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



 
                                                                       
                    OVERVIEW: DISCRETIONARY OUTLAYS,

                       SECURITY AND NON-SECURITY

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

                                HEARING

                               before the

                         JOINT SELECT COMMITTEE

                          ON DEFICIT REDUCTION

                     CONGRESS OF THE UNITED STATES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 26, 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)

                REP. JEB HENSARLING (R-Texas), Co-Chair

                 SEN. PATTY MURRAY (D-Wash.), Co-Chair

SEN. MAX BAUCUS (D-Mont.)            SEN. JON KYL (R-Ariz.)
REP. XAVIER BECERRA (D-Calif.)       SEN. ROB PORTMAN (R-Ohio)
REP. DAVE CAMP (R-Mich.)             SEN. PAT TOOMEY (R-Pa.)
REP. JIM CLYBURN (D-S.C.)            REP. FRED UPTON (R-Mich.)
SEN. JOHN KERRY (D-Mass.)            REP. CHRIS VAN HOLLEN (D-Md.) deg.

                      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..........     3

                               WITNESSES

Elmendorf, Douglas, Ph.D., Director, Congressional Budget Office.     4

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Elmendorf, Douglas, Ph.D.:
    Testimony....................................................     4
    Prepared statement...........................................    35
Hensarling, Hon. Jeb:
    Opening statement............................................     3
    Prepared statement...........................................    71
Murray, Hon. Patty:
    Opening statement............................................     1
    Prepared statement...........................................    72

                                 (iii)


       OVERVIEW: DISCRETIONARY OUTLAYS, SECURITY AND NON-SECURITY

                              ----------                              


                      WEDNESDAY, OCTOBER 26, 2011

                        United States Congress,    
                                 Joint Select Committee    
                                      on Deficit Reduction,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:05 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. This committee will come to order.
    Before we begin, let me just remind all our guests that the 
manifestation of approval or disapproval, including the use of 
signs or placards, is a violation of the rules, which do govern 
this committee. So I want to thank all of our guests in advance 
for their cooperation in maintaining order and decorum.
    First of all, thank you to my co-chair, Representative 
Hensarling, all of my fellow committee members, and Dr. 
Elmendorf for joining us here today, as well as the members of 
the public here in person or watching us at home.
    This committee has been working very hard over the last few 
weeks to come together around a balanced and bipartisan plan to 
reduce the deficit and rein in the debt. We have heard from our 
colleagues. We have heard from the standing House and Senate 
committees, from groups around the country, and close to 
185,000 members of the public through our Web site, http://
www.deficitreduction.gov.
    We continue our work now today with a hearing on 
``Discretionary Outlays, Security and Non-Security.'' And I am 
glad we are talking about this today because it is important 
for us to understand how these policies fit into our overall 
deficit and debt.
    Nondefense discretionary spending represents less than one-
fifth of total Federal spending. Listening to the debates here 
in D.C. over the last few months, you would think this small 
piece of pie was a whole lot bigger. As I expect, we will hear 
more about that from Dr. Elmendorf today.
    Congress has gone to this relatively small pot with cuts 
and spending caps again and again while leaving many other 
pieces of the budget essentially untouched, including the law 
that created this joint committee, which cut roughly $800 
billion in discretionary spending. And all the focus on this 
one area is especially striking, given that we are spending 
about the same on nondefense discretionary programs in 2011 as 
we did in 2001. Meanwhile, mandatory programs increased, 
defense spending increased, and revenues plummeted.
    So as this committee works together on a bipartisan plan to 
reduce the deficit, we need to keep in mind the cuts that have 
already been made, the role discretionary spending plays in our 
overall deficit and debt problem, and the impact irresponsible 
slashing could have on our economic recovery and middle-class 
families across the country. As we all know, these aren't just 
numbers on a page. They affect real people in real ways.
    When food assistance for women and infants is cut, that 
means greater challenges for struggling families. When 
infrastructure investments are shelved, that means fewer jobs 
and more crumbling bridges and roads. And when research, 
education, and student loans are slashed, that means fewer 
opportunities for our businesses and the next generation of 
workers, which is really no savings at all since we end up 
paying for it in the future.
    So while we should certainly examine every piece of the 
budget to see where we can responsibly make additional cuts, it 
doesn't make sense to simply keep going after one small part of 
the budget that disproportionately affects middle-class 
families and the most vulnerable Americans. There has to be 
balance.
    Today, Dr. Elmendorf will be discussing discretionary 
security spending, which has grown significantly in the years 
since 9/11. This is an area where the stakes for our Nation are 
high. From both a national security as well as a budgetary 
perspective, we have to get this right.
    As many of my colleagues have noted over the past few 
weeks, it is an area that would be hit especially hard if this 
committee doesn't come to a deal, and we move to sequestration. 
So I am looking forward to a robust conversation today with Dr. 
Elmendorf about these critical pieces of our Federal budget.
    And before I turn it over to my co-chair, I just want to 
say that over the last few weeks, this committee has been 
working very hard to find common ground and a path toward a 
balanced and bipartisan plan that can pass through this 
committee, through Congress, and get signed into law. We aren't 
there yet, but I am confident that we are making progress. And 
I am hopeful that we are moving quickly enough to meet our 
rapidly approaching deadline.
    As I said from the start, if this committee is going to 
work--and I believe that it must--we all need to be willing to 
make some tough decisions and real compromises. I am willing to 
do that, and I know many of my colleagues are as well.
    Every day, we hear more and more about the effects of 
failure that would be on our Nation's long-term fiscal health 
and credit-worthiness. Over the next few weeks, it is going to 
be up to all of us to demonstrate to the American people that 
we can deliver the kind of results that they expect and that 
they deserve.
    [The prepared statement of Chairman Murray appears in the 
appendix.]
    With that, I would like to recognize my co-chair, 
Representative Hensarling, for his opening statement.

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

    Co-Chair Hensarling. Well, I thank the co-chair for 
yielding, and I want to thank her again for her leadership on 
this committee and the spirit of negotiation that she brings.
    There is no such thing as an unimportant hearing when it 
comes to dealing with our Nation's structural debt crisis. And 
certainly, within our Nation's discretionary budget are 
contained many challenges and, frankly, many important 
priorities that have to be debated and negotiated.
    Not the least of which is what many of us view as the 
number-one function of our Federal Government, and that is to 
protect us from all enemies, foreign and domestic, and 
specifically, our National defense budget, which continues to 
shrink as a percentage of our economy, shrink as a percentage 
of our budget, as we continue to live in a dangerous world.
    When I look at the totality of our discretionary budget, I 
do, again, find some common ground with my co-chair. And again, 
although there is no such thing as an unimportant hearing or 
unimportant section of the budget, in many respects, today we 
may be debating the pennies, nickels, and dimes in a debt 
crisis that is demanding half dollars and dollar bills.
    There has been huge run-ups in our discretionary spending 
since the President has come to office. This is not the forum 
to debate the policies, but I think the numbers speak for 
themselves.
    Without the stimulus program, the Commerce Department has 
increased from '08 to '10 102.9 percent. Without the stimulus, 
EPA has increased 35.7 percent. Subtracting the stimulus, 
Housing and Urban Development increased 22.2 percent. State 
Department without the stimulus, up 132.2 percent, and the list 
goes on.
    Again, it is not at this forum to debate these particular 
policies, but it is important to note the numbers that when 
these particular budgets are growing, the family budget, which 
pays for the Federal budget, has, unfortunately, contracted. 
And it is the family budget that has to pay for the Federal 
budget.
    As an order of magnitude, we know that the discretionary 
spending of our Nation is roughly 40 percent and shrinking. Our 
entitlement spending is roughly 60 percent of the budget and 
growing. We know outside of interest payments on our National 
debt that our mandatory spending is principally driven by our 
healthcare and retirement programs that are simultaneously 
starting to disserve their beneficiaries and driving the Nation 
broke as they grow at 5 and 6 and 7 percent a year, where, 
unfortunately, our Nation, over the last few years, have 
actually seen negative economic growth.
    So, to put this in even a larger context, under the Budget 
Control Act, we collectively have a goal, a goal of $1.5 
trillion in deficit reduction. But we have a duty, a duty to 
provide recommendations in legislative language that will 
significantly improve the short-term and long-term fiscal 
imbalance of the Federal Government.
    Thus, the challenge before us remains that we must find 
quality healthcare solutions, quality retirement security 
solutions for our Nation at a cost that does not compromise our 
National security, does not compromise job growth and our 
economy, and does not mortgage our children's future.
    Everything else we do, including dealing with the 
discretionary budget, will be helpful. Nothing else will solve 
the structural debt crisis or allow this committee to meet its 
statutory duty, only these reforms. And so, prudent stewardship 
of our discretionary budget is going to be helpful. It alone 
cannot solve the crisis. It continues, though, to be an 
important matter.
    I look forward to hearing from our witness, and with that, 
I will yield back, Madam Chairman.
    [The prepared statement of Co-Chair Hensarling appears in 
the appendix.]
    Chairman Murray. Thank you very much.
    With that, I will turn it over to Director Elmendorf for 
your opening statement. And we all appreciate your taking the 
time out of what we have given you as a very busy life, to take 
time to come today and answer our questions. So thank you very 
much, Dr. Elmendorf. Turn it over to you.

