 
figure, has cumulated so far to about $2.5 trillion. By the 
time output rises back to its potential, which will probably be 
several years from now, we expect that cumulative shortfall to 
be about twice as large as it is today, or $5 trillion.
    Not only are the costs associated with this shortfall and 
output immense, they are also borne unevenly, falling 
disproportionately on people who lose their jobs, are displaced 
from their homes, or own businesses that fail.
    I want to emphasize that the economic outlook is highly 
uncertain. Many developments could cause economic outcomes to 
differ substantially in one direction or the other from those 
we currently anticipate. If the recovery continues as expected 
and if tax and spending policies unfold as specified in current 
law, deficits will drop markedly as a share of GDP over the 
next few years.
    Under CBO's baseline projections, shown by the dark blue 
portion of the bars in the figure, deficits fall to about 6 
percent of GDP in 2012, about 3 percent in 2013, and smaller 
amounts for the rest of the decade. In that scenario, deficits 
over the decade total about $3.5 trillion.
    But as a number of you have said, those baseline 
projections understate the budgetary challenges because changes 
in policy that will take effect under current law will produce 
a Federal tax system and spending for some Federal programs 
that differ sharply from the policies that many people have 
become accustomed to.
    Specifically, CBO's baseline projections include the 
following policies specified in current law. First, certain 
provisions of the 2010 Tax Act, including extensions of lower 
rates and expanded credits and deductions enacted in 2001, 
2003, and 2009, all expire at the end of next year.
    Second, the 2-year extension of provisions designed to 
limit the reach of the alternative minimum tax, the extensions 
of emergency unemployment compensation, and the 1-year 
reduction in the payroll tax all expire at the end of this 
year.
    Third, sharp reductions in Medicare's payment rates for 
physician services take effect at the end of this year.
    Fourth, funding for discretionary spending declines over 
time in real terms in accordance with the caps established 
under the Budget Control Act.
    And fifth, additional deficit reduction of more than $1 
trillion will be implemented as required under the act.
    Changing provisions of current law so as to maintain major 
policies that are in effect now would produce markedly 
different budget outcomes.
    For example, and shown by the full bars in the figure, if 
most of the provisions of the 2010 Tax Act were extended, if 
AMT was indexed for inflation, and if Medicare's payment rates 
for physician services were held constant, then deficits over 
the coming decade would total $8.5 trillion, rather than the 
$3.5 trillion in the current law baseline. By 2021, debt held 
by the public would reach 82 percent of GDP, higher than in any 
year since 1948.
    Yesterday, CBO released an analysis of the enforcement 
procedures of the Budget Control Act. As shown in the slide, we 
estimate that if no legislation originating from this committee 
is enacted, the following would occur over the next decade.
    Reductions in the caps on discretionary appropriations for 
defense would cut outlays by about $450 billion. Reductions in 
the caps on discretionary appropriations for nondefense 
purposes would cut outlays by about $300 billion. And 
reductions in mandatory spending would yield net savings of 
about $140 billion. The total reduction deficits would be about 
$1.1 trillion.
    The estimated reductions in mandatory spending are 
comparatively small because the law exempts a significant 
portion of such spending from the enforcement procedures. As a 
result, about 70 percent of the total savings would come from 
lower discretionary spending. Cuts in defense and nondefense 
spending of that magnitude would probably lead to reductions in 
the number of military and civilian employees and in the scale 
and scope of Federal programs.
    Beyond the coming decade, as you know, the fiscal outlook 
worsens, as the aging of the population and rising costs for 
healthcare put significant and increasing pressure on the 
budget under current law. When CBO issued its most recent long-
term outlook in June, debt held by the public was projected to 
reach 84 percent of GDP in 2035 under current law and about 190 
percent of GDP under policies that more closely resemble the 
current policies.
    Although new long-term projections would differ because we 
would incorporate the latest 10-year projections, the amount of 
Federal borrowing that would be necessary under current 
policies would be clearly unsustainable. In sum, the Federal 
budget is quickly heading into territory that is unfamiliar to 
the United States and to most other developed countries as 
well.
    As this committee considers its charge to recommend 
policies that would reduce future budget deficits, its key 
choices fall into three broad categories listed in the slide. 
How much deficit reduction should be accomplished? How quickly 
should deficit reduction be implemented? What form should 
deficit reduction take? Let me take up these questions briefly 
in turn.
    First, regarding the amount of deficit reduction, there is 
no commonly agreed upon level of Federal debt that is 
sustainable or optimal. Under CBO's current law baseline, debt 
held by the public is projected to fall from 67 percent of GDP 
this year to 61 percent in 2021. However, stabilizing the debt 
at that level would still leave it larger than in any year 
between 1953 and 2009.
    Lawmakers might determine that debt should be reduced to 
amounts lower than those shown in CBO's baseline and closer to 
those we have experienced in the past. That would reduce the 
burden of debt on the economy, relieve some of the long-term 
pressures on the budget, diminish the risk of a fiscal crisis, 
and enhance the Government's flexibility to respond to 
unanticipated developments. Of course, it would also require 
larger amounts of deficit reduction.
    Furthermore, lawmakers might decide that some of the 
current policies scheduled to expire under current law should 
be continued. In that case, achieving a particular level of 
debt could require much larger amounts of deficit reduction 
from other policies.
    For example, if most of the provisions in the 2010 Tax Act 
were extended, the AMT was indexed for inflation, and 
Medicare's payment rates for physicians were held constant, 
then reducing debt in 2021 to the 61 percent of GDP projected 
under current law would require other changes in policies to 
reduce deficits over the next 10 years by a total of $6.2 
trillion, rather than the $1.2 trillion needed from this 
committee to avoid automatic budget cuts.
    In 2021 alone, the gap between Federal revenues and 
spending if those policies were continued and no other 
budgetary changes were made, as shown by the right pair of bars 
in the figure, is projected to be 4.7 percent of GDP. Putting 
debt on a downward trajectory relative to GDP in that year 
would require a much smaller deficit. Reaching that objective, 
declining debt relative to the GDP from that starting point 
would require a reduction in the deficit of about 2.5 percent 
of GDP, or $600 billion in that year alone.
    Your second set of choices involves the timing of deficit 
reduction, which involves difficult tradeoffs summarized in the 
slide. On one hand, cutting spending or increasing taxes slowly 
would lead to a greater accumulation of Government debt and 
might raise doubts about whether the longer-term deficit 
reductions would ultimately take effect.
    On the other hand, implementing spending cuts or tax 
increases abruptly would give families, businesses, and State 
and local governments little time to plan and adjust. In 
addition, and particularly important given the current state of 
the economy, immediate spending cuts or tax increases would 
represent an added drag on the weak economic expansion.
    However, credible steps to narrow budget deficits over the 
longer term would support output and employment in the next few 
years by holding down interest rates and reducing uncertainty, 
thereby by enhancing confidence by businesses and consumers. 
Therefore, the near-term economic effects of deficit reduction 
would depend on the balance between changes in spending and 
taxes that take effect quickly and those that take effect 
slowly.
    As shown in this next slide, credible policy changes that 
would substantially reduce deficits later in the coming decade 
and beyond without immediate spending cuts or tax increases 
would both support the economic expansion in the next few years 
and strengthen the economy over the longer term.
    Moreover, there is no inherent contradiction between using 
fiscal policy to support the economy today while the 
unemployment rate is high and many factories and offices are 
underused and imposing fiscal restraint several years from now 
when output and employment will probably be close to their 
potential. If policymakers wanted to achieve both a short-term 
economic boost and longer-term fiscal sustainability, the 
combination of policies that would be most effective, according 
to our analysis, would be changes in taxes and spending that 
would widen the deficit today, but narrow it later in the 
decade.
    Such an approach would work best if the future policy 
changes were sufficiently specific, enacted into law, and 
widely supported so that observers believe that the future 
restraint would truly take effect.
    Your third set of choices involves the composition of 
deficit reduction. Federal spending and revenues affect the 
total amount and types of output that are produced, the 
distribution of that output among various segments of society, 
and people's well-being in a variety of ways.
    In considering the challenge of putting fiscal policy on a 
sustainable path, many observers have wondered whether it is 
possible to return to previous policies regarding Federal 
spending and revenues. Unfortunately, the past combination of 
policies cannot be repeated when it comes to the Federal 
budget. The aging of the population and rising costs for 
healthcare have changed the backdrop for budget decisions in a 
fundamental way.
    Under current law, spending on Social Security, Medicare, 
and other major healthcare programs, the darkest line in the 
figure, is projected to reach about 12 percent of GDP in 2021, 
compared with an average of about 7 percent during the past 40 
years. That is an increase worth 5 percent of GDP. Most of that 
spending goes to benefits for people over age 65, with smaller 
shares for blind and disabled people and for nonelderly, able-
bodied people.
    In stark contrast, under current law, all spending apart 
from Social Security and the major healthcare programs and 
interest payments on the debt is projected to decline 
noticeably as a share of the economy. That broad collection of 
programs includes defense, the largest single piece; the 
Supplemental Nutrition Assistance Program, formerly known as 
food stamps; unemployment compensation; veterans benefits; 
Federal civilian and military retirement benefits; 
transportation; health research; education and training; and 
other programs.
    That whole collection of programs has incurred spending 
averaging 11.5 percent of GDP during the past 40 years. With 
expected improvement in the economy and the new caps on 
discretionary spending, it falls in our projection by 2021 to 
less than 8 percent of GDP, the lowest share in more than 40 
years, under current law and in our baseline projections.
    Putting those pieces together and including interest 
payments, between 1971 and 2010, as shown by the left pair of 
bars in the figure, Federal spending averaged about 21 percent 
of GDP. But under current law for 2021, as shown by the right 
pair of bars, CBO projects it to grow to about 23 percent of 
GDP.
    Alternatively, if the laws governing Social Security and 
the major healthcare programs were unchanged and all other 
programs were operated in line with their average relationship 
to the size of the economy during the past 40 years, Federal 
spending would be much higher in 2021, around 28 percent of 
GDP. That amount exceeds the 40-year average for revenues as a 
share of GDP by about 10 percentage points.
    In conclusion, given the aging of the population and rising 
costs for healthcare, attaining a sustainable Federal budget 
will require the United States to deviate from the policies of 
the past 40 years in at least one of the following ways. Raise 
Federal revenues significantly above their average share of 
GDP, make major changes in the sorts of benefits provided for 
Americans when they become older, or substantially reduce the 
role of the rest of the Federal Government relative to the size 
of the economy.
    My colleagues and I at CBO stand ready to provide the 
analysis and information that can help you in making these 
important choices.
    Thank you. I am happy to take your questions.
    [The prepared statement of Dr. Elmendorf appears in the 
appendix.]
    Chairman Murray. Thank you very much, Dr. Elmendorf.
    As we begin the work that has been outlined for us as a 
committee under the Budget Control Act, I think it is helpful 
for us to have a clear understanding of the scope of the 
problem, and you laid that out very clearly for us. I think we 
all agree this task is pretty enormous, and we have to come 
together around a balanced approach that addresses our fiscal 
situation, but also focuses on making sure that we remain 
competitive and looks at our long-term growth.
    So I wanted to start by just asking you to expand a little 
bit on what you were just talking about and talk to us about 
what we should consider in weighing the tradeoffs between 
helping our economy in the short term to help create growth and 
not causing significant harm in the long term.
    Dr. Elmendorf. In our judgment, and this is consistent with 
a consensus of professional opinion, cuts in spending or 
increases in taxes at a moment when there are a lot of unused 
resources in the economy--unemployed workers, empty homes, 
unused factories and offices--and when monetary policy is 
finding it difficult to provide further support for economic 
activity because the Federal funds rate is already very close 
to zero, then under those conditions cuts in spending and 
increases in taxes will tend to slow the economic recovery. 
They will tend to reduce the levels of output and employment 
relative to what would otherwise be.
    At the same time, and this is also quite consistent with a 
consensus professional opinion, over time, as our economy moves 
back toward potential output and those unused resources become 
used again, under those sorts of economic conditions, cuts in 
spending or increases in taxes that reduce outsize budget 
deficits are good for the economy, bolster output and incomes.
    That may seem like a paradox, but it isn't really. It is 
just reflecting the view that the effect of Federal fiscal 
policy on the economy depends on economic conditions and on the 
stance and abilities of monetary policy.
    And that is why, in our judgment, the analysis that we have 
done and presented to the Congress on a number of occasions 
over the past few years, to provide the greatest boost to 
economic activity now and over the medium run and long run, the 
combination of fiscal policies likely to be most effective 
would be policies that cut taxes or increase spending in the 
near term, but over the medium and longer term move in the 
opposite direction and cut spending or raise taxes.
