[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
Additional Material Submitted for the Record
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