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

    Dr. Elmendorf. Thank you, Senator Murray, Congressman 
Hensarling. I and the other folks at CBO are happy to be trying 
to help this committee in its very challenging task.
    To all the members of the committee, my comments today will 
focus on four questions that are addressed in the written 
testimony. First, what does discretionary spending comprise? 
Second, what has been the historical trend in discretionary 
spending? Third, how will discretionary spending evolve over 
the next decade under current law? And fourth, how might the 
path of discretionary spending be altered?
    Before digging into that substance, though, let me briefly 
clarify some of the terms I will use. When I talk about 
discretionary funding, I am adding together the budget 
authority that is appropriated for those programs and the so-
called obligation limitations that govern spending for certain 
transportation programs. Those two types of funding provide 
agencies with the authority to spend money. When the funds are 
actually disbursed, they become outlays.
    Also, through the testimony, I will focus on defense and 
nondefense discretionary spending, rather than security and 
non-security spending. Defense spending is a traditional 
category that includes all of the spending on military 
activities of the Department of Defense, plus spending for the 
Department of Energy's atomic energy defense activities and 
some defense-related activities of other agencies. Nondefense 
spending is everything else in the discretionary category.
    The Budget Control Act sets caps on discretionary spending 
for 2012 and 2013 using different categories, security and non-
security, where security includes most, but not all of defense 
and also includes appropriations for the Department of Homeland 
Security, the Department of Veterans Affairs, and the 
international affairs budget category.
    However, in 2014 and beyond, the Budget Control Act 
specifies a single cap on discretionary funding. There is an 
entirely different set of caps in the law that would come into 
play if legislation from this committee does not generate 
sufficient deficit reduction. In that case, the further cuts in 
spending that would be required are based on the traditional 
defense and nondefense categories. Although to make the 
situation truly confusing, the act labels those security and 
non-security as well. We thought it would be most useful for 
this testimony to focus on the familiar defense and nondefense 
categories.
    Let me now turn to the first substantive question, which is 
what discretionary spending comprises. In fiscal year 2011, 
total funding for discretionary programs was about $1.3 
trillion, of which more than half went to defense and less than 
half went to nondefense programs. If you turn now to the second 
page of the handouts in front of you, you will see a big donut 
that is labeled ``Defense Discretionary Funding for 2011.''
    Of total defense funding for 2011, 43 percent, the biggest 
piece on the right of the donut, went to operation and 
maintenance, which pays for the day-to-day activities of the 
military, the training of military units, the majority of costs 
for the military's healthcare program, and compensation for 
most of DoD's civilian employees. Another 22 percent of defense 
funding went to compensation of military personnel, including 
pay and housing and food allowances.
    Procurement, representing 18 percent, funds the purchase 
and upgrade of weapons systems. Appropriations for the wars in 
Afghanistan and Iraq and related activities accounted for about 
a quarter of total defense funding. They were distributed 
across the categories shown here, are included in the amounts 
reported.
    If you turn to the next page of the handout, it shows a 
comparable picture for nondefense discretionary funding for 
2011. Seven broad categories accounted for about 80 percent of 
the total. Education, training, employment, and social services 
programs together claimed 16 percent. Transportation programs 
received 15 percent of the total, with about half of that going 
to highway programs.
    Income security programs, mostly for housing and nutrition 
assistance, represented 11 percent. That amount does not 
include unemployment compensation, food stamps, or temporary 
aid to needy families because they are all part of mandatory 
spending.
    Discretionary appropriations for veterans benefits, 
primarily for the Veterans Health Administration, were 10 
percent of total nondefense discretionary funding last year. 
Health was another 10 percent, with about half of that amount 
devoted to the National Institutes of Health.
    International affairs and the administration of justice 
were each about 9 percent, and a collection of smaller 
categories makes up the remaining 20 percent.
    Looking at nondefense discretionary spending as a whole, 
about one-third is disbursed in grants to State and local 
governments. Of those grants, about a third are devoted to 
education and training programs and a quarter to transportation 
programs, with the remainder going to environmental protection, 
law enforcement, economic development, and various other 
purposes.
    Let me now turn to the second question in the testimony, 
which is the historical trend in discretionary spending. This 
is depicted in the next page of the handout.
    Discretionary spending declined noticeably as a share of 
GDP from the early 1970s to 2000, mostly because defense 
spending declined relative to GDP from about 8 percent in 1970 
to a low of 3 percent between 1999 and 2001. Defense spending 
then climbed again.
    Outlays for nondefense discretionary programs have averaged 
about 4 percent of GDP during the past 40 years, with 
considerable variation, as you can see, but no evident trend. 
Thus, on average, such outlays increased during that period 
roughly in line with the size and income of the population.
    Nondefense discretionary outlays were elevated in the past 
few years in part, as has been noted, because of funding from 
the 2009 Recovery Act.
    Altogether, discretionary spending amounted to about 9 
percent of GDP in the past 2 years, higher than the 6 percent 
in 2000, but lower than the 11 to 12 percent of the early 
1970s.
    The third question addressed in the testimony is how 
discretionary spending will evolve over the next decade under 
current law. To illustrate the potential impact of the caps on 
discretionary appropriations set in the Budget Control Act and 
the automatic enforcement procedures contained in that act, we 
projected appropriations under several different assumptions, 
including the three listed on the next page of the handout.
    I apologize for those who don't have the handout. I think 
that members of the committee should have it in front of them. 
For other people, I am referring to figures and tables that are 
in the written testimony, and there are a couple of slides that 
are words also from the written testimony. Nothing I am saying 
is new and is not in that testimony.
    The largest numbers that we looked at, about $12 trillion 
over the next decade, would come from extrapolating funding for 
2011, adjusted for inflation. That is the way CBO constructed 
its baseline projections in recent years before the caps in the 
Budget Control Act.
    The next set of numbers I will talk about assumes that 
funding is equal to the new caps set in law, about $11.3 
trillion over the decade. For illustrative purposes, I will 
focus in a moment on the scenario under which the caps are met 
through proportional reductions in defense and nondefense 
spending. But many other combinations are possible, and the 
written testimony offers a range of possibilities.
    And the third and smallest numbers I will talk about, 
totaling $10.4 trillion, incorporate the sequestration and 
reduction in caps that we estimate would occur if no savings 
resulted from the work of this committee.
    The next page of the handout is Table 3 from the written 
testimony and deals with defense spending. I will focus on just 
the two rows of numbers near the bottom highlighted in blue.
    I want to emphasize that the caps on defense spending do 
not constrain appropriations for the war in Afghanistan or for 
similar activities. And the automatic enforcement procedures 
would not affect funding for such purposes either. So what you 
are seeing here are numbers for the base defense budget.
    The upper of those two blue rows shows the reduction in 
defense spending moving from the path where the amount of 
funding in 2011 has grown with the rate of inflation to a path 
of proportional reductions in defense and nondefense spending 
funding to meet the caps. Between 2012 and 2021, such 
reductions would total $445 billion, the number shown at the 
far right end of the blue bar, or about 7 percent.
    The lower of the two blue rows shows the larger reductions 
in defense funding and moving from the path where the amount of 
funding jumped off 2011 and grew with the rate of inflation to 
the path that would occur if this committee's work resulted in 
no savings. Between 2012 and 2021, the cumulative reductions on 
this path would total $882 billion, or 14 percent. In 2021 
alone, defense funding, excluding war funding, would be $110 
billion, or 16 percent, lower than it would be if such 
appropriations kept pace with inflation.
    If you skip the next page of that handout, which is a 
continuation of the table, the figure beyond that shows defense 
spending as a share of GDP. The light blue line on the left-
hand side shows the history of funding for the base defense 
budget. The middle line on the right with the short dots shows 
our projection, assuming proportional cuts in defense and 
nondefense spending to meet the caps. The lowest line shows our 
projection if the maximum automatic reductions are triggered.
    Under those two assumptions, in 2021, funding for defense, 
excluding war funding, would represent 2.7 or 2.5 percent of 
GDP, compared with an average of 3.4 percent during the past 
decade.
    The next page of the handout is Table 4 from the written 
testimony and deals with nondefense spending. Again, I will 
focus on just the two rows of numbers highlighted in blue.
    The upper of the two blue rows shows the reduction in 
nondefense funding again and moving from the path where 2011 
funding grew with the rate of inflation down to the path that 
would result if the caps were met through proportional 
reductions on the defense and nondefense sides. Between 2012 
and 2021, such reductions would total $418 billion, or 7 
percent.
    The lower of the two blue rows again shows the larger 
reductions in this time nondefense funding moving from this 
inflation-adjusted path to the path if no savings result from 
the work of this committee. Between 2012 and 2021, the 
cumulative reductions would total $794 billion. In 2021 alone, 
nondefense budget authority would be $99 billion, or 15 
percent, lower than it would be if such appropriations kept 
pace with inflation.
    The next page of the handout shows nondefense funding as a 
share of GDP, again Figure 6 from the written testimony. The 
line on the left side shows the history of such funding. You 
can see that nondefense discretionary funding spiked upward in 
2009 but then fell back sharply in the past couple of years to 
roughly its average share of GDP during the preceding decade.
    The upper line on the right shows our projection, assuming 
proportional cuts in defense and nondefense funding to meet the 
caps. The lower line shows our projection if the maximum 
automatic cuts are triggered. Under those two assumptions, in 
2021, nondefense funding would represent 2.8 or 2.6 percent of 
GDP, compared with an average of 4.1 percent during the past 
decade.
    The fourth and last question addressed in the testimony is 
how the path of discretionary spending might be altered. Let me 
make two quick points, which are summarized on the last page of 
the handout.
    First, for some programs, reductions may be particularly 
challenging because funding increases that are greater than the 
rate of inflation would be necessary to maintain current 
policies or plans. For example, implementing the 
administration's multiyear defense plans would require nearly 
$500 billion more defense funding over the coming decade than 
would occur if current funding increased at the rate of 
inflation.
    Other examples where an inflation-adjusted extrapolation of 
current funding would be insufficient to fund current policies 