    Chairman Murray. Okay. Thank you.
    Dr. Elmendorf, as you know, several bipartisan groups have 
released reports in the last 9 months with recommendations for 
reining in our deficit and spending and stemming the rise of 
Federal debt. All of them came with a balanced approach, and I 
am concerned that Congress has not yet included revenues or 
entitlements, as we have focused only so far on discretionary 
spending cuts and caps, when I think we need to be looking at 
balanced approaches.
    Now some have made it clear that they want entitlements off 
the table. Others have made it clear they want revenues off the 
table. Unfortunately, that leaves only a relatively very small 
amount of discretionary and mandatory spending that Members so 
far have been willing to focus on.
    Would you agree that while cuts and caps we instituted 
within the Budget Control Act can help somewhat with the long 
term, what we really need is a comprehensive approach that does 
address both revenue and mandatory programs?
    Dr. Elmendorf. So, Senator, as a matter of arithmetic, 
there are a lot of different paths to reducing budget deficits, 
and it is not CBO's role to make recommendations among those 
alternative paths. I think the crucial point, though, is that 
the more large pieces of the puzzle one takes off the table, 
then the greater the changes will need to be in the remaining 
pieces.
    You can see this very clearly in this picture. In 2021, 
this pictures shows, under current law, revenues being about 21 
percent of GDP. If one instead wants to----
    Senator Baucus. Can you explain that? We can't see it.
    Chairman Murray. It is hard to see.
    Dr. Elmendorf. I am sorry. So this is Figure 14 in the 
written testimony, if you have that in front of you? What the 
left-hand--I will explain it.
    Senator Baucus. Exhibit 14?
    Dr. Elmendorf. Yes. Exhibit 14.
    Senator Baucus. Thank you.
    Dr. Elmendorf. Figure 14 in the written testimony. The 
left-hand set of bars shows the averages over the last 40 
years. The far left bar is revenues. Revenues have averaged 
about 18 percent of GDP. Then the right-hand bar shows the 
major pieces of spending. The bottom chunk is Social Security 
and major healthcare programs. This is----
    Senator Baucus. Could you try a page?
    Chairman Murray. Page 42.
    Senator Baucus. Forty-two. Thank you.
    Dr. Elmendorf. The left-hand piece, as I said, is revenues. 
They have averaged 18 percent of GDP. The right-hand bar shows 
spending, Social Security, and the major healthcare programs--
that is Medicare, Medicaid, now CHIP--in the future, including 
subsidies to be provided through insurance exchanges. In the 
past, that has averaged about 7 percent of GDP.
    All other non-interest spending--that is other mandatory 
spending, it is defense spending, it is nondefense 
discretionary spending--has averaged 11.5 percent of GDP. And 
interest payments have averaged about 2.25 percent of GDP. With 
the deficit, that has been a little under 3 percent.
    For 2021, under current law, revenues would rise to be 
about 21 percent of GDP. Social Security and the major 
healthcare programs would be 12, a little over 12 percent of 
GDP. That is 5 percent of GDP more than the average for the 
past 40 years, and that is the essence of the point that the 
aging of the population and rising costs for healthcare have 
changed the backdrop for the decisions that you and your 
colleagues make.
    If those policies continue to operate--those programs 
continue to operate in the way they have operated in the past, 
they will be much more expensive than they have been in the 
past because there will be more people collecting benefits, and 
each person will be collecting more in benefits. And that is 
the crucial driver of the future budget trajectory relative to 
what we have seen in the past.
    The other category, other non-interest spending, as you can 
see, is already much smaller in 2021 under current law and our 
projections than it has been historically. And that is a 
combination of improvement in the economy, which we think will 
reduce the number of people on food stamps, collecting 
unemployment insurance, and so on, but also discretionary 
spending caps that reduce both defense spending and nondefense 
discretionary spending in real terms and thus reduce them 
fairly sharply as shares of GDP.
    Chairman Murray. Dr. Elmendorf, I am out of time.
    Dr. Elmendorf. Sorry.
    Chairman Murray. And as chair, I am trying to keep 
everybody to that. But I appreciate that response and want to 
turn it over to my co-chair, Congressman Hensarling.
    Co-Chair Hensarling. Thank you, Madam Co-Chair.
    And Dr. Elmendorf, maybe we will continue on this line of 
questioning. Is it possible to pull up your Figure 12 from your 
testimony, if somebody could help me with that?
    Dr. Elmendorf. Figure 12?
    Co-Chair Hensarling. Page 39 of your testimony. I believe 
it is entitled Figure 12.
    Now as I understand it, this chart is a chart of historic 
and projected growth on Social Security, Medicare, other major 
healthcare programs. You wouldn't happen to have this chart 
plotted against growth in GDP, would you?
    Dr. Elmendorf. So these are shares of GDP. This is spending 
on these programs expressed as a percentage of GDP.
    Co-Chair Hensarling. Okay. But historic average, post World 
War II GDP has averaged what, roughly 3 percent annual economic 
growth?
    Dr. Elmendorf. I think that is about right, Congressman. I 
don't know for sure.
    Co-Chair Hensarling. Okay. On your Figure 14, again, Social 
Security and major healthcare programs have averaged 7.2 
percent of GDP. Current law, going to 12.2 percent of GDP in 
just 10 years. So from 7.2 to 12.2, not quite double, but 
certainly that could be described as explosive growth, could it 
not?
    Dr. Elmendorf. Very rapid, Congressman. Yes.
    Co-Chair Hensarling. We won't parse terms. As I am looking 
at some of your CBO data just for the last 10 years, apparently 
Social Security has grown at an average of 5.8 percent, 
Medicare 9.1 percent, Medicaid 8.8 percent in the last decade. 
And again, we now have a revised GDP growth outlook coming out 
of your August revision of your baseline.
    So, is it a fair assessment that we have Social Security, 
Medicare, other healthcare programs that are potentially 
growing two and three times the rate of growth in our economy?
    Dr. Elmendorf. They have grown much faster in the past, and 
our projections are for them to continue to outpace economic 
growth. Of course, the exact amount is uncertain, but the gap 
in the growth rates that we have seen historically has been 
very large, as you said.
    Co-Chair Hensarling. Now, Senator Toomey certainly in his 
comments talked about the current law baseline, and although an 
important exercise, it is certainly not dispositive to the task 
in front of us. But under a current law baseline, Medicare 
physicians are due to take essentially a 30 percent pay cut 
next year. Correct?
    Dr. Elmendorf. Yes. That is right.
    Co-Chair Hensarling. Does CBO--I believe recently you 
testified that CBO did not have a model to really impact--to 
show the impact of such a cut on healthcare delivery. Is that 
correct? Is CBO developing a model, or is that beyond the scope 
of what you do?
    Dr. Elmendorf. It is in the long-term plan, Congressman. We 
and others have raised concerns that the much slower growth 
projected for payments to physicians through Medicare relative 
to the private sector could affect the access to care or 
quality of care received by beneficiaries. But we do not have a 
model and are not about in the near term to have a model that 
would enable us to make any more specific predictions along 
those lines, I am afraid.
    Co-Chair Hensarling. Well, what I am trying to get at is 
clearly--and again, I quoted the President, who I don't often 
agree with, in our last organizational meeting, where he said, 
``The major driver of our long-term liabilities, everybody here 
knows, is Medicare and Medicaid and our healthcare spending. 
Nothing comes close.'' And I take it you would probably agree 
with that assessment as well, Dr. Elmendorf?
    Dr. Elmendorf. Yes. That is right.
    Co-Chair Hensarling. But I am also trying to get to the 
qualitative aspect of this, too, in our current systems, and 
you say CBO is developing a model. I know that CMS actuaries 
have said as essentially if that under the current baseline 
that, ``Medicare beneficiaries would almost certainly face 
increasingly severe problems with access to care.'' That is the 
Medicare actuaries, August of 2010.
    The Medicare trustees 2011 report, talking about the 
growing insolvency, ``Beneficiary access to healthcare services 
would be rapidly curtailed.''
    The President's Administrator for Centers for Medicare and 
Medicaid Services has said, ``The decision is not whether or 
not we will ration care. The decision is whether we will ration 
with our eyes open.''
    So, to some extent, Dr. Elmendorf, even though CBO doesn't 
have a model, we are looking at not just programs that are 
driving the insolvency of our country, but in many respects, 
left unreformed, is also shortchanging the beneficiaries as 
well. Would you agree with that assessment, or again, until you 
have your model, that is----
    Dr. Elmendorf. I think all I can say, Congressman, is that 
the extent of the pressure on providers of care to Medicare 
beneficiaries may depend a lot on the time horizon over which 
one looks. When the actuaries make projections for 75 years 
into the future, they have shown a picture that I have seen in 
testimonies about the relative payment rates to providers many, 
many decades into the future.
    The sorts of changes that are in train for the coming 
decade might affect access to care or quality of the care, as I 
have said, but would be much less severe in those effects than 
if those same policies were left in place for the remainder of 
the 75-year period that the actuaries make projections for. So, 
but beyond that, we just don't have a way of trying to quantify 
for you the extent of the impact on beneficiaries.
    Co-Chair Hensarling. Apparently, the trustees in CMS do so 
far. In an attempt to lead by example and follow the lead of my 
co-chair, I see my time is now ended.
    Thank you, Dr. Elmendorf.
    Dr. Elmendorf. Thank you.
    Chairman Murray. Representative Becerra?
    Representative Becerra. Dr. Elmendorf, thank you very much 
for your testimony, and you focused quite a bit of your time on 
what is coming up, which, if we are not careful, could be 
pretty bad.
    But we are dealing right now with a $14 trillion national 
debt plus--$14 trillion-plus national debt and fairly massive 
deficits today, and we have been charged to come up with 
savings from these current and past deficits of at least $1.5 
trillion.
    And so, let me ask that a few charts that I have, the first 
chart actually is a chart CBO's work done in 2001 that I would 
like to have raised. It is called ``Changes in CBO's Baseline 
Projections of the Surplus Since January 2001,'' and what I 
would like to do on that chart, if we can get that up, is just 
point out what was being projected by your office back in 2001 
and then analyze--and I think all my colleagues have copies of 
those charts with them--and analyze that.
    Now it is very difficult to make out these tables and make 
much sense of them. But for those who can make out the lines, 
the numbers on those charts, the very top line, the total 
surplus as projected in January----
    Senator Baucus. Xavier, could you tell us what page that is 
on?
    Representative Becerra. It should be a separate package 
that you got----
    Senator Baucus. Oh, it is a handout.
    Representative Becerra. It is a separate handout. That is 
correct. It should be----
    Dr. Elmendorf. I think this is a table that CBO has 
published and posted on its Web site, but it is not included in 
the testimony that I brought today.
    Representative Becerra. That is correct. And I only will 
make a couple of points here since it is difficult to read all 
the numbers on the table. But the first one is that the top 
line there, total surpluses as projected in January 2001, 
projected that after--from 2001 to 2011, if you totaled it up, 
we have surpluses of $5.610 trillion.
    And if you go down to the very bottom of the chart, towards 
the very bottom, to the line that says ``Actual Surplus or 
Deficit,'' under the year 2002 column, by the year 2002, there 
was a negative 158, which means a deficit of $158 billion.
    So that while the projections in 2001 were for record 
surpluses totaling over 10 or so years, $5.6 trillion, by the 
second year, by 2002, we were already beginning to run 
deficits, not surpluses. So we knew well in advance of the year 
2011 that the Federal Government was beginning to run 
deficits--in fact, record deficits--that could ultimately harm 
our economy.
    I have another chart that uses the data from the CBO that 
we just discussed and tries to put it in a little easier form 
to analyze. And the Pew Center did this chart, taking the data 
from the Congressional Budget Office to try to segment out 
where that change from surplus to deficit went. All those 
dollars that were spent, all the revenue through the tax code 
that was lost, where did it go?
    And obviously, the biggest piece of the pie on the right, 
technical and economic, that is what I think you described 
earlier as shortfall in Nation's output. In other words, all 
the things that have caused us to have less output than we had 
expected, projected. The recession and so forth probably 
constitutes the biggest portion of that.
    After that, the second biggest slice of the pie that drove 
our deficits, you can see, are the tax cuts in 2001 and 2002, 
the Bush tax cuts. Actually, you could put together our defense 
costs, which are here in the very bottom, ``Operations in Iraq 
and Afghanistan'' at 10 percent, and ``Other Defense 
Spending,'' a little bit further up to the left, at 5 percent, 
and you have 15 percent of the pie due to defense spending, and 
so on.
