[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]



 
                   THE CONGRESSIONAL BUDGET OFFICE'S

                      BUDGET AND ECONOMIC OUTLOOK
=======================================================================



                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET

                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

           HEARING HELD IN WASHINGTON, DC, FEBRUARY 13, 2013

                               __________

                            Serial No. 113-1

                               __________

           Printed for the use of the Committee on the Budget


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                        COMMITTEE ON THE BUDGET

                     PAUL RYAN, Wisconsin, Chairman
TOM PRICE, Georgia                   CHRIS VAN HOLLEN, Maryland,
SCOTT GARRETT, New Jersey              Ranking Minority Member
JOHN CAMPBELL, California            ALLYSON Y. SCHWARTZ, Pennsylvania
KEN CALVERT, California              JOHN A. YARMUTH, Kentucky
TOM COLE, Oklahoma                   BILL PASCRELL, Jr., New Jersey
TOM McCLINTOCK, California           TIM RYAN, Ohio
JAMES LANKFORD, Oklahoma             GWEN MOORE, Wisconsin
DIANE BLACK, Tennessee               KATHY CASTOR, Florida
REID J. RIBBLE, Wisconsin            JIM McDERMOTT, Washington
BILL FLORES, Texas                   BARBARA LEE, California
TODD ROKITA, Indiana                 DAVID N. CICILLINE, Rhode Island
ROB WOODALL, Georgia                 HAKEEM S. JEFFRIES, New York
MARSHA BLACKBURN, Tennessee          MARK POCAN, Wisconsin
ALAN NUNNELEE, Mississippi           MICHELLE LUJAN GRISHAM, New Mexico
E. SCOTT RIGELL, Virginia            JARED HUFFMAN, California
VICKY HARTZLER, Missouri             TONY CARDENAS, California
JACKIE WALORSKI, Indiana             EARL BLUMENAUER, Oregon
LUKE MESSER, Indiana                 KURT SCHRADER, Oregon
TOM RICE, South Carolina
ROGER WILLIAMS, Texas
SEAN P. DUFFY, Wisconsin

                           Professional Staff

                     Austin Smythe, Staff Director
                Thomas S. Kahn, Minority Staff Director



                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, February 13, 2013................     1

    Hon. Paul Ryan, Chairman, Committee on the Budget............     1
        Prepared statement of....................................     3
        Questions submitted for the record.......................    57
    Hon. Chris Van Hollen, ranking member, Committee on the 
      Budget.....................................................     3
        Prepared statement of....................................     5
        Question submitted for the record........................    58
    Douglas W. Elmendorf, Director, Congressional Budget Office..     6
        Prepared statement of....................................     9
        Response to questions submitted for the record...........    58
    Hon. Luke Messer, a Representative in Congress from the State 
      of Indiana, questions submitted for the record.............    58