include veterans healthcare and Pell grants for higher 
education. Moreover, some observers believe that current 
policies in some areas are insufficient to meet the Nation's 
future needs.
    For example, many analysts believe that current national 
spending on infrastructure is inadequate to provide enough 
roads, bridges, and other capital assets to maintain the 
current level of services or to fund all the projects for which 
benefits exceed costs. Of course, if spending on certain 
programs is allowed to grow faster than inflation, then even 
less room under the caps will be available for other 
discretionary activities.
    Secondly, CBO assumes in its baseline projections that 
funding subject to the caps will be equal to the amounts 
currently specified in law for those caps. That means that 
legislation that reduced the funds available for a particular 
discretionary activity or that achieve savings in undertaking a 
particular activity would only reduce projected total 
appropriations if the legislation also lowered the caps. 
Without a reduction in the caps, funding for other 
discretionary activities would probably fill the gap created by 
any specific reduction or savings.
    I hope this information is helpful to you, and I am happy 
to answer any questions that you have.
    Thank you.
    [The prepared statement of Dr. Elmendorf appears in the 
appendix.]
    Chairman Murray. Thank you very much, Dr. Elmendorf. And 
again, thank you for being here today and taking our questions.
    As you know, this committee is working very hard together 
to try and find a balanced plan to reduce our deficit and rein 
in our debt. It is not an easy task. We all believe it is 
necessary.
    Over the past 10 years, domestic discretionary spending has 
remained essentially flat after adjusting for inflation, and 
this spending has remained stagnant despite the growing need to 
have investments to spur job creation and assistance for those 
in our country who have been hit the hardest because of this 
recession.
    In your testimony, you mentioned that discretionary outlays 
during the past decade increased primarily due to the increase 
in security spending after 9/11. So let me start by asking you 
a few questions about the impact of past and potential cuts to 
discretionary spending on our overall budget picture.
    Would you agree that with the negotiations on the fiscal 
year 2011 appropriations bills and discretionary spending caps 
in the recent Budget Control Act, that Congress has already 
made significant efforts to reduce discretionary spending?
    Dr. Elmendorf. Yes, Senator. The current path of 
discretionary spending under existing law is a good deal lower 
than it would have been without the actions you described.
    Chairman Murray. And isn't it the case that even if we 
completely eliminated discretionary funding--everything from 
NIH to elementary and secondary education, military base 
construction, national parks, processing Social Security 
checks--all of it, we would still face deficits of hundreds of 
billions of dollars because we have not addressed entitlements 
and revenues?
    Dr. Elmendorf. I have not done that precise calculation, 
Senator, but you are most definitely right that discretionary 
spending is, and as Congressman Hensarling also noted, a 
shrinking share of Federal outlays over time. And entitlement 
programs, mandatory spending is a growing share of Federal 
outlays, in some cases growing rather rapidly.
    And without addressing that path of spending, it would be 
extremely difficult to put the budget on a sustainable path.
    Chairman Murray. Okay. Well, given the discretionary 
spending cuts that Congress has already made, can you talk 
about what the economic impact or effect of further efforts to 
cut discretionary spending, both in fiscal year 2012 budget 
process and in this committee's final product?
    Dr. Elmendorf. So, over time, cuts in discretionary 
spending reduce in general the services that the American 
public receives, services in protection against foreign 
enemies, services in the highways they can use or the national 
parks they can visit, or other sorts of programs.
    Those cutbacks have a variety of human costs. They can also 
have economic costs depending on the nature of the cutback. 
Even infrastructure spending, for example, where many analysts 
think that the country should probably spend more, some sorts 
of projects could have a very high economic return. Other 
projects could have a very low economic return. So the nature 
of the economic effects depends very much on the particular 
changes in policy.
    In addition, in the short term, given the large gap between 
our economy's potential to produce output and the level of 
goods and services being demanded and being produced, cutbacks 
in Government spending or we believe increases in taxes in the 
near term would reduce the level of economic activity and 
employment relative to what would otherwise happen. I view that 
as really a separate sort of effect from more of the medium-
term or longer-term effects, where the effects, as I said, vary 
a good deal depending on the nature of the program being cut.
    Chairman Murray. Okay. Well, all of us on this committee 
know that we need to address the large, long-term drivers of 
our unbalanced Federal budget. But I also really believe that 
we have to take steps to strengthen that economic recovery and 
address the jobs crisis that we are seeing today.
    Now according to CBO's rule of thumb regarding economic 
growth and its relationship to budget projections, CBO states, 
and I quote, ``Stronger economic growth improves the budget's 
bottom line. Weaker growth worsens it.''
    Now CBO's projections for economic growth are now weaker 
for 2011 and 2012 than CBO projected just earlier this year. 
Correct?
    Dr. Elmendorf. Yes, that is right. We have not written 
formal projections. But if we would do a forecast today, yes, 
it would be weaker than we wrote in August.
    Chairman Murray. Okay. Well, nearly all of the economists 
are telling us that growth continues to suffer from a 
significant weakness in demand, and many are warning against 
pursuing overly aggressive measures of austerity in the short 
term. And I wanted to ask you, do you agree that a lack of 
demand is one of the key factors holding back our economic 
recovery?
    Dr. Elmendorf. Yes. I think it is a widespread view among 
analysts that lack of demand for goods and services is the key 
factor holding back the recovery. The further question, of 
course, is the source of that lack of demand.
    Chairman Murray. Okay. So how does a reduction in 
Government spending generally affect demand on the economy and 
during an economic downturn?
    Dr. Elmendorf. Reduction in Government spending will 
generally reduce the demand for goods and services, either 
because the Government is buying less itself or because it is 
providing lower transfers to individuals to purchase goods 
themselves.
    Chairman Murray. Does tax increases or spending cuts have a 
larger impact in reducing that demand and the economic growth?
    Dr. Elmendorf. Depends on the specific tax increase or 
spending cut that you have in mind, Senator. Certain forms of 
Government spending, we think, have a large bang for the buck 
in terms of effects on demands. Others have lower effects. 
Certain kinds of tax increases would restrain demand by more 
than other kinds of tax increases. It depends on the nature of 
the spending or tax change, often on the recipient of the 
spending or the payer of the tax.
    Chairman Murray. Okay. Thank you very much. I appreciate 
it.
    Representative Hensarling?
    Dr. Elmendorf. Thank you, Senator.
    Co-Chair Hensarling. Thank you.
    And Dr. Elmendorf, again, on behalf of the entirety of this 
committee, I want to thank you and thank your staff. We know 
that you are sorting through a number of homework assignments, 
if you will, from various and sundry members here. And again, 
we want to thank you with the diligence and professionalism you 
bring to that task.
    Dr. Elmendorf. Thank you, Congressman.
    Co-Chair Hensarling. Again, when I look at the statutory 
duty, as opposed to the statutory goal for this committee, our 
duty is to, frankly, offer recommendations in statutory 
language to address both the short-term and long-term 
imbalance.
    With respect to the short-term imbalance, is it not true 
that the stimulus bill with interest amounts to over $1 
trillion of spending, which accounts for a large temporary 
growth in our discretionary budget?
    Dr. Elmendorf. Yes. Although, as you know, Congressman, 
only a part of the Recovery Act was about discretionary 
spending. There were also increases in mandatory spending and 
reductions in taxes. In total, we put it a little over $800 
billion, and including interest, I think you are right, about 
$1 trillion.
    And it did lead to a bulge in discretionary funding and 
then to an attenuated bulge in outlays because not all the 
money got spent right away.
    Co-Chair Hensarling. I don't know if you have at your 
fingertips numbers with respect to agency growth? I had quoted 
a few, and now that I look down, apparently the source is your 
office. So I hope I am quoting your office correctly.
    Dr. Elmendorf. I don't have those at hand, Congressman. But 
if they are numbers from us, then you can certainly trust them. 
[Laughter.]
    Co-Chair Hensarling. So I can trust them. Well, then I 
trust that when you add in the stimulus, the Commerce 
Department has grown 219 percent from '08 to '10. That with the 
stimulus, EPA has grown 130.8 percent. The Energy Department 
has grown 170.7 percent with the stimulus. Education has grown 
180.6 percent, at a time when the economy has actually seen 
negative economic growth, and family paychecks have shrunk.
    And unfortunately, again, this is not the forum in which to 
debate the stimulus, but I think it has to be noted when we are 
talking about areas of the budget where savings could be had, 
at least the American people certainly deserve the facts.
    I want to follow up on, to some extent, a point that my co-
chairman was making, and I believe I have this right. Correct 
me if I am wrong. Under your alternative fiscal scenario, which 
essentially is a current policy baseline, I believe it is at 
2024 that all Federal revenues will simply be used to fund the 
mandatory portion of the budget, which is essentially our 
entitlement and interest. Is that correct?
    Dr. Elmendorf. I am sorry. Again, Congressman, you have a 
better hand around our facts than I have. But the qualitative 
point you are making is certainly right that mandatory spending 
just dominates the Government budget in an increasing way, in a 
rapidly increasing way over time.
    Co-Chair Hensarling. This actually came up in our earlier 
hearing with you, and I think I have this correct. Under your 
alternative fiscal scenario, you assume a growing revenue base, 
do you not? Do you not assume revenues increasing to their 
historic level of roughly 18, 18.5 percent of GDP?
    Dr. Elmendorf. Yes, that is right.
    Co-Chair Hensarling. And don't you also assume, in your 
alternative fiscal scenario, the tax increases that are 
contained within the Patient Protection and Affordable Care 
Act? Do you recall if those are assumed in your fiscal----
    Dr. Elmendorf. So what we do, as you know, in our extended 
baseline scenario, we try to follow current law. The 
alternative fiscal scenario is meant to track more closely what 
many people think of as current policy.
    What we do for revenues in that scenario is simply to hold 
them at the historical average share beyond 2021 without trying 
to specify ourselves what combination of specific tax policies 
the Congress might enact to hold revenues at that level. So 
there is no specific answer to whether any given tax is in or 
out of that alternative scenario beyond 2021. We have just set 
revenue at the historical average to provide information for 
the Congress of what might happen if that sort of policy or set 
of policies were continued.
    Co-Chair Hensarling. I have a question about the overseas 
contingency operation, the OCO funding. I believe that you have 
recently readjusted your baseline, but we all know that the 
President announced that our military engagement in Iraq will 
end this year. And the President plans to completely reverse 
the surge in Afghanistan, I believe, by this time next year.
    But I still think you are showing a pretty hefty sum in the 
overseas contingency operation line item. So can you explain to 