    And interestingly enough, increase in net interest, money 
we pay just on the interest we owe on that national debt, is 
one of the largest items as well. So nothing productive comes 
of making those payments.
    I raise all that because as we talk about where we should 
target our solutions, we should know what has driven us most 
towards these large annual deficits that now give us this over 
$14 trillion national debt.
    And the final chart that I wanted to raise because it also 
points out the actual discretionary spending part of the pie, 
which you spent some time on--not the tax expenditures, not the 
spending we do through the tax code, which is the largest 
portion, but through the allocations we make every year through 
the budgeting process, the appropriation process. Hard to tell 
again, unless you have a chart in your hand, but the largest 
item shows the change in spending from 2001 to 2010, the 
greatest percentage of that added spending in those 10 years 
was in the Department of Defense, much of it because of the war 
in Iraq and the war in Afghanistan. But fully two-thirds of the 
costs or the extra spending that was done from 2001 to now 2010 
has come in spending done in the Department of Defense.
    You could compare that to, say, the Veterans Department, 
Veterans Affairs Department. The share of the new spending over 
that 10-year period that went to veterans was about 5 percent. 
Education, you can see further down the list. The new spending 
beyond what was expected in 2001, it is about 1 percent.
    And I think that is important to sort of gauge that. And as 
much as I hope we have a chance to get into some of this and 
talk about where we have to go, I think it is important to know 
where we are coming from. And so, I thank you for being here to 
help us gauge those responses into the future.
    I yield back.
    Chairman Murray. Senator Kyl?
    Senator Kyl. Thank you, Madam Chairman.
    Rather than make a speech, which would probably have the 
effect of dividing us if I responded to my colleague, I would 
like to focus on areas where we might find agreement, going 
back to my opening statement, and to begin with a quotation 
from the President.
    In March of last year, he said, and I quote, ``It is 
estimated that improper payments cost taxpayers almost $100 
billion last year alone. If we created a Department of Improper 
Payments, it would actually be one of the biggest departments 
in our Government.''
    Well, this committee can address the question of improper 
payments, but I think we are going to need CBO's help in order 
to do that. For 2010, GAO estimated total improper payments at 
over $125 billion. And according to its report, Medicare, 
Medicaid, and unemployment insurance ranked 1, 2, and 3 in 
total improper payments. Their figures were slightly below 
those I quoted earlier.
    But the bottom line is that if you had $100 billion, as the 
President says, in overpayments each year, over a decade, that 
is $1 trillion. More than $1 trillion when you compound it. It 
is an area we need to address.
    And since it doesn't involve cuts in benefits or 
fundamental reform of programs--which I happen to think we 
should do, but I am trying to stay on areas where we can reach 
bipartisan consensus here--we are going to need help in scoring 
how to approach this.
    My first question I guess I should ask is do you agree, 
whether it is with these specific numbers or not, with the 
President's contention, let's just say, that at least there is 
a significant amount of inappropriate payment for some of the 
programs that I have mentioned?
    Dr. Elmendorf. So I agree with that. I have two quick 
comments. One is that there is a difference, of course, between 
improper payments and fraud. Fraud is a much narrower category 
involving certain legal issues.
    Some improper payments are simply that people didn't put 
Social Security numbers into forms where they should have or so 
on. And if the forms were filled out properly, the payments 
might be still made.
    So just people should understand that when they see some of 
these largest numbers for improper payments, that is a much 
broader set of situations than the sort of thing that we read 
of prosecutions regarding in the newspaper.
    Second point to make, of course, is not just whether the 
improperness or the fraud is out there, but what policy levers 
the Government has to go after that. Of course, those programs 
are not trying to encourage improper payments or fraud. There 
is an active effort on the part of the Justice Department, as 
well as the part of the departments running these programs, to 
crack down on fraud. And you do see stories in the newspaper 
about prosecutions.
    So the question that we can help the committee work on is 
what policy levers are available that can try to wring some of 
that money out of the system?
    Senator Kyl. Exactly so. And that is where we need your 
advice. And the comment about fraud is obviously correct. I 
think fraud is not the most significant part of these 
overpayments, but it is important.
    One question is would we benefit in a cost-benefit analysis 
by devoting more resources to trying to root that out? We 
should deal with that. Another would deal with whether or not 
hiring additional people to check before the check goes out 
rather than audit after we find the problem would be 
beneficial.
    The prompt payment requirements represent part of the 
challenge that we have here, as I understand it. So, now, is it 
true that CBO has--well, let me just ask, has CBO itself done 
an analysis of these numbers?
    Dr. Elmendorf. I don't have numbers comparable to the ones 
you quoted to use. But we do spend a fair amount of time 
working with Members of Congress, working with the people at 
CMS, and so on to think about ways that policies could be 
changed that would try to reduce the level of those payments.
    And as you know, the Budget Control Act, in fact, included 
provisions for raising the caps in discretionary spending to 
cover some of those increased efforts that you described.
    Senator Kyl. Right.
    Dr. Elmendorf. And we included in our estimate of the 
effects of that act the savings that we thought would accrue in 
terms of reduced payments.
    Senator Kyl. Well, just to summarize, will you work with us 
to try to help us identify the potential policy that could 
result in, on a cost-benefit analysis, significant savings if 
we were to implement it?
    Dr. Elmendorf. Yes. We certainly will. But can I just also 
caution, I am not against our working with you on any issue 
that you want us to work with you on, but there is no evidence 
that suggests that this sort of effort can represent a large 
share of the $1.2 trillion or $1.5 trillion or the larger 
numbers that some of you have discussed as being the objective 
in savings for this committee.
    Senator Kyl. Well, the GAO, if the GAO report is right, if 
what the President said is right, if there is over $100 billion 
in just 1 year alone, then even if we get 25 percent of that, 
it is a significant amount of money. It is at least something 
that I think on a bipartisan basis we can agree on because it 
doesn't involve fundamental reform of the program, it seems to 
me.
    Now there is a second area that I wanted raise here, too, 
and that is asset sales. There are a lot of different reports. 
CRS, for example, in 2009 said the Government held well over 
10,000 unneeded buildings, spending $134 million just to 
maintain them. The President's budget assumed savings by 
selling property and so on.
    One of the things we would also like to ask you to do, and 
I know you have scored the President's proposal, but that was a 
proposal that relied on incentives to sell property. If we 
simply mandated the sale of property, I think we would need 
your advice about how to structure that so that we would get 
the best return for the sales that we would want to accomplish.
    Will you work with us on that potential area of--that is 
revenue rather than savings, but it all amounts to the same 
thing in terms of helping us with our problem.
    Dr. Elmendorf. Yes, Senator. Of course, we will work with 
you. I would caution again. We have done a fair amount of work. 
We have given testimony on this topic, and there is no evidence 
that the amount of savings that could be--or extra revenue that 
could be reaped by the Government through efforts in this 
direction could represent any substantial share of numbers that 
begin with ``t'' for trillion.
    The Base Closure and Realignment effort has not yielded 
significant amounts of money for the Government in terms of 
selling the property. It saved money in terms of operating some 
of these facilities, but not much has been sold.
    When one sees these numbers of thousands of Government 
properties not being used, many of them by number are shacks in 
the middle of nowhere that don't have market value. And the 
properties that have the most value--there has been some back 
and forth I have seen in the newspapers about property in Los 
Angeles--then the people who live around it are fighting very 
hard to prevent the Federal Government from selling it.
    Not to discourage you from passing laws to the contrary. 
But what happens are the things that are most valuable is that 
the people who are there are using it or potentially using it 
or want the area to stay that way tend to push back very hard, 
and history suggests that very little money is actually reaped.
    But we are certainly ready to work with you on policies in 
that direction.
    Chairman Murray. Senator Baucus?
    Senator Baucus. Thank you, Senator Murray.
    Again, I want to follow up with Senator Kyl's questions. I 
think we should explore this much more vigorously than we have 
in the past, and I think you and I and others will try to work 
with you to try to find some solutions here.
    On the version I have of your statement, it is page 5. You 
are talking about the timing of deficit reduction, and you 
state that according to analysis, essentially, credible policy 
changes that would substantially reduce deficits later in the 
coming decade for the longer term, the thought being spending, 
cuts in spending are efficient, would both support economic 
expansion in the next few years and the strength of the economy 
longer term.
    My basic question is, could you give us some examples about 
how we could achieve both goals, namely jobs and deficit 
reduction? That is really one of the key questions here is how 
do we do this?
    There are probably several ways. You mentioned that deficit 
reduction has to be, in the longer term, credible because we 
can't do something that is not credible. It has to work, but we 
have to find the balance. And I wondered if you could give us a 
couple examples in how we accomplish that?
    Dr. Elmendorf. Well, there are a number of possibilities, 
Senator. We released a report in January of 2010 that analyzed 
a set of alternative proposals for spurring job growth. We 
looked at increased transfer payments. We looked at cuts in all 
sorts of different types of taxes. We looked at other types of 
Government spending increases.
    And I don't want to be appearing to steer the committee in 
any particular direction among those choices because the 
choices involve not just the effects on the economy--and we did 
estimate quantitatively the impact on output and employment. 
They also involve choices about what you want the Government to 
do, what sorts of activities it should be engaged in, what the 
role of the Government should be relative to the private 
sector.
    So the set of choices in making stimulative policy, in 
addition to doing deficit reduction policy, are far beyond our 
technical role. I think the crucial points, though, are that 
cuts in taxes or increases in spending in the near term will 
spur output and employment in the near term. But just by 
themselves, they will reduce output and incomes later on 
because of the extra debt that is accumulated.
    Senator Baucus. Right. I----
    Dr. Elmendorf. If one wants to also improve the medium and 
longer-term outlook for the economy, then one needs to have 
deficit reduction that offsets the extra costs in the near term 
and reduce the deficit further relative to the unsustainable 
path of current policies.
    Senator Baucus. I appreciate that. In fact, I think I have 
your chart, your table, that is entitled ``Estimated Effects of 
Policy Options on Output and Employment.'' And I applaud you 
for it because, according to that chart, you, for example, with 
respect to jobs as to cumulative effects on employment, in 
2010, '11, '10 to '15, you have highs and lows that you rate. 
You know, this creates more jobs than that.
    So you give us a sense of what--for example, increasing the 
aid to the unemployed is very high in terms of its economic 
effect and helping people without jobs, but also with respect 
to the economy and GDP. So I appreciate that, and I will work 
with you to try to find ways to address that.
    I would like to turn to another question, and that is I 
don't want to steal from my good friend Rob Portman. He can 
follow up a lot more. But it is sort of the baseline question. 
And you say that we can get to 61 percent of GDP in 2021 under 
current law. But I think most of us here in this room don't 
think that current law is very realistic. There are going to be 
changes, and you list some of the changes in your statement, 
namely, the tax cuts--2010 tax cuts, AMT indexed for inflation, 
Medicare payment rates, and so forth.
    And if we were to assume that those provisions are going to 
be extended as something called the current policy, that 
instead of trying to get--instead of $1.2 trillion as to 61 
percent of GDP in 2021, the figure I have is about $6.2 
trillion.
    Dr. Elmendorf. Yes. That is right. The cost of extending 
those expiring provisions amounts to about--including the 
interest cost that would result, amounts to about $5 trillion 
over the coming decade. So the choice of the Congress about 
those policies is much larger an impact potentially than the 
stated target deficit reduction of this committee.
    Senator Baucus. All right. So let's say we want to reduce 
the deficit by, what, 6.2--5 plus 1.2 is 6.2, let's say, for 
example.
    Dr. Elmendorf. Okay.
    Senator Baucus. What would the composition of that 
reduction be if we reduce the deficit somewhat in parallel, in 
tandem with proportion to the causes of the additional $5 
trillion? I guess it would just be----
    Dr. Elmendorf. Well, most of the extra $5 trillion under 
your scenario comes from a reduction in taxes. So if one wanted 
to offset that, that is what you are suggesting, then one would 
need to raise significant tax revenue through some other 
channel.
    I mean, I think I understand the purpose for this hearing 
of talking about the history of debt and how we got here. And I 
think you are extending that a bit into the future, looking at 
what policy changes would get us to a certain place. But I 
think really the fundamental question for you is not how we got 
here, but where you want the country to go. What role do you 
and your colleagues want the Government to play in the economy 
and the society?
    Senator Baucus. That is right.
    Dr. Elmendorf. And if you want a role that has benefit 
programs for older Americans like the ones we have had in the 
past and that operates the rest of the Government like the ones 
we have had in the past, then more tax revenue is needed than 
under current tax rates.