                   THE CONGRESSIONAL BUDGET OFFICE'S
                      BUDGET AND ECONOMIC OUTLOOK

                              ----------                              


                      WEDNESDAY, FEBRUARY 13, 2013

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:17 a.m. in room 
210, Cannon House Office Building, Hon. Paul Ryan [chairman of 
the committee] presiding.
    Present: Representatives Ryan of Wisconsin, Price, Garrett, 
Campbell, Cole, McClintock, Lankford, Black, Flores, Rokita, 
Woodall, Blackburn, Nunnelee, Renacci, Rigell, Hartzler, 
Walorski, Messer, Rice, Williams, Van Hollen, Schwartz, 
Pascrell, Ryan of Ohio, Moore, Castor, McDermott, Lee, 
Cicilline, Jeffries, Pocan, Lujan Grisham, Huffman, Cardenas, 
Blumenauer, and Schrader.
    Chairman Ryan. If Dr. Elmendorf could take his usual and 
customary position. Kind of feels like Groundhog Day sometimes, 
doesn't it?
    Mr. Elmendorf. Yes.
    Chairman Ryan. Let me start this hearing, first off, by 
welcoming our new members. We have got a lot of new members who 
cover a big cross-section of this country, who represent 
different areas, different views, different philosophies, and I 
just want to first start off by saying how much of a pleasure 
it is to serve on this committee. This is the kind of committee 
where you get to bring your ideas to the table and air them 
out. We have got enormous fiscal challenges ahead of us. We 
have got a debt problem that we all acknowledge must be dealt 
with. We have got a deficit that needs to be brought down. We 
have got an economy that needs growth, and this is one of those 
areas, one of those committees where we need to have this 
debate.
    We are going to be processing legislation. We are going to 
be considering alternatives, and I just want to say on behalf 
of those of us here on this side of the aisle, we look forward 
to engaging our friends on the other side of the aisle in the 
collegial way and comity way we have, and it will be a good, 
vigorous debate. And this is what the country deserves.
    I mean, with that, welcome everybody to today's hearing. 
Thanks, again, Dr. Elmendorf, Doug, for coming and testifying, 
and I want to thank you for your staff for putting together the 
latest budget and economic outlook. We understand you had a bit 
of a time crunch given the end-of-the-year episodes that 
occurred, and I wanted to say that you didn't miss much of a 
deadline, and you put out your baseline and outlook in a fairly 
quick form, given the circumstances that you had to contend 
with.
    I am sorry to say, though, that things don't look good. The 
CBO says that our economy will grow by only 1.4 percent this 
year. Unemployment will hover around 8 percent this year, and 
we will add another trillion dollars to our debt. That is the 
news we just received from the CBO.
    Further down the road, things get worse. The CBO says we 
will add $10 trillion to our total debt by the end of the 
budget window. That debt will weigh down our economy like an 
anchor. Starting in 2019, the economy will grow by a mere 2.2 
percent, much, much lower than the historical average. And when 
people can't find jobs, many stop looking altogether for work. 
In other words, this report is a warning of what is to come if 
we don't get spending under control.
    Publicly-held debt will hit 76 percent of GDP at the end of 
this year. That is the largest share of debt since 1951. In the 
1950s, we paid down our debt. And our economy kicked into high 
gear. These days, we still haven't gotten a handle on spending. 
Total debt already exceeds 100 percent of gross domestic 
product. You see, we are in the danger zone.
    Economists from the right and left say that if you get your 
total debt at that area, you really go into the danger zone. 
Investors might begin to doubt our ability to pay our 
obligations. They might demand higher interest rates. As we 
know on this committee, if they did that, interest rates across 
the country would skyrocket, on mortgages, on credit cards, on 
car loans. One estimate says that an interest rate increase of 
a single percentage point will cost the average family $400 
more each and every year.
    In short, we could have a debt crisis. And the result of a 
debt crisis would be catastrophic, because unlike during the 
financial crisis, government would be unable to borrow more 
money. Instead, the only way out to be austerity, which we are 
witnessing in Europe; big tax hikes and big spending cuts. 
Interest goes up. We literally start losing control of our own 
fiscal situation. We become slaves to interest on the debt. We 
don't have to look far for examples of a debt crisis in action.
    We don't even have to look at Europe. In Central Falls, 
Rhode Island, retirees' pensions have been slashed by up to 55 
percent. In Stockton, California, a quarter of the police force 
has been laid off. If a debt crisis hit this country, the 
social safety net would unravel. The most vulnerable would 
suffer, and we cannot let that happen. This is our obligation 
here in this committee. And if this report shows us anything, 
it is that, primarily, spending is the problem. Spending on 
Medicare and Social Security is set to double. Spending on 
interest is set to quadruple. The CBO expects revenue to double 
in the next 10 years, so taxes are going up. Revenue is rising. 
It is doubling. But even with the President's tax hikes the 
budget never, ever, ever balances. In fact, it doesn't even 
come close.
    By 2023, the deficit will be nearly $1 trillion, just like 
it is today. The President says we need a balanced approach to 
closing the deficit, by which he seems to mean one tax hike 
after another. But the fact is, mathematically, we can't tax 
our way out of this problem. We need to get serious on 
spending. And unfortunately, the President has yet to produce a 
budget. It was due last week. In violation of the law, it has 
yet to be received by Congress. And Senate Democrats haven't 
passed a budget in nearly 4 years. Hopefully that will change.
    We will offer our budget here in the House on time, next 
month, in accordance with the law. We will put our plan up 
against the President's, and we will have a healthy debate in 
the House over the way forward.
    [The prepared statement of Chairman Ryan follows:]