us the assumptions underlying this OCO number?
    Dr. Elmendorf. Yes, Congressman. What CBO does for any part 
of discretionary spending that is not capped under law is to 
take the latest funding that has been provided by the Congress 
and to extrapolate that over the decade to grow with inflation.
    So when we estimated the effects of the caps under the 
Budget Control Act at the end of July and in early August, we 
compared those caps not with the latest baseline projections we 
published in March, but with the later level of funding that 
the Congress had enacted at the end of March as part of the 
deal to get through the rest of the fiscal year.
    So, similarly now, although our latest baseline projection 
was published in August, we would focus in estimating any caps 
that one might impose on overseas contingency operations on the 
difference between those caps and the level that is the latest 
level that has been appropriated by the Congress. And that 
latest level is about $119 billion on an annual basis.
    If one extrapolates that $119 billion with growth for 
inflation, one ends up with about $1.3 trillion over the coming 
decade. And for that, as for other complements of discretionary 
spending, we don't make an evaluation about how those numbers 
compare with the likely demand for funds or with any particular 
evaluation of the appropriateness of the spending. It is a 
mechanical extrapolation.
    If you thought we would spend less than that over time, 
then one could----
    Co-Chair Hensarling. If I could, Dr. Elmendorf, I see I am 
already over my time. But I guess it is fair to say that under 
your protocols and your rules, the President's recent 
announcement that this money is essentially not going to be 
spent anyway does not come into your calculation?
    Dr. Elmendorf. Not until the Congress enacted a different 
level of appropriations, Congressman.
    Co-Chair Hensarling. Thank you. Thank you.
    Chairman Murray. Thank you very much. Can I just ask how 
closely has that extrapolation tracked over the last 5 years?
    Dr. Elmendorf. Well, the written testimony shows the 
pattern of funding the Congress has provided. For the past 
several years, the annual funding was on the order of $160 
billion. So this new level is about $40 billion below the level 
that has prevailed in fiscal years 2009, 2010, and 2011.
    Chairman Murray. Okay. Thank you.
    We will now move to each of our committee members for 6 
minutes, and we will begin with Representative Becerra.
    Representative Becerra. Dr. Elmendorf, thank you very much 
for being here, and thank you for the work you are helping us 
do over these last several weeks and, hopefully, over the next 
few weeks as well.
    Let me just try to dispose of one question real quickly. 
One of our major problems is the drop in revenues we have seen 
over the last several years, and we are trying to tackle the 
issue of how to best increase those revenues.
    One of the ways you do that is through economic growth. If 
folks are back at work, unemployment rates go down. That means 
you are paying less in unemployment benefits, which is an 
outflow of money, and you are also increasing your revenues 
because people are paying taxes again.
    My understanding is that if you increase the level of 
employment by a certain amount, you will see a commensurate 
decrease in the level of deficits and, of course, a 
commensurate increase in the GDP. Can you give us a real quick 
synopsis of what happens if we put people back to work?
    Dr. Elmendorf. So the stronger the economy is, as you say, 
Congressman, the more the Federal Government and other 
governments collect in revenue and the less it pays out in 
benefits of certain sorts. The biggest response is on the 
revenue side.
    If one is looking for a rule of thumb, people often say 
that the Federal Government's effective tax rate on the margin 
for an extra dollar earned is to collect about 25 cents of that 
in Federal revenue. So an extra dollar of GDP might induce 
another 25 cents or so of extra revenue. That is, of course, a 
very, very rough rule of thumb, and the actual number would 
depend very much on the way in which the economy improved and 
who received the income and how it was taxed and so on.
    Representative Becerra. So the more you put those 15 
million Americans back to work, each of them earning even if it 
is only an average American salary, that is thousands of 
dollars per worker. That effect of a quarter of that dollar 
that each one of those workers earns could be revenue to the 
Government, which would help us decrease these deficits?
    Dr. Elmendorf. That is right, Congressman. It depends, of 
course, on what policies one invokes to move the economy back 
closer toward full employment.
    Representative Becerra. And that is where we invite you 
part of this 12-person panel to help us with those answers.
    Let me move on to another question with regard to 
discretionary spending. My understanding is that your 
projections, and you showed us through some of these charts, 
are what you think might happen if the reductions in some of 
these outlays and in the investments would occur both in 
defense and nondefense over the next 10 years as a result of 
the caps and then, if we are not able to come to some 
agreement, as a result of the triggers in sequestration.
    My understanding is under the caps, there are firewalls 
which separate the savings that we would extract from defense 
from nondefense, but that those firewalls exist for only 2 
years. Your projections go out for 10 years. So are you saying 
that the savings that you show in defense are guaranteed, or 
that is what we presume if the projections continue forward, 
that half of the savings will come from defense and half of the 
savings in the caps will come from nondefense?
    Dr. Elmendorf. So what the Budget Control Act does is to 
establish separate caps on security and non-security funding 
for fiscal years 2012 and 2013, and security funding is both 
defense funding and some other pieces of funding as well. But 
you are right. Beyond those first 2 years, there is no cap on 
overall funding.
    What we looked at in the written testimony was three 
alternatives--one in which the reduction from the inflated 
former baseline with inflated amounts, one in which that was 
taken up almost entirely through cuts in defense spending; one 
in which it was absorbed almost entirely through cuts in 
nondefense funding; and one where it was met through a 
combination, proportional cuts in defense and nondefense 
funding. I presented the middle of those here for simplicity. 
But we looked at the range because, in fact, it will be up to 
future Congresses to decide.
    Representative Becerra. And that is the point I was hoping 
you would make is that it really depends on what Congress does 
where we will see the savings occur?
    Dr. Elmendorf. Yes. Absolutely.
    Representative Becerra. Another quick question. Total up 
all discretionary spending, whether it is for Pentagon, whether 
it is for education, environmental protection, clean water, 
clean air, food safety inspection, total that up. How does it 
compare to the amount that we spend through the tax code 
through what are known as tax expenditures, the tax earmarks?
    Dr. Elmendorf. We haven't published an estimate of that, 
Congressman. I have seen estimates that the sum of tax 
expenditures is about $1 trillion a year. As I mentioned, the 
total funding for discretionary purposes last year is about 
$1.3 trillion.
    Representative Becerra. So we spend almost as much through 
the tax code for certain constituencies as we spend through the 
entire appropriations and allocations process through the 
regular budgetary process. That is the type of spending that we 
are not talking about today, the tax expenditures. But you did 
discuss it some the last time you were here.
    Dr. Elmendorf. Yes. Yes.
    Representative Becerra. Appreciate that very much.
    Final question. I want to thank you for the report you just 
issued on the distribution of income in America and comparison 
over the years. You, I think, highlighted some pretty startling 
numbers about the disparity in income and wealth in America 
today where the top 10 percent, 20 percent of Americans, and 
actually, the top 1 percent of Americans, have really seen a 
concentration of wealth go in their direction, as opposed to 
essentially the very middle of America.
    Can you give us a quick synopsis of what you found?
    Dr. Elmendorf. So we have found, as other researchers have 
found, Congressman, very pronounced widening of the income 
distribution in this country, with reductions in the share of 
national income going to the bottom four quintiles over the 
1979 to 2007 period. And a very large increase, roughly a 
doubling, in the share of national income going to the top 1 
percent of the population.
    Representative Becerra. Thank you. And I see that my time 
is about to expire. So I thank you very much for all your 
assistance.
    Dr. Elmendorf. Thank you, Congressman.
    Representative Becerra. Yield back.
    Chairman Murray. Thank you.
    Senator Kyl?
    Senator Kyl. Thank you, Dr. Elmendorf.
    Let me read to you an email that was sent to interested 
Hill staff by the Associate Director for Legislative Affairs at 
the Congressional Budget Office on October 17th. The subject of 
the email is ``HHS CLASS Announcement on CBO's Baseline.''
    ``On Friday, the Secretary of HHS announced that the 
department does not plan to implement the CLASS Act long-term 
care insurance program under current law. Therefore, in its 
next baseline budget projections, which will be issued in 
January, CBO will assume that the program will not be 
implemented unless there are changes in law or other actions by 
the administration that would supersede Friday's announcement.
    ``Furthermore, following longstanding procedures, CBO takes 
new administrative actions into account when analyzing 
legislation being considered by the Congress, even if it has 
not published new baseline projections. Beginning immediately, 
therefore, legislation to repeal the CLASS provisions in 
current law would be estimated as having no budgetary impact.''
    Now this says that your longstanding policy is to take new 
administrative actions into account. And as you testified in 
response to Representative Hensarling's question, this would 
suggest that you wouldn't necessarily wait for Congress to act.
    The President is commander-in-chief. His troop announcement 
that Representative Hensarling talked about is tantamount, in 
effect, to a Congressional action. He has the ability to 
withdraw the troops down.
    What is the difference between his announcement that we 
will have no presence in Iraq after Christmas and his previous 
decision and announcement that we would withdraw in stages the 
troops from Afghanistan over the ensuing year, what is the 
difference between that announcement and the CLASS Act 
announcement in terms of CBO baseline decisions?
    Dr. Elmendorf. I think the difference, Senator, is a 
difference between the treatment of mandatory spending and 
discretionary spending, laid out at least by 1985 in the 
Balanced Budget and Emergency Deficit Control Act and followed 
since then by CBO in conjunction with the Budget Committees.
    For mandatory spending, and the CLASS Act falls in this 
category, a program where Congress has established certain 
rules, parameters within which administrative actions can be 
taken, we are always trying to provide our latest estimate of 
the effects of that set of authorizations on the Federal 
budget. And if there is news in the form of a very distinct 
announcement that some program has been abandoned, then we 
adjust the scoring base for those mandatory programs.
    But for discretionary spending, our projections don't 
respond to particular sets of programs or objectives because 
the Congress can choose every year how much to provide for 
certain purposes. So----
    Senator Kyl. But if I could interrupt, this is a 
distinction without a difference. The President is the 
commander-in-chief. He is the person that deploys troops, not 
Congress. So are you saying that that difference requires you 
to wait until Congress acts, even though the commander-in-chief 
has already made his announcement and begun the program for 
withdrawal?
    Dr. Elmendorf. Yes, Senator----
    Senator Kyl. They have--in theater, they are making plans 
as we speak on how they are going to withdraw the troops from 
Iraq.
    Dr. Elmendorf. But, Senator, with respect, I think it is a 