    On the other hand, if one wants those tax rates, then one 
has to make very significant changes in spending programs for 
older Americans or other aspects of how the Federal Government 
does its business.
    Senator Baucus. That is exactly right, and I don't want to 
take time here. But it is just really the question. Where do we 
want to go? And do we want to have AMT indexed, for example? Do 
we want to have SGR, the physicians payment rate? Do we want to 
increase taxes for middle-income Americans beginning 2013, or 
upper income, or not?
    I mean, these are basic questions we are going to have to 
ask ourselves, and they all have consequences, really. And the 
consequences if we want to do all that is what we just agreed 
on. Namely, it is a $5 trillion addition to our job here. But 
in addition, we have what the President is going to have us do 
with his jobs plan.
    Thank you.
    Dr. Elmendorf. Yes, Senator.
    Chairman Murray. Representative Upton?
    Representative Upton. Well, thank you again, Dr. Elmendorf.
    I want to underscore what our friend Mr. Kyl said about 
fraud and abuse. I mean, there is nothing more irritating to 
any of us here or certainly to our constituents, and any 
assistance that you could help us on that I know would be low-
hanging fruit in a major way for us to include as part of the 
package.
    Let me ask just an early question as to timing of this 
whole event. We are tasked to have a vote prior to November 
23rd. What is the timing--I mean, other than as soon as 
possible. What is the realistic date that truly we have to have 
our documentation submitted to you?
    I know sometimes a lot of our Members are frustrated trying 
to get a CBO score. I know that there is not a higher priority 
for you all to do this. But what is really the date that you 
are going to want the material so that we can complete the work 
by the statute?
    Dr. Elmendorf. As you know, Congressman, from your work on 
the Energy and Commerce Committee, in order to process----
    Representative Upton. Which would feed into the queue ahead 
of Ways and Means in terms of the committee----[Laughter.]
    Dr. Elmendorf. It is an iterative process in which we often 
see preliminary versions of ideas and offer some preliminary 
feedback. But if this committee intends to write legislation 
that would change entitlement programs in specific ways, that 
process usually takes weeks of drafting to make sure that the 
letters of the law that you are writing accomplish the policy 
objectives that you are setting out to accomplish.
    And as part of that drafting process is our estimating 
ultimately the effects of the letter of the law as it is being 
written. So it will take us at least a few weeks.
    I have a terrific set of colleagues who are incredibly 
talented and work unbelievably hard. But we need to do our jobs 
right, and that means not just pulling numbers out of the air. 
So we have said in discussions with some of the staff of the 
committee that, with all respect, your decisions really need to 
be mostly made by the beginning of November if you want to have 
real legislation and a cost estimate from CBO to go with that 
before you get to Thanksgiving.
    Representative Upton. Now I want to get a better 
understanding of some of the estimates of the cost impact to 
the Affordable Care Act. As we know, the bill increased taxes 
on some of our Nation's most innovative job creators, reduced 
Medicare spending significantly. The tax increases and Medicare 
cuts were traded to create three new entitlement programs, 
which have yet to take effect, and according to our staff's 
projections, which are based on your most recent baseline, 
those new entitlement programs will cost the Nation nearly $2 
trillion over the first 10 years from '14 to 2023.
    So, question one, have you all estimated the full 10-year 
costs for each of these entitlement programs, Medicaid, health 
coverage subsidies and the creation of the CLASS Act, for the 
'14 to '23 period when they are fully implemented?
    Dr. Elmendorf. No, Congressman. We have not.
    Representative Upton. Do you anticipate doing that at all?
    Dr. Elmendorf. No. As you know, we produced estimates for 
the 10-year period that was under consideration when the law 
was being considered, and then we provided a rougher sense of 
what we thought would happen in the second decade from that 
point in time.
    As the time moves forward and the budget window moves out, 
we will ultimately end up with a 10-year budget window that 
will be from 2014 to 2023. But even then, it is not obvious 
that we will have an estimate of the effects of that 
legislation by itself.
    Some pieces of that legislation create new institutions, 
new flows of money that didn't exist before, insurance 
exchanges and subsidies. And those lines of our cost estimate 
will, in some sense, become real flows of money at that point 
in time.
    But much else of that legislation made changes in existing 
programs, in payments through Medicare and so on. And we will 
never know for sure what money actually is flowing differently 
because of that piece of legislation . We will see flow for 
certain purposes through certain accounts, but isolating the 
effects of that legislation won't really be possible.
    The prescription drug benefit is one of the few pieces of 
legislation where we can look back at how we did. In a sense, 
that is because much of that legislation--not all, but much of 
it, the big part--created a whole new stream of money that 
would have been zero otherwise. So we can see the difference.
    But for most legislation that the Congress passes, one can 
never really go back and tell. That is the risk of our table 
that we gave to Congressman Becerra and others. One can never 
really go back and tell what happened. And so, the healthcare 
legislation will be like that at some point.
    Representative Upton. Well, if there is a way that you 
would take the percentage of GDP and try to match that up with 
the outyears and look at 9, 10, 11, 12 years out? Is that a 
thought that you might take up?
    Dr. Elmendorf. Well, so we did. So we can talk with you 
further, Congressman. We did do an estimate as the net effect 
of the law, the share of GDP over the second 10 years. And we 
talked in our estimates at the time about some of the bigger 
pieces of the legislation, things that were growing rapidly or 
growing more slowly or so on.
    That sort of calculation is not really possible to do on 
the level of little specific provisions. It is just too broad a 
brush we need to paint with at that horizon, given the 
uncertainty involved. But if there are other ways of looking at 
those pieces that would be helpful to you, we are happy to try 
to do that.
    I think we made very clear--I hope nobody is confused about 
this--that legislation created significant new entitlements 
that raise Federal outlays. It also made other reductions in 
outlays and raised revenues in ways that on balance we think 
and still think reduce budget deficits. But that was a net 
effect of very large changes with different signs, and that 
increases the uncertainty surrounding those estimates of the 
net effects.
    Representative Upton. Thank you.
    Chairman Murray. Thank you.
    Representative Clyburn?
    Representative Clyburn. Thank you very much, Madam Chair.
    Dr. Elmendorf, since we have been sitting here, we received 
notice that the Nation's poverty rate has increased to 15.1 
percent, up almost a full percentage point. Now back in, I 
think it was September 2010, in testimony before the Senate 
Budget Committee, you said this.
    ``Regarding structural changes, the end of the housing 
boom, and the recession have all induced a reshuffling of jobs 
among businesses, occupations, industries, and geographical 
areas. Those developments suggest that gains in employment in 
the next several years will rely more than usual on the 
creation of new jobs with different businesses in different 
industries and locations and requiring workers with different 
skills.''
    Do you still feel that to be true?
    Dr. Elmendorf. Yes, we do, Congressman. We think that much 
of the extra unemployment we are seeing now is what economists 
would call a cyclical response to a weakness in the demand for 
goods and services. But that some of the extra unemployment we 
see now is more what economists call a structural problem, 
which involves, importantly, the mismatches that we discussed 
in the passage you read, also relates to unemployment insurance 
benefits and other factors in the economy.
    We made a rough attempt to quantify those pieces in our 
August update. But the upshot of that is to say that we think 
there is an important piece of current unemployment that 
relates to this kind of structural mismatch that would--makes 
it harder for those people to go back to work, because it is 
not so much going back as it is going on to something else.
    Representative Clyburn. Then that means then your view is 
there is not much that can be done in the short term to attack 
this?
    Dr. Elmendorf. I wouldn't quite say that. It is 
challenging. I mean, I think what I would say is that the 
cyclical part of the unemployment, that part that is responsive 
to the weakness in demand for goods and services, can be 
addressed through aggregate economic policies.
    The people who are unemployed for structural reasons, in a 
sense, because of the sort of the thing that they knew how to 
do in the place that they live isn't being done there or 
anywhere anymore, that isn't amenable to broad macroeconomic 
policy. It might be responsive to certain types of more focused 
policies--training programs, for example.
    I think the broad brush summary of training programs is 
that it is hard to make them work, but not impossible. I don't 
want to suggest that. But I think it is just a different sort 
of policy that would need to be considered in order to help 
some of those people find new jobs, to help other people create 
the jobs that those people would be able to do.
    Representative Clyburn. Well, just let me say, to be 
certain, I am just as concerned as my good friend Senator Kyl 
is about fraud and abuse. I want to cull that out of the system 
as well as we possibly can.
    The problem I have, though, is that with these kinds of 
numbers and with what you have just laid out, it means that 
those in need are increasing rapidly. And the question then 
becomes if you look at the median family, household income 
declining 2.3 percent, that means that irrespective of what may 
be happening to people who may not be deserving of the 
assistance, there are increases occurring among the needy very 
rapidly, and we have not done anything to absorb that 
challenge.
    Dr. Elmendorf. Certainly right, Congressman, about the 
number of people who are hurting. One thing I would say is that 
the Federal budget automatically does some things for those 
people. Food stamp participation is up. A lot more money is 
flowing out that way. Unemployment insurance, even apart from 
extensions, will pay benefits to more people if more people are 
unemployed.
    So some of the automatic features of entitlement programs 
end up helping those people, but I don't want to suggest that 
that has inoculated them against the overall problems that they 
face.
    Representative Clyburn. That means our burden of doing 
smart cuts is greater than what it may appear just looking at 
the numbers. It means we really need to look into all of these 
programs and see exactly where cuts ought to be made rather 
than just dealing with a number.
    Thank you very much. I yield back.
    Dr. Elmendorf. Yes, Congressman.
    Chairman Murray. Senator Portman?
    Senator Portman. Thanks, Madam Chair.
    Building on what my colleague, Congressman Clyburn, just 
said and what Co-Chair Hensarling talked about earlier in terms 
of the impact of the deficit and debt on the economy, Dr. 
Elmendorf, have you got a reaction to the Rogoff and Reinhart 
study, which shows that once you are at 90 percent of gross 
debt, which we are already, that you have an impact on GDP, 
therefore on jobs, therefore on the kind of issues that 
Congressman Clyburn talked about?
    Dr. Elmendorf. So we are certainly familiar with that work, 
Senator. Carmen Reinhart is a member of our panel of economic 
advisers. We benefit from her expertise.
    I think the thing to note about the study, first of all, as 
it was said, is that they are looking at gross debt. So those 
are larger numbers than the numbers that you will see from me. 
We focus on debt held by the public.
    Senator Portman. Right.
    Dr. Elmendorf. The other thing to say is that they divided 
the world into buckets in a sense, different levels of debt. 
That doesn't prove that there is some particular tipping point 
at 90 percent. It says that above--but their evidence shows 
that above that level, economies tend not to do well.
    We just had an issue brief last year about the risk of a 
fiscal crisis, and in other things that we have written, that 
we don't think it is possible to identify a particular tipping 
point. But there is no doubt that as debt rises, risks of 
fiscal crises rise. The Federal Government loses the 
flexibility to respond to unexpected international developments 
or problems at home because of this looming debt.
    And we are, as I said, moving into territory that is 
unfamiliar to most developed countries for most of the last 
half century.
    Senator Portman. In fact, in looking around the world, and 
there is a recent report by Alberto Alesina of Harvard 
University showing that the most successful and pro-growth test 
of reduction took place in countries that relied chiefly on 
austerity programs, spending cuts. And nations that relied more 
on tax increases were less successful in reducing the deficits 
and had slower economic growth.
    Have you looked at some of these countries that have gone 
through the same process we are going through now, and what 
comment can you give us today on what we can learn from the 
experience of those countries? And maybe if you know about 
Professor Alesina's study?
    Dr. Elmendorf. So I do know Alberto's work. There have been 
a number of studies, as you know, looking at the international 
experience of countries that have faced fiscal crises and have 
undertaken austerity programs. The IMF looked at a very similar 
set of data to the work of Alberto and Silvia and came to a 
different conclusion, in fact. Their conclusion was that in 
countries that really set out to do fiscal austerity, the 
results tended to not be good in the short term.
    I think the principal lesson of looking at countries like 
Greece and others is that it is a terrible situation to end up 
in, where one has to make drastic, abrupt changes in policy. 
But if you look at Greece or Ireland or the experience in the 
UK, which did not face such a crisis but has made a very 
determined pivot in its policy, those economies are not doing 
very well right now.
    And I think leaders in those countries felt they had no 
alternative, given where they had gotten to, that they were at 
a point where people were not lending the governments money 
anymore or were about to stop lending them money, in the view 
of the governments. So they had to make drastic changes. But 
that is not a situation that we would like to find ourselves in 
as a country.
    Senator Portman. It appears as though we are heading there 
if you look at the current policy baseline and some of the more 
realistic assumptions that my colleague, Senator Baucus, talked 
about. If you look at your chart with regard to baselines, you 
say that we have about a $3.5 trillion deficit increase over 
the decade under the current law baseline, but under current 
policy that you have, you say it is about $8.5 trillion.
    I would add tax extenders in there like the R&D tax credit 
and others, and possibly, you are up to about $9.3 trillion.
    Dr. Elmendorf. Yes.
    Senator Portman. So, again, the $1.5 trillion is a 
relatively small part of the problem. It is about 17.5 percent, 
by the way, of your $8.5 trillion number. So I do think that as 
we look at our work, we are going to need your help on looking 
at more realistic baselines. We are making very difficult 
choices on things like alternative minimum tax, SGR, and ending 
the UI extension and payroll tax and so on.
    In terms of what drives that, your Figure 14, I think, is 
very instructive, which talks about the major healthcare 
programs. Earlier, there was discussion about President Obama's 
comments. ``The major driver of our long-term liabilities,'' he 
said, ``everybody here knows is Medicare and Medicaid and our 
healthcare spending. Nothing comes close.''
    Assuming you agree with that, which I assume you do?
    Dr. Elmendorf. Yes.
    Senator Portman. What do you think ought to be the primary 
focus of this committee?
    Dr. Elmendorf. Again, Senator, it is really not the place 
of me or CBO to offer recommendations about how to proceed. But 
there is no doubt that the aspect of the budget that is starkly 
different in the future relative to what we have experienced in 
the past 40 years is spending on programs for older Americans 
and spending on healthcare.
    And the reasons those programs are so much more expensive 
in the future is partly due to changes in policy over time, but 
most importantly due to a greatly increased number of older 
Americans and higher cost for healthcare. As a matter of 
arithmetic, it is possible to raise taxes or carve away at the 
rest of the Government in a way that can support those programs 
in this form for some time, but there should be no illusion 
about the magnitude of the changes required in other policies 
to accommodate that.
    If one really leaves those programs in place, then, in 
fact, under current law already the rest of the Government 
would be much smaller relative to the size of the economy in 
2021 than it has been historically. And one would need to raise 
revenues substantially.
    I mean, this is a 5 percent of GDP increase in the cost of 
Social Security and major healthcare programs in 2021, relative 
to the 40-year average. Five percent of GDP is a very big 
number, and that is why I think many people believe that there 
should be changes in that part of the budget.
    Senator Portman. So if the 22.7 percent of GDP is spending 
in that 2021 estimate under, again, current law and not even 
current policy, the major driver is Social Security and major 
healthcare programs. That is as compared to the historic 
average the last 50 years of about 20.8 percent.
    Revenues there go from 18 percent historic average up to 
20.9 percent. My understanding is even under current policy, 
revenues go up above the 18 percent level. So your $8.2 
trillion----
    Dr. Elmendorf. A little bit.
    Senator Portman [continuing]. Or the $9.3 trillion, which 
is I think a more realistic estimate, also includes a slight 
increase in revenues, is that correct, as a percent of GDP?
    Dr. Elmendorf. I think a slight increase. Yes. That is 
right, Senator.
    Senator Portman. Twenty-two percent, I think, is the 
number.
    Dr. Elmendorf. I am not sure exactly. But, yes, a slight 
increase.
    I would just add one fact here. The number of Americans 
over the age of 65 is going to rise by about one third in the 
coming decade. One third more beneficiaries of Social Security 
and Medicare a decade from now, roughly, than there are today. 
And on top of that, with higher healthcare costs per person, 
one can see why these programs in their current form are 
becoming much more expensive over time.
    Senator Portman. Thank you.
    Chairman Murray. Senator Kerry?
    Senator Kerry. Thank you, Madam Chairman.
    Dr. Elmendorf, I want to try to move through a couple of 
things fairly quickly, if we can. You said a moment ago that 
the aspect of the budget that is starkly different is, I think 
you said, the number of older Americans and the cost of 
healthcare. Is that correct?
    Dr. Elmendorf. Yes. That is right.
    Senator Kerry. And those are the two things that you said 
are starkly different about the aspect of the budget today?
    Dr. Elmendorf. Today, and in the future. Yes, even more so 
in the future.
    Senator Kerry. But isn't it accurate that we have balanced 
the budget I think since World War II five times, and that each 
time we have balanced the budget, revenues have been somewhere 
between 19 and 21 plus percent of GDP? Is that accurate?
    Dr. Elmendorf. That sounds right, Senator. I have not 
checked exactly.
    Senator Kerry. And assuming that is accurate, we are 
currently at 15 percent, 15.3 I think is your prediction for 
this year, of revenues to GDP. Correct?
    Dr. Elmendorf. Yes. That is right.
    Senator Kerry. So isn't it fair to say that, in fact, there 
is an aspect about our budget today that is starkly different, 
which is the level of revenues relative to GDP. It is starkly 
different, isn't it?
    Dr. Elmendorf. Yes. That is right, Senator.
    Senator Kerry. And it is starkly different in that it is 
well lower than the historical average of when we balanced the 
budget or not balanced the budget?
    Dr. Elmendorf. Yes. That is right.
    Senator Kerry. So let me ask you, given that reality and 
given the reality that you and others--I think last year, the 
Committee on Fiscal Future of the United States, which was a 
joint effort of the National Academy of Sciences and the 
National Academy of Public Administration--developed four 
budget scenarios.
    They had one budget scenario where you had nothing but 
cuts, another budget scenario where you had nothing but tax 
increase, and then two in between. The only way they could keep 
the revenues at the historical average and keep the spending at 
a decent level was basically with cuts. But that doesn't get 
you where you need to go in terms of some of this historical 
average and not winding up with major, major cuts in terms of 
the benefits of Medicare or Medicaid.
    So if you want to avoid--you made the statement to us a 
moment ago that we have to make a decision about what we want 
to do. Most people have accepted that we don't want to have 
major reductions to--we have reforms, yes. We need to do a 
better job of making them fiscally sound. But I haven't heard 
anybody stand up on either side of the aisle and say there 
ought to be huge cuts in benefits.
    If that is true, then aren't we forced into a situation 
where we look somewhere near the historical norm with respect 
to the revenue to GDP percentage?
    Dr. Elmendorf. So if one wants to leave spending on Social 
Security and the major healthcare programs roughly in line with 
what would happen under current law, then one needs to either 
further carve away at all the other functions of the 
Government, or one needs to raise revenues above their 
historical average share of GDP by a significant amount, or one 
could do combinations of those.
    But there is no way to simultaneously let Social Security 
and the major healthcare programs grow the way they would under 
current policies or anything close to that and operate the rest 
of the Federal Government in line with its role in the economy 
over the past 40 years and keep revenues the same share of GDP 
they have been on average in the past 40 years. And the reason 
those things are inconsistent, even though they worked in the 
past 40 years, is because the number of people who will be 
older and the number who will be--and the amount they will be 
collecting in health benefits will be so much larger in the 
future than in the past.
    Senator Kerry. Well, I happen to agree with that judgment 
that you have made, and I think it is a very important one with 
respect to how we approach this.
    I also want to--we are going to obviously have some time 
here to discuss the healthcare piece, but isn't it true that, 
well, the Medicare excess cost growth, how does that compare to 
the excess cost growth in overall healthcare spending over the 
next decade?
    I think in recent estimates that you found that Medicare in 
the excess cost growth was actually lower than the historical 
average now. Isn't that true?
    Dr. Elmendorf. Yes. So excess cost growth, meaning not 
necessarily excessive in the judgmental sense, but just faster 
growth in benefits per person than in the growth of GDP per 
person, that sort of excess cost growth in Medicare under 
current law is pretty close to zero for the coming decade. That 
would be a very sharp change from the experience of the past 40 
years.
    Senator Kerry. And what do----
    Dr. Elmendorf. In relation to the discussion we had earlier 
about payment rates to providers.
    Senator Kerry. So what do we attribute that significant 
reduction in the Medicare cost growth rate?
    Dr. Elmendorf. So importantly, to features of the law, like 
the cuts in payment rates to physicians due to take effect the 
end of this year and like a number of the other cuts to 
provider payments enacted in last year's major health 
legislation.
    Senator Kerry. So that has had a beneficial effect in terms 
of restraining growth in Medicare--in Medicare cost?
    Dr. Elmendorf. Yes. That is right.
    Senator Kerry. Thank you. I will reserve my time at this 
point.
    Chairman Murray. Representative Camp?
    Representative Camp. Well, thank you.
    Director Elmendorf, I am sure you remember, as last year 
you testified before the President's National Commission on 
Fiscal Responsibility and Reform on a topic very similar to 
what you are covering today. It seems as if your presentation 
then said, then and now, that we need to get control of the 
automatic spending increases that have been built into the 
Government's budget. Is that a fair statement of your testimony 
then and now?
    Dr. Elmendorf. Well, again, I think we said that those 
pieces are growing very rapidly and that to accommodate that, 
as it stands, would require very large changes in other aspects 
of the money the Government spends or collects.
    Representative Camp. Those are the significant drivers of 
our current situation.
    Dr. Elmendorf. Yes.
    Representative Camp. So what programs in particular are at 
the core of CBO's projections for the long-term Government 
spending? And which programs are responsible for the largest 
increases in Government spending?
    Dr. Elmendorf. So if one looks at Figure 12 from the 
written testimony on page 39, and coming up on the screen for 
those with very good eyesight, one can see that this picture 
shows growth over the next decade in Social Security and in 
Medicare and in other major healthcare programs.
    Representative Camp. Do the other major healthcare programs 
include all of the Healthcare Act, long-term care and other 
Medicaid increases?
    Dr. Elmendorf. So the other major healthcare programs are 
Medicaid, the Children's Health Insurance Program, and 
subsidies through insurance exchanges, and some related smaller 
spending.
    Representative Camp. And the long-term care entitlement?
    Dr. Elmendorf. The long-term care entitlement, as you 
recall, actually raises money for the Government in the first 
decade of its life. And I don't know if that has been netted 
out here or not. I don't think so, actually, Congressman.
    But one can see from this picture that the largest increase 
as a share of GDP over the coming decade among these three 
categories is the other major healthcare programs, followed by 
Social Security and Medicare.
    Representative Camp. All right.
    Dr. Elmendorf. And that is principally, I think, because of 
a great increase in the number of beneficiaries from the 
expansions enacted last year and continued sharp increases in 
costs for beneficiaries in those programs.
    Representative Camp. In your prepared testimony before the 
President's commission, you also included a chart, which--if we 
could pull that up now, and everyone has a copy of this chart 
at their desk in their packet--which showed real GDP per capita 
under different economic conditions. You will notice under the 
alternative fiscal scenario, the line stops between 2025 and 
2030.
    And you explained then that that line stops because 
economic growth collapses and that it simply can't handle debt 
loads that high. Is that an accurate statement of what you 
testified before the President's commission?
    Dr. Elmendorf. Yes. That is right. We have updated this 
picture in our long-term projections from this year. But 
similarly, Congressman, not at quite the same point, the amount 
of debt under this alternative scenario becomes so large that 
our models don't know what to do with it.
    I don't think the economy would actually get that far at 
all because the people in the economy will be looking ahead and 
foreseeing what is happening. I think, in fact, much more 
serious problems will come sooner than we show in these 
pictures.
    Representative Camp. And I think you said that the 
Government debt has become so high that you don't know what to 
do with it because private investment ceases to function and 
the economy ceases to function under that scenario. Is that 
correct?
    Dr. Elmendorf. Ceases to function at some point. Again, I 
think that the freezing up would probably come sooner than we 
show in those pictures because of an anticipation of that 
problem.
    Representative Camp. And I think that analysis really does 
go along with what other analysts have said of the country's 
debt-to-GDP ratio when it exceeds 90 percent, and I am talking 
total debt to GDP ratio, that it reduces economic growth, as 
others have said in their time, by about 1 percent at that 
level.
    Dr. Elmendorf. Yes. I think the models that we are using 
here are consistent with a consensus approach to estimating 
this sort of issue.
    Representative Camp. And am I correct to say that our total 
debt-to-GDP ratio is over 90 percent at this time?
    Dr. Elmendorf. Yes. I think that is right, Congressman.
    Representative Camp. And what impact do you think these 
massive levels of debt relative to GDP have on the economy in 
general and specifically on the prospects for job creation?
    Dr. Elmendorf. Those levels of debt are a burden on the 
economy. They reduce our output and our incomes relative to 
what we would enjoy if we had done less borrowing and had done 
more saving.