distinction with a difference. We are not equipped to project 
what defense funding the President will request in the future 
or what funding the Congress will enact in the future.
    Senator Kyl. So are you----
    Dr. Elmendorf. This news from the administration is a 
factor that will presumably affect the funding they request and 
the funding Congress enacts, but not necessarily in a one-to-
one way that we could analyze.
    Senator Kyl. So this memorandum that was sent should have 
distinguished between mandatory and discretionary spending when 
it talks about CBO's policy. ``CBO will assume the program will 
not be implemented unless there are changes in law by the 
administration that would supersede the announcement. Following 
longstanding procedures, it takes new administrative actions 
into account.''
    So they should have distinguished between mandatory and 
discretionary. Is that what you are saying?
    Dr. Elmendorf. I think you are right, Senator. I should 
have put that word in. But just to emphasize, the things I am 
describing on both the discretionary and mandatory side are 
procedures that go back at least a quarter century.
    Senator Kyl. So then with regard to the so-called OCO 
savings that the President included in his alleged budgetary 
savings, it all depends upon whether the defense appropriations 
legislation is passed or when that legislation is passed as to 
whether you would change your baseline? Is that correct?
    Dr. Elmendorf. Yes. So Congress enacts a different level of 
appropriations at any point, then anything we would do after 
that point would respond to that new level of enacted 
appropriations.
    Senator Kyl. Thank you.
    So if we are able to get the appropriations bills completed 
before the December 23rd deadline for this committee to act, 
much of the alleged OCO savings would no longer be available 
because of an adjustment in your baseline projections. Would 
that be correct?
    Dr. Elmendorf. Well, I don't know, Senator. It depends what 
level appropriations you enacted.
    Senator Kyl. To the extent they are lower than the previous 
year's, would it not cut that amount from your baseline?
    Dr. Elmendorf. To the extent that they are lower than the 
$119 billion that has already been enacted for this fiscal 
year----
    Senator Kyl. Correct.
    Dr. Elmendorf [continuing]. That is a good deal lower than 
the $159 billion from the last fiscal year. If, in fact, the 
Congress decided to enact appropriations for the rest of this 
fiscal year that were below $119 billion for overseas 
contingency operations, then that would bring down our 
projection of those and the base against which we would 
estimate further reductions, importantly.
    Senator Kyl. Thank you very much.
    Dr. Elmendorf. Thank you.
    Chairman Murray. Senator Baucus?
    Senator Baucus. Thank you, Madam Co-Chair.
    I would like to just focus a little bit on defense 
spending. Is it true that our current level of defense 
spending, including OCO--otherwise known as overseas 
contingency operation, otherwise known as war funding--is 
higher now in historic terms compared with any other time in 
American history except for World War II?
    That is, is the current level of defense spending, 
including war funding, greater now than during the Korean War?
    Dr. Elmendorf. Yes, I believe that is true, Senator.
    Senator Baucus. Okay.
    Dr. Elmendorf. As I showed in my testimony, as a share of 
GDP, that spending is----
    Senator Baucus. No, I am not talking about--no, no. I am 
not talking about share of GDP.
    Dr. Elmendorf. In dollars----
    Senator Baucus. Dollars.
    Dr. Elmendorf. Dollars adjusted for inflation?
    Senator Baucus. Dollars. Dollars. Dollars adjusted for 
inflation.
    Dr. Elmendorf. Yes. So, in dollars adjusted for inflation, 
DoD spending was about $240 billion during the Korean War, and 
in 2011, it is nearly $700 billion.
    Senator Baucus. Okay. So the same would be true for the 
Vietnam War? That is, we are spending more dollars----
    Dr. Elmendorf. Yes.
    Senator Baucus [continuing]. Than we did in Vietnam, 
adjusted for inflation?
    Dr. Elmendorf. Yes, Senator.
    Senator Baucus. Adjusted for inflation. Thank you.
    And more than we ever did during the Reagan administration, 
adjusted for inflation?
    Dr. Elmendorf. Yes, Senator.
    Senator Baucus. And more than the Cold War average?
    Dr. Elmendorf. Yes, Senator.
    Senator Baucus. Which is the highest since World War II. Is 
that correct?
    Dr. Elmendorf. So by our--I think during the Reagan 
administration, yes, that was higher than in the Vietnam War or 
Korean War.
    Senator Baucus. Okay. We have already touched on this, but 
I just want to nail this down. The Budget Control Act, as you 
mentioned, had two separate caps--for what is it, 2012----
    Dr. Elmendorf. 2012 and 2013.
    Senator Baucus [continuing]. And 2013, but no separate caps 
for security and non-security thereafter?
    Dr. Elmendorf. Yes, Senator.
    Senator Baucus. Which means that the Appropriations 
Committees of the Congress could decide to spend more on 
security than is allowed under the caps in the first 2 years?
    Dr. Elmendorf. Yes. It can pick any allocation under those 
total caps that it chooses.
    Senator Baucus. Anything they want to do under those total 
caps?
    Dr. Elmendorf. Yes. Now if this committee doesn't achieve 
any additional savings, then the enforcement procedures 
establish separate caps for defense and nondefense 
discretionary spending.
    Senator Baucus. Okay.
    Dr. Elmendorf. But under the basic caps, you are right, 
Senator.
    Senator Baucus. Okay. So there are basic caps. There are 
base caps in the act. Are there any caps on war spending?
    Dr. Elmendorf. No, Senator. The caps do not constrain war 
spending.
    Senator Baucus. There are no caps on war spending?
    Dr. Elmendorf. No. I think, technically, the caps would be 
adjusted upward by any amount of spending that was designated 
by the Congress for overseas contingency operation.
    Senator Baucus. That is a technical point. The main point 
is there are specific caps for security and non-security at 
least for 2 years, then no caps in the act for subsequent 
years, and no caps whatsoever on OCO.
    Dr. Elmendorf. That is correct, Senator.
    Senator Baucus. Nothing.
    Dr. Elmendorf. Yes.
    Senator Baucus. Okay. No caps on OCO.
    Now has the Appropriations Committee sometimes gone to OCO 
to spend dollars that are really arguably not war funding 
because that is a kind of an extra pot of money to use? It is 
there, and there are no caps on it. Has that ever happened?
    Dr. Elmendorf. Senator, I can't speak to the motivations or 
thought process of the Appropriations Committee. Certainly, 
there will be inevitably some ambiguity in any effort to 
allocate costs, and what costs are truly attributable to these 
wars and what costs are not will be a matter of judgment. And--
--
    Senator Baucus. Okay. Didn't the Senate Appropriations 
Committee propose--maybe they actually did--to move $9.9 
billion of base programs requested by the President to this 
account?
    Dr. Elmendorf. I think over the past few years, Senator, 
there have been some movement of money that used to be 
designated as OCO into base budgets, and I think some movement 
in the other direction as well. I am afraid I don't have an 
overall assessment of the numbers involved.
    Senator Baucus. What about there are reports that--and this 
obviously double-checked--$100 million was taken out of OCO for 
migration and refugee assistance for places like Kenya and 
Pakistan?
    Dr. Elmendorf. I am sorry, Senator. I don't know.
    Senator Baucus. But we do know that there is no limit on 
the OCO account. And let me ask, how is it defined? What are 
the definitions of what constitutes and does not constitute 
appropriate spending out of the war account?
    Dr. Elmendorf. So, in our presentations, we follow the 
labeling provided by the Congress, and it is up to you and your 
colleagues to decide what you support under various categories.
    Senator Baucus. But it just kind of sounds like it is what 
Congress wants to do.
    Dr. Elmendorf. That is our--yes, Senator.
    Senator Baucus. And that sometimes happens around here. But 
you are saying there are no scoring rules under the Budget 
Control Act that would restrict the migration of base defense 
spending to OCO in the future?
    Dr. Elmendorf. I think that it is up to the Congress, as I 
said, to designate what it views as related to those operations 
and what it views as part of spending that would happen anyway.
    Senator Baucus. And if this committee were to say dollars 
could not be spent on a certain program, my understanding is 
that that would not be scored by your office?
    Dr. Elmendorf. Again, a certain discretionary program--
Senator Kyl has taught me to be very careful about that. 
Changes to mandatory programs, of course, we would do estimates 
of. But changes in individual discretionary programs, we would 
not take account of because we are relying on the overall level 
of the caps.
    Senator Baucus. Correct. Correct.
    Dr. Elmendorf. And the squeezing of one particular program 
without a change in the cap level----
    Senator Baucus. Right.
    Dr. Elmendorf [continuing]. We think would be filled by 
other----
    Senator Baucus. What if this committee were to establish 
caps? Would that be scored? What if there were a cap on OCO?
    Dr. Elmendorf. If the committee established caps on OCO 
that were below the level of funding that is based on the 
extrapolation with increases for inflation from the latest 
enacted appropriations, then we would estimate savings from 
that.
    Senator Baucus. And you are suggesting about one-point--
what did you say?
    Dr. Elmendorf. About $1.3 trillion.
    Senator Baucus. About $1.3 trillion.
    Dr. Elmendorf. Yes.
    Senator Baucus. Uncapped?
    Dr. Elmendorf. Yes. And that is just the--it is not magic. 
That is the $119 billion, the most recently enacted, 
extrapolated with inflation.
    Senator Baucus. Extrapolated forward with no caps?
    Dr. Elmendorf. Yes.
    Senator Baucus. Okay. But if we were to set a cap, then 
that would be scored?
    Dr. Elmendorf. We would estimate the effects. Yes, Senator.
    Senator Baucus. Thank you.
    Chairman Murray. Thank you, Senator Baucus.
    Representative Upton?
    Representative Upton. Thank you, Madam Chair.
    And again, Dr. Elmendorf, we appreciate your participating 
today. And I just want to take us back to a question from 
earlier days, and that is, as this committee works to try and 
get an agreement, a solution, what is the real date that you 
want us to give you the information that your worker bees can 
turn out a reasonable number for us?
    Dr. Elmendorf. So, as you know, Congressman, our legions of 
skilled analysts are working very hard for this committee 
already.
    Representative Upton. Have they had time off until now?
    Dr. Elmendorf. No, Congressman, I am afraid not. We have a 
terrifically hard-working group, as you know.
    As I said the last time I was here, if you have a set of 
proposals that would make changes across a range of mandatory 
spending programs, then that would require us some weeks to 
work with legislative counsel and the staff of this committee 
in refining the legislative language to accomplish the 
objectives that you are setting out to accomplish and then for 
us to produce a cost estimate.
    And backing up from Thanksgiving, that left us looking at 
the beginning of November, which we are very aware, as you are, 
Congressman, is not very far away.
    Representative Upton. Thank you.
    What is the deficit as a share of GDP today?
    Dr. Elmendorf. The deficit in fiscal year 2011 just 
completed was about 8.5 percent of GDP.
    Representative Upton. And if this committee fails and we 
end up with a sequester, and we do the numbers that you 
suggested here in your testimony for both defense and 
nondefense. So that defense we would end up with a sequester 
of, in essence, of $882 billion in savings over the 10 years 
and a number of almost the same, $794 billion, in nondefense 
over that same 10 years, and nothing on the entitlement side or 
nothing on the mandatory side--just those two--where would we 
go in terms of the debt as a percentage of GDP 10 years down 
the road?
    Dr. Elmendorf. So, Congressman, let me be clear. These 
numbers at the bottom of these tables are a comparison of the 
sequestered cap path to the inflated----
    Representative Upton. Right. Right.