    Representative Camp. This committee has been tasked under 
the Budget Control Act with finding $1.5 trillion in deficit 
reduction over a 10-year period. What is the size of the 
economy over the next 10 years?
    Dr. Elmendorf. So GDP today is about $15 trillion. We think 
it grows over the course of the coming 10 years. If you have 
done that calculation, Congressman, I would be happy to hear 
the number from you.
    Representative Camp. Well, just assuming over 10 years, 
$150 trillion, we are talking about 1 percent of our economy, 
are we not, in terms of rough numbers?
    And the reason I want to point out this number is you 
mentioned the impact of us making decisions about spending that 
might have impacts on the economy, and I just want to put in 
perspective, over the next 10 years, these reductions in debt 
that we are asked to find over the next 10 years roughly 
represent about 1 percent of the economy. And I am talking very 
rough numbers.
    Dr. Elmendorf. So I think that sounds about right to me, 
Congressman. And I agree that the problem is very large by the 
standards of the incremental fiscal policy decisions that the 
Congress normally makes. But it should not be viewed as 
unsolvable. Changes in policy can put us on a different path.
    Representative Camp. And in terms of outlays, I think this 
amount over the next 10 years represents about 3 percent of our 
outlays, and as I think Senator Portman mentioned as well. And 
so, I think we need to put it in perspective that while I am 
not underplaying how difficult this might be, but in terms of 
impacting the economic trajectory of the United States economy, 
we are not over the next 10-year period in significant 
percentages of either economy or outlays. Most families and 
businesses have had to do with less than 3 percent, and I think 
it is something over a 10-year period, they have obviously had 
to do with less than that.
    Dr. Elmendorf. Yes.
    Representative Camp. And just lastly, I realize my time has 
expired. I do want to just ask you one quick thing.
    We may come to agreement on impacts within the 10-year 
budget window, but we may have decisions that are outside of 
the 10-year budget window. And I just wanted to ask if you 
would be willing to work with us to find ways to measure the 
impact of policies outside the traditional budget window and if 
you would commit to helping us do that?
    Dr. Elmendorf. Yes. Absolutely, Congressman.
    Representative Camp. Thank you very much, and I yield back.
    Chairman Murray. Representative Van Hollen?
    Representative Van Hollen. Thank you, Madam Chairman.
    Let me just start, Dr. Elmendorf, by thanking you for your 
testimony and just say that--and this goes for Republicans and 
Democrats alike--we are all entitled to our own opinions, but 
not to our own facts. And the last time that our budget was 
balanced was back in the 2001, 2000 time period. And in fact, 
during that time, revenues as a percent of GDP was 20.6 percent 
in the year 2000 and 19.5 percent in the year 2001.
    And the last time spending was 18 percent of GDP was about 
1967, and it has risen since then largely because we, as a 
nation, decided to make sure that older Americans in their 
retirement had the health security they needed. So it is 
important to keep those facts in mind as we go forward.
    Now you posed a very fundamental question to this 
committee, and let me ask you this. If we were to try and 
continue with current retirement and healthcare, security 
programs in the future, we would need significant changes to 
revenue beyond current law, would we not, in order to fund them 
and balance our budget, assuming we kept the rest of Government 
constant?
    Dr. Elmendorf. Yes. That is right, Congressman.
    Representative Van Hollen. And if we were to try to 
preserve those--let me ask you this. If we were to continue 
current revenue policy without any changes, it would require 
very deep cuts to those retirement and security programs, would 
it not, if we were to try and bring down the deficit?
    Dr. Elmendorf. If you also maintain the rest of the 
Government in accordance with its historical pattern, yes, 
Congressman.
    Representative Van Hollen. That is right. And as you 
pointed out in your testimony, in fact, over the next 10 years 
as a percent of GDP, that is going down, is it not?
    Dr. Elmendorf. Yes.
    Representative Van Hollen. Okay. So that is the fundamental 
question, and I think we recognize that we have to deal with 
the outyear issues. We have a demographic challenge. We have 
more and more people retiring. But as you just pointed out, if 
we want to avoid huge cuts to Medicare and to Social Security, 
we also have to deal with the revenue piece. In other words, we 
have to increase revenues beyond current policy if we want to 
avoid very deep cuts.
    So I think it is important that we look at the revenue side 
of the equation right now, and you have presented that to us in 
your testimony. And I think it is time for this committee to 
get real and recognize that, yes, there are spending issues, 
especially in the outyears, but there is also a revenue issue.
    Now, as you point out, under current law, the 10-year 
cumulative deficit is $3.4 trillion. Correct? Under current 
law.
    Dr. Elmendorf. I think it is a $3.5 trillion.
    Representative Van Hollen. Three and a half trillion 
dollars?
    Dr. Elmendorf. Yes.
    Representative Van Hollen. And as you point out on page 19 
of your testimony, if we continue current tax policy and the 
current physician payments under Medicare, that will rise from 
$3.4 trillion to over $8.5 trillion. That is there in your 
testimony.
    Dr. Elmendorf. Yes.
    Representative Van Hollen. Now you mentioned those two 
factors together, but I think it is important to point out that 
of that over $5 trillion, that the huge bulk of it has to do 
with continuing current tax policy, does it not?
    Dr. Elmendorf. Yes.
    Representative Van Hollen. And in fact, by my calculation, 
you get just under $4 trillion on revenue. And if you add the 
debt service associated with that, you are talking about $4.5 
trillion of your $5 trillion dealing with current revenue 
policy. Is that right?
    Dr. Elmendorf. Yes. That is right.
    Representative Van Hollen. So, just to be clear, if this 
committee were to adjourn today and the Congress were to 
adjourn for the next 10 years and go away, we would actually 
achieve greater deficit reduction than if we went, took the 
Simpson-Bowles advice and went big. Is that not right?
    In other words, we would get over $4 trillion over that 10-
year period, even if we fixed the doctor, physician 
reimbursement piece, right?
    Dr. Elmendorf. So if--let me make sure I have this right. 
If you extended those expiring tax provisions----
    Representative Van Hollen. That is right.
    Dr. Elmendorf [continuing]. And indexed the AMT for 
inflation----
    Representative Van Hollen. Yes.
    Dr. Elmendorf [continuing]. Then that would add to deficits 
by $4.5 trillion or so. That would be larger than the amount of 
savings if this committee stayed----
    Representative Van Hollen. It is simple math, right? It 
would be more than the $4 trillion that a lot of people talked 
about, right?
    Dr. Elmendorf. Yes. That is right.
    Representative Van Hollen. Okay. So I think it is 
important, as we look at this challenge, to look at both sides 
of the equation there. And what we are talking about, just so 
we can translate this into what the American people have 
experienced, what we would be talking about is essentially 
going back to the same tax rates and tax policy that was in 
effect during the Clinton administration, a period of time when 
20 million jobs were created and the economy booming.
    Now I am not suggesting we go back to that particular tax 
policy, but if you look at Simpson-Bowles compared to current 
law, they provide about a $2 trillion tax cut compared to 
current law, as opposed to $4 trillion. If you look at Rivlin-
Domenici, they propose about a $1 trillion tax cut compared to 
current law, approximation.
    So if we are really going to address this challenge, let's 
recognize that if we don't deal with the revenue piece, as Dr. 
Elmendorf said, you are talking about dramatic cuts to health 
and retirement security for America's seniors. We have to take 
a balanced approach. That is why the other bipartisan groups 
took that kind of approach.
    Thank you, Madam Chairman.
    Chairman Murray. Senator Toomey?
    Senator Toomey. Thank you, Madam Chairman.
    Since my colleagues have raised this issue, I just want to 
touch on a couple of things that didn't quite make it into the 
conversation so far. Isn't it true that as recently as 2007 the 
current tax rate structure yielded revenue that was about 18.5 
percent of GDP?
    Dr. Elmendorf. I think that is right, Senator. Yes. The 
current level, of course, is very low because the economy is 
very weak.
    Senator Toomey. Exactly. And the main reason that total 
revenue as a percentage of GDP is so much lower than the 
historical levels is because we have an economy that is still 
effectively in a recession, very high unemployment, very weak, 
lack of growth. Isn't that right?
    Dr. Elmendorf. Yes. That is right.
    Senator Toomey. And as recently as 2007, the deficit that 
we had that year was about, if I remember correctly, less than 
1.5 percent of GDP, I believe. And if we could get to the point 
where we consistently had deficits of 1.5 percent of GDP, then 
our debt as a percentage of our economy would clearly be 
declining, and we would have, to a very large extent, solved 
this problem, if not completely.
    Dr. Elmendorf. Yes. That is right. If you could--yes. That 
is right.
    Senator Toomey. To the level of the deficit that we had in 
2007, with the current tax rates. Let me ask a couple of other 
questions, if I could?
    You went through, and I don't think there is any dispute 
that excessive debt has all kinds of negative implications--we 
all acknowledge that--including the possibility that we get to 
the point where you have a financial crisis, an economic 
freezing up.
    Isn't it true that it is essentially impossible to know 
precisely when you get to that point?
    Dr. Elmendorf. Absolutely.
    Senator Toomey. So it is just not knowable?
    Dr. Elmendorf. I think it is just not knowable.
    Senator Toomey. Right. Isn't there a danger that the 
magnitude of the debt is already impeding economic growth, 
having a chilling effect on investment and risk taking? Isn't 
that possible?
    Dr. Elmendorf. I think the level of debt is probably 
weighing on economic activity. All things equal, of course, we 
wish we had less.
    Senator Toomey. Right.
    Dr. Elmendorf. I think the question is how to proceed from 
here.
    Senator Toomey. I guess the point I want to make is given 
that it is probably already weighing on economic growth and 
given that we acknowledge that continuing down this path 
eventually leads to a full-blown crisis and we can't know when, 
that suggests to me that it is very dangerous to delay making 
meaningful reform. And while there is some concern that curbing 
the size of the deficit in the short run impedes economic 
growth, I would argue that it is already happening.
    And if we--if the future promised reductions in the deficit 
either weren't credible or at some point became less credible, 
then we could discover we are already in that territory where 
the financial crisis could emerge. Isn't that a danger that we 
would run in delaying this?
    Dr. Elmendorf. I think there are disadvantages to delay, 
Senator, as we said in the written testimony and as I repeated 
here. Again, based on our analysis, which I think is consistent 
with a consensus of professional opinion, immediate increases 
in taxes or cuts in spending would slow the economic recovery. 
But that is not meant to imply that there aren't a variety of 
factors that can matter in different ways, not meant to imply 
that we are sure we have that right.
    But that is, I think, the consensus of professional 
opinion.
    Senator Toomey. It might be, but there certainly is an 
alternative point of view about that, especially with regard to 
the spending side.
    Dr. Elmendorf. Yes, Senator. That is right.
    Senator Toomey. And even though you and I might disagree on 
this debate somewhat, I am sure you would agree that when it 
comes to its impact on economic growth, not all Government 
spending is equal.
    Dr. Elmendorf. That is absolutely right.
    Senator Toomey. Spending in your models would generate more 
rather than less. Similarly, not all tax cuts are comparable, 
right?
    Dr. Elmendorf. Exactly.
    Senator Toomey. Some encourage economic growth more than 
others?
    Dr. Elmendorf. Exactly.
    Senator Toomey. And in fact, crudely speaking and broadly 
speaking, that spending and tax cuts, while they may 
arithmetically have the same impact on the deficit if you 
assume they have no other implications, in fact, they do have 
other implications?
    Dr. Elmendorf. That is right. And when we do economic 
modeling of the consequences of alternative fiscal policies, we 
try to capture that. We incorporate the level of marginal tax 
rates on labor and capital and those effects on work and on 
saving.
    Senator Toomey. Right. And on page 33 of your testimony, 
you observe that lower marginal rates enhance the incentive to 
work and save and invest, and that has a pro-growth feedback on 
the economy.
    One of the things we haven't discussed, but I would like 
your reflection on, is the possibility of a revenue-neutral tax 
reform that simplifies the code, broadens the base, and lowers 
marginal rates. Wouldn't that tend to enhance growth and, 
therefore, enhance revenue to the Government?
    Dr. Elmendorf. Yes. That is right, Senator. The magnitude 
of that effect, of course, depends on the specifics of the 
policies that would be enacted.
    Senator Toomey. Right. And so, I wonder if you have a rule 
of thumb that you could share with us. For instance, for a 
given incremental increase in the rate of growth on average, 
what kind of impact does that have on the deficit over an 
extended period of time?
    Dr. Elmendorf. Well, so we offer our rules of thumb for 
that in the back of our annual Budget and Economic Outlooks. 
And the magnitude of that effect I will offer to you in one 
moment.
    Senator Toomey. A figure that comes to mind, and maybe you 
could confirm or refute, is that a 0.1 percent of additional 
growth on average sustained over 10 years is roughly $300 
billion in additional revenue? Is that about----
    Dr. Elmendorf. Yes. That is just right.
    Senator Toomey. So a full percent, I mean, this may not be 
perfectly linear, but it certainly goes in the same direction?
    Dr. Elmendorf. Yes. It almost certainly isn't perfectly 
linear, and we offer these rules of thumb for small changes 
because we are just not sure what else might happen with very 
large----
    Senator Toomey. The point is a small, sustained change in 
growth has a huge impact on the deficit or reducing the 
deficit. Would you agree with that?
    Dr. Elmendorf. Yes. That is right.
    Senator Toomey. Thank you.
    Thank you, Madam Chairman.
    Chairman Murray. I thank you very much. And we have gotten 
through our first round here, and I appreciate everybody 
keeping it concise.
    I am going to have to use the prerogative of my chair to 
make a small change at this time. The House is going to be 
having votes at approximately 1 p.m. There are 12 of us, and 
the time is very short. So unless somebody throws something at 
me, I am going to limit each of us to 2 minutes in the final 
round and would ask everybody to please keep it to that 
timeframe.
    Dr. Elmendorf, let me just ask, as you have been talking 
about, in the long-term budget report from January, CBO 
included an analysis on the impact of lower than expected 
economic growth on the Federal budget. I wanted to ask you, 
what does CBO estimate is the impact on the deficit projections 
in the near term and over the next 10 years if GDP growth 
continues to weaken beyond what is reflected in the current 
estimates?
    Dr. Elmendorf. So, certainly, a weaker economy implies 
worse budget outcomes, primarily because tax revenues fall. 
Also because there is some extra spending in some of the 
entitlement programs that we talked about a moment ago.
    We have not done quantitative estimates of budget outcomes 
for other particular scenarios beyond what is in these rules of 
thumb that we have offered in our volume in January. And the 
rules of thumb are rough because a lot of things can or may not 
rise and fall with the rest of the economy.
    We have been surprised in the past few years at some of the 
outcomes of tax revenue even given the state of the economy. 
But there is no doubt that a weaker economy is worse for the 
budget and a stronger economy is a lot better for the budget. 
The challenge is how to move the economy, and it is not easy to 
move a $15 trillion economy.
    Chairman Murray. Thank you.
    I do have a question about sequestration. I am going to 
submit it for the record because I do think it is important. As 
hard as the choices we are looking at here, we need to 
understand the impact of that, and I appreciate the information 
you have put out on that.
    But the significant impacts to sequestration I think need 
to be understood by our committee as well. So I will submit 
that for the record.
    Dr. Elmendorf. I will be happy to answer it, Senator.
    Chairman Murray. And reserve my time and turn it over to 
Mr. Hensarling.
    Co-Chair Hensarling. Dr. Elmendorf, I think it was Senator 
Kerry who brought up that revenues today are roughly at 14 
percent of GDP. Doesn't your latest budget estimate under a 
current policy baseline show that revenues go back to their 
historic norm of 18 percent of GDP in 2014?
    Dr. Elmendorf. Yes. That is right, Congressman. They are a 
little over 15 percent today, and the improvement in the 
economy and other underlying factors in the tax code we think 
will push that up to a little over 18 percent under current 
policy.
    Co-Chair Hensarling. Your alternative fiscal scenario, 
which is a current policy baseline, also shows spending going 
from a historic average of roughly 20.5 percent up to 34 
percent of GDP. Is that correct?
    Dr. Elmendorf. That sounds about right, Congressman.
    Co-Chair Hensarling. So is it fair to say that with respect 
to revenues, one is episodic related to the lack of economic 
recovery, the other is structural. Is that a fair assessment?
    Dr. Elmendorf. Yes. Both factors are at work right now, 
Congressman, and----
    Co-Chair Hensarling. Let me continue on there. Those who 
have advocated or have brought up that historically when the 
budget has been balanced, taxes have gone beyond their historic 
norm of roughly 18 percent of GDP to closer to 20 percent of 
GDP. And again, this is your alternative fiscal scenario shows 
that spending by 2035 goes up to 33.9 percent, and the same 
alternative fiscal scenario shows that taxes already on a path 
to increase from 18 percent of GDP to 18.4.
    So following the analysis of those who advocate that in 
order to achieve a balanced budget that revenues have to come 
up from what you say they are already rising, from 18.4 to, 
say, 20 percent of GDP, wouldn't the analysis also suggest 
under a balanced approach that spending has to decrease 
essentially 14 percentage points under your alternative fiscal 
scenario to reach its historic norm?
    Dr. Elmendorf. So, Congressman, I would rather not parse 
the meaning of the word ``balance,'' given its role, apparent 
role in your discussions. But you are right that if revenues 
were at 20 percent of GDP, then balancing the budget, given the 
assumptions, it would require a reduction in spending.
    Co-Chair Hensarling. Thank you.
    Chairman Murray. Representative Becerra?
    Representative Becerra. Dr. Elmendorf, I think I am going 
to start calling you ``Sergeant Friday.'' You are here 
essentially giving us at least your best interpretation of the 
facts, and we appreciate that because you are not trying to 
give us opinion. You are not telling us whether in 5 years or 
10 years we should reduce the benefits we give to seniors under 
Medicare or make a change to our defense and security needs.
    You are simply telling us what the numbers show and leaving 
it to us as policymakers to come up with a good mix. And I 
appreciate that. I suspect your mother or father or your 
grandmother or grandfather are probably also pleased that you 
are just talking numbers and not saying what should be done to 
them with regard to Medicare or Social Security or anything 
else.
    One quick point, with regard to the discussion of our long-
term costs, you mentioned Medicare and Social Security and 
Medicaid. Medicare and Medicaid, because they deal with 
healthcare and healthcare costs, are in a different boat than 
Social Security, are they not, in terms of their long-term 
costs?
    Dr. Elmendorf. Yes. That is right. The increases in 
spending for those programs that we project under current law 
are a lot greater over time than for Social Security.
    Representative Becerra. And indeed, Social Security, by 
about 2028, 2030, starts to stabilize and stays pretty constant 
in terms of its cost to the Federal Government into the 
outyears, right?
    Dr. Elmendorf. Yes. Roughly so. After the baby boom 
generation has primarily retired, that line roughly levels out.
    Representative Becerra. And because you are dealing with 
facts, you are not here to tell us about how to make that fix 
to healthcare because the reality is that Medicare and Medicaid 
are simply reimbursement or financing systems. If we were to 
just cut benefits for a senior, that doesn't necessarily mean 
that their healthcare cost will drop. That shifts the cost more 
into the pocket of the senior to pay for that care if Medicare 
just reduces what it reimburses?
    Dr. Elmendorf. I think it depends on the policy, of course. 
But there are some policies that shift cost, and there may be 
some policies that reduce overall costs.
    Representative Becerra. Thanks, Sergeant Friday. Appreciate 
it.
    Dr. Elmendorf. Thank you, Congressman.
    Chairman Murray. Senator Kyl?
    Senator Kyl. Thank you, Dr. Elmendorf.
    Just one question in the interest of time here. While I 
know you agreed with Senator Toomey's observation that there is 
another point of view or other points of view, regarding your 
argument that cuts in spending now can harm economic growth or 
delay economic recovery, that is true of defense spending as 
much as other spending. Is that not correct?
    Dr. Elmendorf. It is true of potentially all types of 
spending. There may be differences across types, but I think 
that is a more subtle distinction.
    Senator Kyl. Yes. And here, with defense, for example, you 
have high unemployment of returning veterans to begin with. You 
have the reduction in end strength. You have more people 
potentially unemployed. You have people making radios and 
building ships and so on. And if those cuts, therefore, end up 
reducing the employment in those industries and the amount of 
money spent in those areas, obviously, it could delay economic 
recovery.
    Dr. Elmendorf. Yes. That is right, Senator.
    Senator Kyl. Thank you.
    Chairman Murray. Senator Baucus?
    Senator Baucus. Thank you, Madam Chairman.
    I wondered, Dr. Elmendorf, if you could just again, we 
discussed a little bit of it already, what changes either let's 
say in tax policy will stimulate the economy most, if you could 
rank them somehow?
    Dr. Elmendorf. Well, as it turns out, in the table which 
you are looking, Senator, from our January 2010 report, we did 
consider the effects of a set of alternative tax cuts. We have 
not updated this table since that point. If we did, I think the 
numbers would be slightly different, but probably not 
fundamentally different.
    Reductions in payroll taxes that we studied here were among 
the more powerful levers, followed by expensing of investment 
costs, and then followed below that by a little bit by broader 
reductions in income taxes. And the reason for that difference 
is principally that the money that is saved by employers or 
employees in payroll taxes we think translates into a fairly 
comparatively large amount of incremental spending. And also in 
the case of a cut to what employers pay amounts to at least a 
temporary discount on the cost of hiring workers.
    Senator Baucus. Let me change subjects. If we have a 
revenue-neutral tax reform, corporate or individual, and the 
tax reform, let's say, on the individual side is dramatic, 
broaden the base, lowering the rate, et cetera, how much growth 
would result from a very simplified tax code along those lines?
    Dr. Elmendorf. A tax code with a broader base and lower 
rates would spur economic growth, but the magnitude is 
something we would have to take specific proposals from you 
back to our models and work hard on them for a while before we 
could hazard any sort of quantitative estimate.
    Senator Baucus. Okay. Thank you.
    Dr. Elmendorf. Thank you, Senator.
    Chairman Murray. Representative Upton?
    Representative Upton. Thank you.
    I am concerned about the impact of the Affordable Care Act 
on job creation. Can you provide us a detailed explanation of 
the methodology used to calculate how many employers will 
actually drop their healthcare coverage for their employees?
    Dr. Elmendorf. I can provide a brief summary in the next 
minute and three-quarters, Congressman. We have a model of 
health insurance coverage in which employees and employers are 
trying to obtain coverage at low cost, but also giving weight 
to the quality of the coverage they receive.
    In our analysis, the Affordable Care Act encourages some 
employers to provide insurance coverage who would not have 
otherwise because of the mandate for insurance coverage and 
some of the subsidies. On the other hand, it encourages other 
employers who would have offered coverage not to offer any 
more. And we think that latter effect outweighs the former, and 
we have a small reduction in employer-sponsored insurance 
coverage.
    Our estimates are very consistent with the estimates of 
other people, with large-scale models like those at the Urban 
Institute. Obviously, there is a tremendous amount of 
uncertainty around those estimates, and there have been some 
surveys that have suggested there would be more employer 
dropping.
    At this point, based on the things that we have seen since 
we did those estimates, we are comfortable those estimates make 
sense. But it is an issue where we have been asked to explore 
the sensitivity of the budgetary effects to alternative 
outcomes in terms of employer-sponsored insurance coverage, and 
we are working on those estimates now.
    Representative Upton. Could you actually provide us maybe a 
dial-up? I don't know what your percentage is. I thought it was 
like as low as 5 percent or less?
    Dr. Elmendorf. It is a small percentage. I am not exactly 
sure.
    Representative Upton. Yes. And I wonder if you could 
provide us an estimate, if it was maybe 10 or 20 percent?
    Dr. Elmendorf. So the challenge we have is that it matters 
a lot for budgetary cost who ends up with and without employer-
sponsored health insurance coverage. So we can't really do just 
a scaling up in that sense. We have to understand in the model, 
and there are ways to change the assumptions in the model to 
give different answers. But we need to do that because that 
will affect the budgetary cost.
    It is also not obvious that the budgetary cost is as large 
as it may seem at first. If people are not getting employer-
sponsored coverage and move to the exchanges, they will pay--
the Government will pay more for their coverage. On the other 
hand, the employers will have extra money that they were 
previously using to buy health insurance with. Most economists 
think that money will turn up as wages for workers. They will 
pay taxes on that.
    If it doesn't, it will turn up as additional corporate 
profits, and they will pay tax on that. So the overall 
budgetary effects will depend on the combination of changes in 
exchange subsidies, in Medicaid costs, and in tax receipts. But 
we are working on that, Congressman.
    Representative Upton. Thank you.
    Chairman Murray. Thank you.
    Representative Clyburn?
    Representative Clyburn. Thank you, Madam Chair.