    Dr. Elmendorf [continuing]. Extrapolation. It is not the 
amount of the sequester or the enforced budget portion itself. 
Remind you, our baseline projections for August incorporated 
the $1.2 trillion that is under current law to be achieved 
either through the actions of this committee or through these 
enforcement procedures.
    So whether the committee hits $1.2 trillion or hits the 
last--the remainder is filled in to the enforcement, as long as 
you don't save more than $1.2 trillion, you are putting 
yourself back to our baseline projection from the summer. Under 
that projection, allowing for the expiring provisions of the 
tax code to expire and Medicare payments to doctors to be cut 
very sharply and the other features of current law, deficits, 
by the end of the decade, are 1.5 percent or so of GDP, and 
debt is actually declining relative to GDP.
    But that hinges absolutely critically on revenues rising 
above their historical average share of GDP, as it would under 
current law, and discretionary spending falling well below its 
average share of GDP in order, essentially, to make room for 
the great increase in Social Security and the major healthcare 
programs.
    Representative Upton. I didn't know if you saw the GAO 
report that was released earlier this week as related to if 
this committee fails that--or I want to say that $1 trillion in 
savings is not sufficient, is the words that they used, for 
stability, and they predicted, in essence, I believe, a credit 
downgrade. Have you had a chance to look at that report?
    Dr. Elmendorf. I have glanced at it, Congressman.
    Representative Upton. Do you have any comments? I know it 
just came out this week.
    Dr. Elmendorf. One technical point, which is that they 
offer two scenarios. One of which is close to our alternative 
scenario based on current policy. The other of which they view 
as closer to current law.
    Nonetheless, what they do in that scenario is to limit the 
increase in tax revenue as a share of GDP that would actually 
happen under current law. Our extended baseline scenario 
incorporates the rising revenues relative to the GDP that would 
persist and go on beyond this next decade.
    So both of their scenarios look worse than our better 
scenario. It is just a difference in policy assumption about 
tax revenue--tax policy. But we certainly agree very much with 
the underlying point of the analysis that under current 
policies, the U.S. Government is on an unsustainable fiscal 
path and that the magnitude of changes that will be needed from 
current policies is very large.
    As I said the last time I testified here, if one wanted to 
consider extending the expiring tax provisions and limiting the 
reach of the alternative minimum tax and adjusting Medicare's 
payments to doctors, the deficit over the coming decade becomes 
$8.5 trillion rather than the $3.5 trillion under current law. 
And debt would be rising relative to GDP to levels that we have 
almost never seen in this country.
    Representative Upton. Thank you.
    Chairman Murray. Representative Clyburn?
    Representative Clyburn. Thank you very much, Madam Chair.
    And Dr. Elmendorf, thank you very much for being here again 
today.
    You may recall that at the first hearing I discussed a 
little bit of the growing wealth gap that exists. I did that 
with some references to unemployment numbers.
    Now your recent report indicates that over the last 28 
years--in my estimation, that is a generation. Over the last 
generation, we have seen an increase in income of upper 1 
percent households in America of 275 percent. During that same 
time, we have seen an increase in the top 20 percent of 65 
percent. But of the bottom 20 percent, only 18 percent.
    Now over that same period of time, for the 60 percent of 
the middle, we have seen income has grown only 40 percent. That 
indicates to me that the middle income is shrinking relative to 
the rest of the country.
    Now if we were to extrapolate that out, as you talked 
about, I would assume that we are where we are because of--
well, let me put it this way. To the extent that Government 
policy has allowed this gap to exist, if we continue current 
policy, then it is fair to say that we are going to experience 
that kind of continued widening of the wealth gap in America, 
in the United States.
    Dr. Elmendorf. So, Congressman, one of the issues that we 
wrestle with in our projections is the evolution of the income 
distribution. The study that we did, as you know, ends with 
data from 2007.
    Representative Clyburn. Right.
    Dr. Elmendorf. What has happened during the past few years 
of the recession and financial crisis is not clear. Although if 
you look in our study, some past recessions have shown some 
narrowing of the income gap, particularly because higher income 
people collect a relatively larger share of their income from 
capital income, which tends to be more cyclical.
    So just where things precisely stand today, I am not sure. 
Our projections do incorporate some ongoing widening of the 
income distribution, but whether is it is on the--whether the 
events of the last 30 or so years will continue at that pace, 
we don't know, and I don't think our projection calls for a 
continued widening to that extent.
    But neither do we see forces at hand that would cause that 
to be reversed in coming years.
    Representative Clyburn. So we don't see anything that could 
possibly shrink that either?
    Dr. Elmendorf. No, again, except for the effects of this 
recession, which we don't have data for. But looking from here 
on, we don't see those underlying factors reversing.
    Representative Clyburn. I would assume then that this--I 
have seen a whole lot in the media in recent days about who is, 
in fact, paying the taxes in the country. I am assuming, as my 
dad used to tell me, ``Don't argue about taxes, son, because if 
you really owe them, that means you made something.''
    So I am assuming that these people are not paying because 
they don't owe anything. They don't owe anything because they 
have not made anything. So that is just an assumption on my 
part.
    But let me look at this economic ladder that we talk about 
a lot. If we are going to see a shrinkage in that gap, it would 
seem to me that we need to start looking at how do you prepare 
people to assume tax-paying responsibilities in our society? 
And we do that by investing in their education, to the extent 
that things like Pell grant, Head Start, Title I for 
disadvantaged people, all of these things are designed to 
prepare people to earn income and, therefore, pay taxes and not 
be on the Government dole, as we like to say down South.
    Am I to believe that if we dramatically reduce that 
investment, then we will dramatically reduce people's abilities 
to assume these responsibilities and to become taxpayers?
    Dr. Elmendorf. You are raising important, but difficult 
questions, Congressman. People's ability to earn income comes, 
as you know, from a whole variety of forces on their lives. 
Federal Government policy is one of those forces. And if 
Federal policy were changed in a way that provided 
significantly less support for people in obtaining educations 
or getting skills, that could well affect their income in the 
future.
    But I don't have a way of quantifying that. It depends very 
much on the specific programs. There is very large research 
literature and a lot of experimentation in the world about 
training programs, for example. And some seem to work well, and 
some seem to work badly. And the ones that work well are 
difficult sometimes to expand to a larger scale.
    So just what role particular Government programs play, 
again, is a much-studied question, and we do some work in that 
area. But there isn't a very good general answer to how 
important that is as a factor relative to other factors 
influencing people's ability to earn income, as you say, and 
then, through that, to pay taxes.
    Representative Clyburn. Well, thank you very much, Dr. 
Elmendorf. This time goes real fast here.
    Dr. Elmendorf. Thank you, Congressman.
    Representative Clyburn. My time has expired.
    Chairman Murray. Senator Portman?
    Senator Portman. Thank you, Co-Chair.
    And thank you, Director Elmendorf, for being with us again 
and for all the hard work that you and your team are doing in 
responding to our many inquiries. Because I said that, I expect 
mine to be prioritized. Kidding, guys. [Laughter.]
    Dr. Elmendorf. We prioritize everybody first, Senator.
    Senator Portman. Thank you, yes. Especially the committee, 
I hope, because we do have a short period of time here, and we 
have a lot of work yet to do.
    You talked a little about jobs and the economy earlier, and 
my colleague Congressman Clyburn just raised this issue, the 
importance of jobs, which is, after all, one way you get people 
paying taxes is to be sure they have the opportunity to earn 
enough money to pay those taxes. And you had said that you 
believe that demand was the key issue, and the source of that 
lack of demand was the tough question.
    And I would just ask you if you could comment on the 
unsustainable fiscal path that you have outlined repeatedly, 
including again today, and the fact that, as you said, we are 
increasing the debt by anywhere from $3.5 trillion to $9 
trillion over the coming decade, depending on whether you use 
the current law or current policy baseline. Reminding us that 
our commitment here is to reach $1.5 trillion and $1.2 trillion 
to avoid sequester. That, of course, isn't even close to the 
increase we are likely to see from the current $14.5 trillion 
debt.
    What impact does that have? I am sure you have looked at 
the Rogoff and Reinhart study and others who have commented on 
the impact of this unsustainable fiscal situation on our 
current economy.
    Dr. Elmendorf. So I think the unsustainable path matters in 
the short run in various ways. Partly, the borrowing the 
Government has done and anticipation of Government borrowing 
can crowd out private investment to some extent. At the moment, 
with private investment weak anyway, the magnitude of that 
crowding out is less clear. In fact, we see Treasury interest 
rates, as you know, being very low at the moment.
    But there can be crowding out of investment. I think beyond 
that, the uncertainty about fiscal policy is probably weighing 
on households and businesses. They can recognize that there 
will have to be, as a matter of arithmetic, changes in taxes 
and/or spending relative to current policy, but they don't know 
what those changes will be. And I think that sort of 
uncertainty is naturally an inhibiting factor in decisions, 
particularly commitments of money over time to invest in 
factories and equipment, to invest by hiring people, for 
households to invest in housing and durable goods.
    That uncertainty is a piece, I think, of broader 
uncertainty about Government policies. There are a lot of 
different policies that are, I think, up in the air in a way. 
And that policy uncertainty, of course, is a piece of a much 
broader uncertainty about the state of the economy and the 
income that households think they will have in the future and 
the demand for the goods and services that businesses think 
they will have in the future.
    Senator Portman. Well, I appreciate that. And as an 
economist, I appreciate your giving us really a sense of the 
importance of our task because it is not just about cutting 
spending, is it? It is about the economy and jobs. And although 
we are not called the jobs committee, what we do will affect 
that sense of certainty and predictability going forward.
    Dr. Elmendorf. Yes.
    Senator Portman. And again, not in the substantial ways 
that we would hope, all of us, but it will make a difference 
and take us in the right direction. The alternative, of course, 
has been talked about today as well, which is if we don't do 
our work, what impact that could have, even make our prospects 
for economic growth more negative.
    Let me use some figures here that you may not trust because 
they are from the Office of Management and Budget. And you said 
earlier that you trusted the CBO figures, but I think they are 
consistent with yours. And let me start by saying I totally 
agree with what you said earlier. Mandatory spending dominates 
the Federal--or mandatory spending dominates the Federal 
spending. That was your quote a few minutes ago.
    Co-Chairs Murray and Hensarling have also made that same 
point in various ways from a little different perspective, and 
I totally agree with that. I think if this committee doesn't 
get at the issue, which is the biggest part of our budget, over 
50 percent of the budget--60 percent, if you include interest 
on the debt--and the fastest-growing part of our budget has 
gone from roughly 25 percent of our budget in the 1960s to over 
50 percent today.
    If we don't get at that, the largest part and the fastest-
growing part of the budget, we will, of course, not have 
accomplished our goal. But having said that, let me give you 
some statistics on the discretionary side, since that is the 
topic of our hearing today. I will give you some numbers from 
1990 until today.
    Nondefense discretionary has risen during that time by 95 
percent, which, by the way, is nearly double the 52 percent 
growth in defense spending. So if you took 52 percent growth in 
defense spending from 1990 until today, 95 percent on 
nondefense. Now admittedly, the defense spending is not as high 
because the increases we have seen have been more recent, from 
2001, which reflected an increase from the cuts in the 1990s on 
defense. So if you use just the last decade, defense would be 
higher.
    But let us look then at 2001 to 2011 on the nondefense 
side. Outlays on the education side, discretionary spending up 
116 percent in the last 10 years. International spending up 102 
percent. Veterans spending up 100 percent. Community and 
regional development spending up 71 percent. Health research 
and regulation spending up 56 percent, and so on.
    So I just think we need to keep both of these things in 
mind. One, that if we don't deal with the spending issues, it 
is tough to get this economy going. And second, we have seen 
some substantial increases in the discretionary spending, 
understanding that the BCA has now put those spending levels 
under more constraints. Do you agree with those numbers?
    Dr. Elmendorf. I don't know those--have this back of the 
hand, Senator. But I would not argue with your numbers.
    Senator Portman. Well, again, thank you for all your help 
to help us achieve the goal we have all talked about today, and 
we look forward to working with you going forward.
    Dr. Elmendorf. Thank you, Senator.
    Chairman Murray. Senator Kerry?
    Senator Kerry. Dr. Elmendorf, thank you very much for being 
here. Thank you for the terrific work you and your team are 
doing. We appreciate it.
    It is my understanding that CBO keeps regular estimates on 
the number of jobs that have been created by the American 
Recovery and Reinvestment Act. Is that correct?
    Dr. Elmendorf. Yes, Senator. We are required to publish 
estimates once a quarter.
    Senator Kerry. Right. And so, just quickly, because I don't 
want to spend much on time, is it not correct that without the 
policies of the American Recovery and Reinvestment Act that GDP 
would be lower and unemployment would be higher?
    Dr. Elmendorf. Yes, Senator.
    Senator Kerry. So it has had a positive impact on GDP and 
on reducing unemployment?
    Dr. Elmendorf. Those are our estimates, Senator. Yes.
    Senator Kerry. Now, with respect to our work here in the 
committee, I talked to you last time you were here about 
``going big,'' about a $4 trillion total target if you include 
the money already cut, $3 trillion if you don't. It is my 
understanding that you already have in your baseline an 
accounting for $1.2 trillion in deficit reduction by this 
committee. Is that accurate?
    Dr. Elmendorf. Yes.
    Senator Kerry. So if all we do in this committee is $1.2 
trillion, we, in effect, are not reducing the deficit below the 
current levels or rates?
    Dr. Elmendorf. That is right. That is because of these 
automatic enforcement procedures. If you don't take explicit 
action, there is a backup plan, which is the further cuts in 
spending that I have outlined here.
    Senator Kerry. Now with respect to the bigger deal, so to 
speak, would you tell the committee or share with the committee 
your perception of assuming you had a $3 trillion reduction, 
which included something along the ratios we have all heard 
about either in Rivlin-Domenici or in Simpson-Bowles or Gang of 
Six, somewhere in the vicinity of 3-to-1 or 2-to-1 of cuts to 
revenue, and assuming that the revenue were to come exclusively 
from the highest-end people, that 275 percent increase in 
income, can you make a judgment as to what the impact would be 
on the marketplace and perceptions of deficit reduction or job 
growth that come from the $3 trillion versus just achieving the 
$1.2 trillion goal?
    Dr. Elmendorf. So just looking at the aggregate deficit 
reduction, I think it is clear that larger reductions coming 
from the work of this committee would have a positive effect on 
current spending and on current output and employment. And 
conversely, that a failure of this committee to reach agreement 
or for Congress to enact an agreement reached by the committee 
would have a negative effect on confidence and, thus, on 
spending.
    Senator Kerry. And if we do simply $1.2 trillion or $1.5 
trillion, which is the target goal, and that is all we do, 
isn't it a fact that we are going to be back here in about a 
year or 2 or 3, at maximum, dealing with the very same issues 
that are on the plate now about the unsustainability of our 
budget?
    Dr. Elmendorf. Yes, Senator. And I think that is certainly 
right.
    Senator Kerry. So in terms of the duty that Co-Chair 
Hensarling has talked about to provide language to 
significantly reduce, the most important message to the 
marketplace, I am told, comes if you achieve a $4 trillion 
total, which is the only way to begin to stabilize the debt. Is 
that not accurate?
    Dr. Elmendorf. Yes, the amount that is needed depends, very 
importantly, on how you view the expiring tax provisions and 
some other provisions of current law that would take us away 
from current policies to which people have become accustomed. 
If one extends all or a large share of the expiring tax 
provisions over the next few years, then the gap between 
spending and revenues over the coming decade becomes much 
larger, and much more other action is needed in order to 
achieve any given objective for the path of debt relative to 
the size of the----
    Senator Kerry. Well, can you share with the committee what 
would have a greater negative impact on growth--the failure of 
the committee to come up with more than $1.2 trillion or $1.5 
trillion and the marketplace signals that would send about the 
continued fiscal plight of the country, or an ability to come 
up with a $3 trillion or $4 trillion level that had that 3-to-
1, 2-to-1 ratio that I talked about with any revenue coming 
either from closing tax loopholes or exclusively from that 
high-end 275 percent increase income earner?
    Which would have the greater negative impact on our 
economy--finding some revenue from those folks and getting a 
deal, or having no deal and not having that revenue?
    Dr. Elmendorf. I am afraid, Senator, I can't analyze the 
sort of policy proposals you are describing in my head.
    Senator Kerry. Well, can you analyze----
    Dr. Elmendorf. And we have not done an analysis of any of 
the packages you have described.
    Senator Kerry. But you can analyze--I mean, you have told 
us that if we fail to come up with anything that deals with the 
unsustainability, we are sending a bad message to the 
marketplace, aren't we?
    Dr. Elmendorf. Yes. Again, I think in terms of the amount 
of deficit reduction, the more that this committee can achieve 
over some period of time, the better that would be for current 
confidence. But I can't weigh that off against the effects of 
sort of a hypothetical combination of specific spending and tax 
changes.
    Senator Kerry. Well, leave the hypothetical out. Can you 
tell us what, for instance, the expiration of the top end of 
the Bush tax cut, if it went from 35 to 39.6 and it was part of 
a $4 trillion deal, would that have a negative impact on growth 
in our economy?
    Dr. Elmendorf. So we actually did last fall, for the Senate 
Budget Committee, provide estimates of the effects on the 
economy of different ways of extending the expiring tax 
provisions, and extending them had the negative effect of 
reducing deficits, the positive effect of keeping marginal tax 
rates lower and, thus, encouraging work and saving.
    In our estimates, the negative effects of the extra debt 
was larger than the positive effects of lowering marginal tax 
rates for those particular policies we looked, again, over the 
medium and longer term. But that is why the answer really 
depends on the specifics of the policies.
    Senator Kerry. Thank you very much. I appreciate it.
    Chairman Murray. Representative Camp?
    Representative Camp. Well, thank you, Co-Chair.
    Mr. Elmendorf, is there anything in the Budget Control Act 
that would prevent the Congress from changing how the sequester 
would affect defense spending?
    Dr. Elmendorf. I mean, the Congress could enact a change in 
law that could override the Budget Control Act.
    Representative Camp. So there is nothing in the Budget 
Control Act that would prevent that?
    Dr. Elmendorf. No. I mean, in general, as you know, any 
Congress can reverse the actions of a previous Congress.
    Representative Camp. I appreciate your response to a 
question by Senator Murray that you believe that your 
projections on GDP growth are too generous and that you believe 
actually they would be lower, which would mean actually our 
deficit is worse than you have projected in the past. But under 
your projections, you are assuming a 30 percent cut to 
physicians in Medicare, are you not?
    Dr. Elmendorf. Yes.
    Representative Camp. And you are assuming that taxes go up 
$3.8 trillion, that everybody's taxes go up, certainly would 
have a detrimental effect on the economy. And you are assuming 
that there is a cut in discretionary spending.
    So, as you project that and in answer to Mr. Upton's 
question that deficits are going to decline as a percentage of 
our GDP, it is based on all of these assumptions, which, 
frankly, would impact that number particularly in one way. I 
would just have to say----
    Dr. Elmendorf. As you know, Congressman, it is not our 
assumptions. We are following current law in that way.
    Representative Camp. But these are assumptions you baked 
into your proposals, into your testimony today. I am just 
trying to point that out.
    And under either of your long-term fiscal projections, 
spending on entitlements or mandatory health programs, Social 
Security, et cetera, will increase between 15 and 17 percent of 
GDP, of our gross domestic product. And net interest costs will 
increase to between 4 and 9 percent. And under either of those 
scenarios, that crowds out discretionary spending, even if 
assuming the highest levels of revenue this country has even 
seen.
    So I guess my question is under even the best of 
assumptions, the rosiest of assumptions, total discretionary 
spending under that sort of long-term scenario was about 1 
percent of GDP versus the 9.3 percent it is today. And I guess 
I would say to you, your response to that suggestion or those 
calculations, do they sound correct to you?
    Dr. Elmendorf. So, again, I don't have our long-term 
numbers at hand. We extrapolate--for our projections over the 
long term also, we extrapolate discretionary spending according 
to some simple rule of thumb. What the Congress ultimately did 
when it reached an unsustainable point, we can't predict.
    Representative Camp. Well, presuming my question then that 
if, under the rosiest of assumptions, given those long-term CBO 
projections that discretionary spending is just 1 percent of 
GDP, has that ever occurred in recent history?
    Dr. Elmendorf. Well, I mean, I don't know about the 18th 
century. But, no, it has not occurred in recent history.
    Representative Camp. In recent history. Relatively recent 
history.
    Dr. Elmendorf. No.
    Representative Camp. So we have never been at that level?
    Dr. Elmendorf. No.
    Representative Camp. And I think the question is could we 
operate a functioning Government at just 1 percent of 
discretionary spending of GDP?
    Dr. Elmendorf. Nothing like the Government that we are now 
accustomed to in either defense or nondefense programs.
    Representative Camp. And again, with your testimony that 
mandatory spending, as you said, dominates the Government 
budget I think was your quote. You also said it is a growing 
share of spending. It is growing rapidly. Doesn't this 