    Dr. Elmendorf, let me look at revenue from a different 
perspective here. Is it fair to say that the decrease--or the 
increase in unemployment has decreased revenue going into the 
Federal coffers?
    Dr. Elmendorf. Yes. That is right, Congressman.
    Representative Clyburn. If we had a decrease in 
unemployment of just, say, 0.5 percent--from 9.1 to 8.6--what 
would be the level of revenue increase?
    Dr. Elmendorf. I can't do that in my head, Congressman. It 
would help, but I don't know. And it would help partly because 
we would pay less unemployment insurance benefits and partly 
because of people who are earning money would pay taxes on 
those earnings.
    Representative Clyburn. So it is a double whammy.
    Dr. Elmendorf. Both sides of the budget would be affected.
    Representative Clyburn. I would like to see some computer 
printout.
    Dr. Elmendorf. I will task my computer with that 
assignment, Congressman.
    Representative Clyburn. I appreciate it. Thank you.
    Chairman Murray. Senator Portman?
    Senator Portman. I think Congressman Clyburn has just made 
a great point, which is the economy plays such a huge role 
here. And since this is a hearing about the history of how we 
got here, I have gone back and looked at your May 12, 2011, 
report, which talked about earlier 32 percent of the difference 
between a $5.6 trillion surplus projected and the $6.2 trillion 
deficit, which is an $11.8 trillion swing, 32 percent of that 
is because of the economy.
    And about 33 percent of it is new spending. About a third 
of that spending is for global war on terror--Iraq, 
Afghanistan, and other spending on the war on terror. It is 
about 39 percent is due to new spending when you add the 6 
percent that is the stimulus.
    Fifteen percent is the Bush tax cut. By the way, over 70 
percent of that went to those making less than $250,000 a year. 
And then the rest is interest and the AMT and the rebates in 
2008.
    So I think it is a great point that the economy is going to 
drive so much of this. And we talked about this earlier, but 
you said that you thought that increasing taxes at this point 
would have a negative impact, just as you thought that certain 
spending cuts would have a negative impact on economic growth 
and jobs.
    But then, in response to Senator Baucus, you said that some 
tax reform, particularly lowering the rates, broadening the 
base, would have a positive economic impact. Can you briefly 
speak to that as it relates to the corporate tax code and the 
possibility also of lowering the rate to make the U.S. more 
competitive?
    Dr. Elmendorf. So I think that in terms of both the 
individual income tax and the corporate income tax, economists 
widely agree that lower tax rates and broader base would be 
good for the economy both because the lower rates would reduce 
the disincentive to worker to save and also because broadening 
the base itself can, if done in certain ways, reduce the 
incentives for misallocating capital resources.
    Again, to actually estimate the effects on the economy, we 
or our colleagues at the staff of the Joint Committee on 
Taxation would need to have specific proposals and would need 
to spend some time trying to model those. It is a very 
complicated business, as you know, Senator.
    Senator Portman. How long would it take you?
    Dr. Elmendorf. I will not commit to that. Offhand, if we 
have proposals from you, we will work on them as fast as we 
possibly can. I will certainly promise you that.
    Senator Portman. And prioritize them, right?
    Dr. Elmendorf. We are giving very high priority to the work 
of this committee, Senator.
    Senator Portman. Thank you, Madam Chair.
    Chairman Murray. Senator Kerry?
    Senator Kerry. There is a big distinction, is there not, 
almost obvious, Dr. Elmendorf, if 98 percent of America was 
getting a tax cut and 2 percent, who happen to be the 
wealthiest people whose decisions are very different and whose 
impact on the economy is very different, there is a big 
difference in that versus sort of a blanket discussion of all 
of the tax cut versus none. Correct?
    Dr. Elmendorf. In terms of the economic effects, yes, 
Senator.
    Senator Kerry. Yes.
    Dr. Elmendorf. We think that is right.
    Senator Kerry. And I think that is part of the modeling 
that needs to be done here because I think that distinction 
will be very telling in a lot of ways.
    What I want to ask is I think it would be helpful to all of 
us on the committee, I have great respect for the Rogoff-
Reinhart analysis. In fact, I suggested we might get them in 
here, and I think it is an important one. But, and here is the 
``but,'' and I would like you to draw the distinction for us.
    Your analyses and much of our discussion centers around the 
public debt. The public debt is 62 percent, I believe, of GDP. 
But we have had a number of references here to the gross debt, 
which obviously includes all of the trust funds and so forth, 
where there is a very different impact because of the full 
faith and credit of the United States and printing and so 
forth.
    Help us understand how that distinction might play out in 
our deliberations, particularly with respect to the impact on 
interest rates. I think the public debt has far more impact on 
interest rates than on the economic judgments, does it not? So 
maybe you can just educate us a little bit on that distinction 
between them.
    Dr. Elmendorf. Yes, Senator. So CBO focuses on debt held by 
the public because we think that is a better measure of the 
impact of Federal borrowing on financial markets today than 
gross debt. Of course, any snapshot of what the Government owes 
at a point in time will be very incomplete without looking at 
where the fiscal trajectory is going, and that is why we always 
combine our reporting on current levels of debt held by the 
public with projections of revenues and spending. And 
certainly, financial markets are very attentive not just to the 
current amount of debt, but also to the amount of debt they 
would expect the Government to be trying to get them to buy in 
years ahead.
    But our view is that debt held by the public, together with 
these projections for the future, offers you and your 
colleagues a fairly complete, by no means perfect, but a fairly 
complete picture of the Federal budget situation.
    Gross debt, which, as you said, includes money, includes 
bonds held by various Government trust funds, we think does not 
really measure the amount of--does not measure the amount of 
debt that the private financial system has been asked to absorb 
today, nor is it a very good measure of what will happen in the 
future because for some programs, the amount of debt held in 
those trust funds is a lot less than the amount that they will 
need to pay benefits under current law. In other cases, the 
amount of debt held in the trust funds doesn't actually 
correspond to future spending. So we just don't think that is 
the most useful measure.
    Now in the work that Carmen Reinhart and Ken Rogoff did, 
they viewed that as the best available measure for the set of 
countries over the period of time that they have done this 
analysis for. And I don't want to put words in their mouth, but 
we have discussed this issue with Carmen.
    And, but I think in our case, because we do these very 
elaborate projections on a very detailed level of the budget, 
that combining those projections with debt held by the public 
gives you and your colleagues the best sense of where this 
country stands today.
    Senator Kerry. Thank you.
    Chairman Murray. And Representative Camp?
    Representative Camp. Thank you very much.
    I just wanted to point out that as part of the fiscal 
commission, I researched how often Federal revenues exceeded 20 
percent of GDP in the history of our country, and we found they 
have only done it three times since--in the history of our 
country--in 1944, in 1945, and 2000.
    And in 2000, they were 20.6 percent of GDP revenues, and 
that was really largely due to the threefold increase in 
capital gains from $40 billion in 1999 to $12 billion--or $121 
billion in 2000. So that was what drove that.
    Is that and----
    Dr. Elmendorf. I think that is right, Congressman.
    Representative Camp. Thank you.
    And in the 11 fiscal years since 1940, we have had surplus 
revenues for 4 of those years between 19 and 20 percent, and 
for 7 of those years, they were less than 19 percent of GDP.
    So I have a letter that outlines all of this that I would 
like to submit for the record. And I just think it is important 
to point out that, again, during the 12 years in which the 
budget was in surplus, outlays never exceeded 19.4 percent of 
GDP, and I think it is important to keep those revenue levels 
in historical perspective.
    Chairman Murray. Representative Van Hollen?
    Representative Van Hollen. Thank you, Madam Chairman.
    I would again point out that the last time Federal spending 
was around 18 percent of GDP or lower was about 1967. We made a 
decision in this country to provide for health security for 
seniors. So we have really got to look at that period of time 
since then if we want to continue that commitment, including 
what years the budget was in balance, which was in 2000-2001 
period.
    Look, Dr. Elmendorf, I think you have made a very good 
point in your testimony. I know you are not making 
recommendations, but I think your testimony was clear that you 
can't address the deficit challenge without modernizing the 
health security programs, unless you have large increases in 
taxes above even current law. But unless you change current tax 
policy, you can't address the deficit situation without deep 
cuts in health security programs.
    Now I just want to have a quick question. You mentioned 
that there are some tax policies that generate more economic 
activity, some that generate less. You mentioned the payroll 
tax holiday is one that generated relatively more than some of 
the others because more money in people's pockets.
    Isn't it also true that with respect to spending programs, 
there are some that generate more activity than others in the 
economy and that investments in the area of infrastructure and 
education provide for economic growth? Isn't that also the 
case?
    Dr. Elmendorf. Yes. But just give me one moment to say that 
I want to be careful about the pieces of the budget. There are 
revenues. There is Social Security and the major healthcare 
programs on my chart, and there is the rest of the budget. And 
I don't think you disagree with this, Congressman.
    But the thing that is not possible to do is to maintain 
Social Security and the major healthcare programs in their 
current state and maintain the rest of the Federal Government 
at the same share relative to the size of the economy it has 
been in the past and maintain revenues at their historical 
average share of GDP.
    Representative Van Hollen. Right.
    Dr. Elmendorf. One needs to move at least one. One could 
also choose to move any two or three of those as you choose. 
What is not possible, as a matter of arithmetic, given the 
aging of population and rising healthcare costs, is to have all 
three of those pieces look like they looked historically.
    And different policies on the spending side do have 
different effects in economic growth, and they do at different 
horizons. So some policies might be more effective this year or 
next. Others might be more effective over longer periods of 
time, and we can try to provide that sort of information to you 
and others if you are interested in that.
    Representative Van Hollen. I appreciate that, Dr. 
Elmendorf. I am just making the point that both tax policies, 
as well as investment, spending policies, both can have 
positive economic impact. Is that right?
    Dr. Elmendorf. Yes. That is right.
    Representative Van Hollen. Thank you.
    Chairman Murray. Senator Toomey?
    Senator Toomey. Thanks, Madam Chairman.
    Dr. Elmendorf, one of the challenges that we face is how we 
can address these challenges in a credible way, right? How, for 
instance, willing will future Congresses be to abide by 
spending caps or other kinds of reductions or disciplines that 
we might try to impose? And of course, we cannot tie the hands 
of future Congresses.
    So I wonder if you might reflect on ways that we could 
maximize the chances that future--that spending restraints that 
we would hope to achieve would, in fact, come to pass, whether 
that would be through strengthening existing budget enforcement 
mechanisms, creating new ones, or other ways that we might do 
that.
    Dr. Elmendorf. I think, Senator, the most effective way to 
ensure that changes you discuss today actually become--take 
effect later is to enact those changes into law today. 
Enforcement procedures are only a backstop. Ultimately, the 
Congress will need to enact changes in the legislation 
governing certain programs or provisions to the tax code if it 
wants to make those changes.
    And if specific changes are enacted into law this year, 
then I think there is a much greater chance that they will take 
effect when the time comes than if what is enacted into law 
this year is simply a set of objectives for total amounts of 
spending or total amounts of taxes or other sorts of 
benchmarks.
    Senator Toomey. So structural reforms in a program are 
likely to have more enduring results than long-term caps 
designated. Would you agree with that?
    Dr. Elmendorf. Yes, I think that is right. And I think we 
have seen that historically. The original Gramm-Rudman 
legislation, Gramm-Rudman-Hollings, was cast aside because the 
overall target that it set for the deficit proved to be 
impossible to meet. Whereas the provisions of the early 1990s, 
the PAYGO provisions that tried to make it more difficult for 
the Congress to make deficits worse, seem, to most observers, 
to have been at least somewhat effective during the period when 
the Congress was very concerned about budget deficits.
    So I think it is the important aspect of this for both the 
long-term effects and also for the shorter-term effects in 
terms of people believing the deficits will be smaller in the 
future comes from specificity in putting provisions into law 
today, even if they are timed to take effect, for various 
different reasons, at different points in the future.
    Senator Toomey. Thank you.
    Chairman Murray. Thank you very much.
    I want to thank all of our committee members for being so 
accommodating. Dr. Elmendorf, certainly, for your input and 
your staff's input for today as well.
    I want to remind all of our members that they have 3 
business days to submit questions for the record, and I hope 
that the witness can respond quickly to that.
    Dr. Elmendorf. Yes, we will.
    Chairman Murray. Great. Thank you.
    And members should submit their questions by the close of 
business on Friday, September 16th.
    [The information follows:]
    Chairman Murray. Without objection, the joint committee 
stands now adjourned.
    [Whereupon, at 1:10 p.m., the committee was adjourned.]

                            A P P E N D I X

              Additional Material Submitted for the Record

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