illustrate that as part of what we are trying to do, the need 
to rein in mandatory spending is obviously one of the 
priorities that we need to address?
    Dr. Elmendorf. Again, it is up to the committee to choose 
what changes in policy it wants, but certainly, a growth in 
mandatory spending, particularly for healthcare and also in 
Social Security, is the feature of the budget that makes the 
past unrepeatable. It is the change under current policies 
because of the aging of the population and the rising costs of 
healthcare that push up that spending in such a substantial way 
that require us as a country and you as our elected leaders to 
make choices to make the future different in some way from the 
past.
    And whether that is through changes in those programs or 
changes in tax revenues or changes in other Government programs 
is up to you, as you know.
    Representative Camp. Thank you.
    I yield back, Madam Chair.
    [Disturbance in hearing room.]
    Chairman Murray. The committee will be in order, please. 
The chair wishes to remind all of our guests that----
    [Disturbance in hearing room.]
    Chairman Murray. I would request that the Capitol Police 
restore order.
    The committee shall recess until we are in order. [Recess.]
    Chairman Murray. Thank you very much.
    Representative, you can continue.
    Representative Camp. No, I had yielded back, Madam Chair.
    Chairman Murray. All right. We will turn to Representative 
Van Hollen.
    Representative Van Hollen. Thank you, Madam Chairman.
    Thank you, Dr. Elmendorf, for your testimony.
    Just to be clear, if the Congress was to take action to 
repeal the defense portion of the sequester, all things being 
equal, that would make the deficit worse. Correct?
    Dr. Elmendorf. Yes.
    Representative Van Hollen. Thank you.
    Let me just go back to I think sort of an overall theme 
here, which is that as a share of GDP, under current law, 
nondefense discretionary spending is shrinking dramatically 
over the next 10 years. Is that not the case?
    Dr. Elmendorf. Yes, that is right, Congressman.
    Representative Van Hollen. And in fact, it goes to below 3 
percent in your chart, Figure 6, which as a percent of the 
economy is about the lowest level since the Eisenhower 
administration.
    Now there have been many questions that relate to the level 
of nondefense discretionary spending during the 2007-2008 
period, which was a component of the Recovery Act. Just to be 
clear, in your response to Senator Kerry's question, I think 
you indicated very clearly that that spending as part of the 
overall Affordable Care Act actually helped prevent the economy 
from getting worse. Correct?
    Dr. Elmendorf. I think you mean the Recovery Act--
    Representative Van Hollen. Correct.
    Dr. Elmendorf [continuing]. In 2009 and 2010 and this year.
    Representative Van Hollen. That is right.
    Dr. Elmendorf. And we believe that cuts in taxes and 
increases in Government spending through that act increased 
output and employment relative to what would have occurred 
otherwise.
    Representative Van Hollen. That is right. And as we look 
forward in this committee, and I received a letter from you. I 
think the calculation of the Congressional Budget Office is 
that about a little over one-third of the current deficit that 
we face is a result of the fact that the economy is not at full 
employment. Is that right?
    Dr. Elmendorf. That sounds right. Yes, Congressman.
    Representative Van Hollen. So even though we have prevented 
things from getting a lot worse more quickly, clearly, we have 
a long way to go, and I wanted to follow up on a remark you 
made with respect to infrastructure spending where you said, 
``Many analysts think that the country should spend more in the 
area of infrastructure.''
    CBO, I know, has looked at infrastructure investments. Do 
you believe that that is an effective way to try and boost job 
growth, especially given the fact that we have over 14 percent 
unemployment in the construction sector?
    Dr. Elmendorf. Yes, Congressman. We think a variety of 
Government spending programs, if increased, or Government tax 
revenues, if reduced, would spur economic activity in the next 
few years.
    Representative Van Hollen. And I know CBO has also analyzed 
different forms of investment to see which would be more 
effective. There a lot of folks out there who are unemployed 
through no fault of their own and who are continuing to look 
for work. As I looked at your analyses, one of the most 
effective ways to boost consumer demand, which, of course, is a 
big soft spot, would be to extend support for people who are 
out of work through no fault of their own. Is that right?
    Dr. Elmendorf. Yes, Congressman.
    Representative Van Hollen. Thank you.
    And another issue that is looming on the horizon is as of 
the beginning of next year, the current payroll tax holiday, 
which is in effect for all working Americans, will lapse unless 
the Congress takes action. And if that were to lapse and that 
would mean that working people had less disposable income, 
especially at this point in time, that would also dampen demand 
in the economy, would it not?
    Dr. Elmendorf. Yes, Congressman.
    Representative Van Hollen. And all that dampening of demand 
would mean less economic growth and fewer jobs, would it not?
    Dr. Elmendorf. Yes.
    Representative Van Hollen. Thank you.
    A lot of ground has, obviously, been covered here. I would 
just want to pick up on the question, comment really that our 
Congressman Upton made, and I think we are all very aware of 
the fact that the clock is ticking here. And in my view, we 
have to accomplish an awful lot in a very short period of time, 
especially given your constraints.
    And I really hope that this committee is able to complete 
its mission and come up with a package that serves two 
purposes. One is to try and get the economy moving again and 
put people back to work, and you have described some ways that 
that could be done in response to questions. And as you have 
also indicated, that can also help reduce the deficit over a 
period of time because the sooner you get people back to work, 
the more the economy gets back into gear, the more revenue that 
will come in.
    Secondly, we need to act to put in place a long-term, 
credible, deficit reduction plan that does that in a steady way 
without harming current jobs and economic growth, and we need 
to do it, I believe, in a balanced way, like every other 
bipartisan group that has looked at this challenge recently. 
And so, I hope we can complete that mission.
    As you have indicated in your testimony today and before, 
in that long-term picture, there are two big components. One is 
there is no doubt we have to get a grip on the increasing 
costs, as a result of the baby boom retirement, rising 
healthcare, no doubt about it. And there are smart ways to do 
it, and then there are ways that I think would impose a lot of 
unnecessary pain on Americans.
    But we need to reform the healthcare system so that we 
focus more on the value of care than the volume of care, more 
on quality than on quantity, and then we have to deal with the 
revenue issue. And we all know that in the past decade when 
folks at the very top were paying a little more, the economy 
performed just fine. Twenty million jobs were created. The 
economy was booming. And so, it seems to me that this is a time 
for shared responsibility to address our country's needs, and I 
think your testimony made that very clear.
    So thank you, Dr. Elmendorf.
    Thank you. Thank you, Madam Chairman and Mr. Chairman.
    Dr. Elmendorf. Thank you, Congressman.
    Chairman Murray. Senator Toomey?
    Senator Toomey. Thank you, Madam chairman.
    And thank you, Dr. Elmendorf.
    A couple of quick follow-ups here. First, I know it is your 
view that the recent huge increase in spending and the 
corresponding big deficits have generated more economic growth 
and more job creation than we would have had in the absence of 
those things. But surely you would agree that that essentially 
asks for a comparison to a counterfactual, and as such, it is 
completely impossible to prove?
    Dr. Elmendorf. Yes. That is right, Senator.
    Senator Toomey. Okay. I would just urge us to consider that 
there is another theory here, which is that Government can't 
really create demand on balance. It can substitute public 
demand for private demand, but that it is illusory to think 
that the Government can simply step in and make up for what is 
perceived to be a shortfall of private sector demand.
    And by the way, I would suggest that there are governments, 
such as Greece and Italy and Portugal and Spain, who have 
created a lot of demand domestically through their excessive 
spending, and it is not working out so well for them.
    I wanted to follow up on something. I might have 
misunderstood this, but I thought I heard someone suggest that 
nondefense discretionary spending has been essentially flat for 
about the last decade. And I think we have touched on this in 
various ways, but I just want to be very clear. In fact, by any 
reasonable measure, nondefense discretionary spending has grown 
dramatically, I would say.
    The numbers I have are in 2000, we spent about $284 billion 
in nondefense discretionary spending. In 2010, we spent $550 
billion. We have had a slight reduction in 2011. But this is 
growing, obviously, in nominal terms. It is growing in 
inflation-adjusted terms. It is growing faster than inflation 
plus population growth. It is growing faster than GDP, in fact. 
Isn't that true?
    Dr. Elmendorf. I think that is correct about outlays, 
Senator, and I do show that in one of the figures. The issue, 
though, worth pointing to is that funding, meaning the new 
budget authority the Congress is providing for nondefense 
discretionary purposes, is actually now back down already in 
fiscal year 2011 as a share of GDP to roughly what it was over 
the preceding few decades. And you can see that in Figure 6 of 
the testimony.
    Now you are right as in terms of nominal dollars or in 
terms of real inflation-adjusted dollars, it is certainly up.
    Senator Toomey. Right.
    Dr. Elmendorf. And as a share of GDP, though, there is a 
sharp distinction between the level of outlays in 2011, which 
depended on previous year's funding, and the level of funding 
in 2011, which is the jumping off point for future discussions 
of appropriations.
    Senator Toomey. My point is over this 10-year period, we 
have seen huge growth in nondefense discretionary spending.
    The last point I would just like to ask is I think it is 
your view, but I would like to ask, is it your view that if we 
were to pursue revenue-neutral tax reform that would have the 
effect of broadening the base on which taxes are applied and 
lowering marginal rates, that it is true both with respect to 
such corporate reform or individual reform that that would have 
a pro-growth effect on the economy, which, of course, in turn 
generates more income for the Government?
    Dr. Elmendorf. Yes, that is right. Again, the amount would 
depend on the specifics of the proposal.
    Senator Toomey. Absolutely. But to the extent that we 
pursued that, we would be generating economic growth, therefore 
jobs and revenue for the Treasury?
    Dr. Elmendorf. Yes, Senator.
    Senator Toomey. Great. Thanks very much.
    Chairman Murray. Dr. Elmendorf, thank you very much for 
coming today and testifying.
    And I want to thank all of our members for being short and 
concise. We have a lot of work to do and a shrinking amount of 
time to finish it with.
    Dr. Elmendorf, thank you to you and your entire team for 
the tremendous amount of work that we are putting forward to 
you, and appreciate all of that.
    I do want Members to know that they have 3 business days to 
submit questions for the record, and I hope the witnesses can 
respond very quickly to that. So Members should submit their 
questions by the close of business on Friday, October 28th.
    Chairman Murray. I would also like to inform everyone that 
we are going to have another hearing on November 1st. The topic 
will be ``An Overview of Previous Debt Proposals.'' We will be 
hearing from former Senator Simpson, Erskine Bowles, Alice 
Rivlin, and former Senator Pete Domenici.
    Without objection, this joint committee stands adjourned.
    Dr. Elmendorf. Thank you, Senator.
    [Whereupon, at 11:45 a.m., the committee was adjourned.]


                            A P P E N D I X

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