Prepared Statement of Hon. Paul Ryan, Chairman, Committee on the Budget

    Welcome, everyone, to today's hearing. Thanks to Dr. Elmendorf for 
coming to testify. And thanks to your staff for putting together the 
latest Budget and Economic Outlook.
    I'm sorry to say: Things don't look good. The CBO says our economy 
will grow by only 1.4 percent this year. Unemployment will hover around 
8 percent. And we will add another trillion dollars to our debt.
    Farther down the road, things get worse. The CBO says we will add 
$10 trillion to our total debt by the end of the budget window. That 
debt will weigh down our economy like an anchor. Starting in 2019, the 
economy will grow by a mere 2.2 percent--much lower than the historical 
average. And when people can't find jobs, many will stop looking 
altogether.
    In other words, this report is a warning of what's to come--if we 
don't get spending under control.
    Publicly held debt will hit 76 percent of GDP at the end of this 
year--the largest share since 1951. In the 1950s, we paid down our 
debt--and our economy kicked into high gear. But these days, we still 
haven't gotten a handle on spending. Total debt already exceeds 100 
percent of GDP.
    We're in a danger zone. Investors might begin to doubt our ability 
to pay our obligations. They might demand higher interest rates. If 
they did, interest rates across the country would skyrocket--on 
mortgages, on credit cards, on car loans. One estimate says an 
interest-rate increase of a single percentage point would cost the 
average family $400 more each year.
    In short, we would have a debt crisis. And the results would be 
catastrophic--because unlike during the financial crisis, government 
would be unable to borrow more money. Instead, the only way out would 
be austerity: big tax hikes and big spending cuts.
    We don't have to look far for examples of a debt crisis in action. 
In Central Falls, Rhode Island, retirees' pensions have been slashed by 
up to 55 percent. In Stockton, California, a quarter of the police 
force has been laid off. If a debt crisis hit the country, the social-
safety net would unravel. And the most vulnerable would suffer. We 
can't let that happen.
    And if this report shows us anything, it's that spending is the 
problem.
    Spending on Medicare and Social Security is set to double. Spending 
on interest is set to quadruple. The CBO expects revenue to double in 
the next ten years. But even with the President's tax hikes, the budget 
never balances. In fact, it doesn't come close. By 2023, the deficit 
will be nearly $1 trillion.
    The President says we need a ``balanced'' approach to closing the 
deficit--by which he seems to mean one tax hike after another. But the 
fact is, we can't tax our way out of this problem. We need to get 
serious about spending.
    Unfortunately, the President has yet to produce a budget--in 
violation of the law. And Senate Democrats haven't passed a budget in 
nearly four years.
    House Republicans will offer their budget--on time--next month. We 
will put our plan up against the President's. And we will have a 
healthy debate in the House over the way forward.
    With that, I yield to the ranking member, Mr. Van Hollen.

    Chairman Ryan. With that, I would like to yield to the 
ranking member for his opening comments.
    Mr. Van Hollen. Thank you, Mr. Chairman. I want to join the 
chairman in welcoming Dr. Elmendorf, and thank you and your 
team at the Congressional Budget Office for the professional 
work that you do.
    Just at the outset, let me say with respect to the timing 
the President's budget submission. I think all of us who were 
part of the last Congress know that we struggled until January 
2nd to pass legislation to avoid the fiscal cliff. The result 
of that legislation was to make sure that we did not see a 
sharp increase in taxes on middle-income Americans, but we 
asked higher-income individuals to begin to contribute to 
reducing the debt over the long term.
    As CBO has said, that that action did help strengthen the 
economy. If we had actually gone over the fiscal cliff, we 
would be in a world of hurt, but it did take us until January 
2nd, to do it, and we didn't know how much revenue would be 
coming in either this year or in the next 10 years. So it is 
understandable that the President needs a little more time on 
the budget.
    Look, as the Budget Committee, our challenge is to try and 
come up with a blueprint for our country's decisions on 
spending and taxes. And while we talk a lot about numbers, 
ultimately it should be a reflection of where the American 
people are in terms of their values and their priorities. And I 
believe, and I hope we share this view, that as we approach the 
budget, our number one priority has to be expanding economic 
growth, making sure we promote job creation, making sure we 
strengthen the middle class so that we don't have an economy 
that just works for some folks at the very top, but we have an 
economy that works for everybody in terms of rising wages and 
rising incomes, and a plan that meets the commitments we have 
made to people throughout the country, including our seniors.
    That is the overriding goal. And reducing deficits, 
especially over the long term, has to be important part of that 
but it has to be seen in the context of the overriding goal: 
Job creation, strengthening the middle class. And so I hope as 
we have these discussions over how we reduce our deficits, what 
is the timing, and pace, and target of doing that, we look at 
it through the lens of job creation, strengthening of the 
middle class. And that should hold true whether we are talking 
about the short term, the medium term, or the long term.
    Over the long term, there is no doubt, we see rising 
deficits, and the challenges we have said before is not whether 
we reduce those deficits, but again, the magnitude of the 
reduction, the timing of the reduction, and how we do it. And 
as the President said last night, we support taking a balanced 
approach to that, meaning cuts, and I would just remind my 
colleagues that over the last 2 years, including the Budget 
Control Act and previous actions, we will reduce spending by 
$1.5 trillion by capping discretionary spending.
    As a result of the agreement to avoid the fiscal cliff, we 
will raise $600 billion in revenue from higher income earners. 
If you add up the interest savings on that, that is $2.5 
trillion in deficit reduction.
    Yes, we have to do more in outyears, but we believe in 
order to do it the right way and meet our commitments to our 
citizens and preserve economic growth and strength in the 
middle class, we have got to make sure we deal with that in a 
balanced way.
    Now, let me just say in the short term, that means dealing 
with the sequester, Mr. Chairman. You cited the fact that CBO 
projects 1.4 percent growth. None of us want to see growth that 
slow. A full .6 percent of that growth is attributed--of that 
lack of growth, is attributed to the sequester. In other words, 
if we were to replace the sequester in a balanced way, you 
would add .6 percent to growth. And translating that number 
into actual jobs, and we will get testimony from Dr. Elmendorf, 
but we are talking about hundreds of thousands of jobs lost 
this year if we don't replace the sequester.
    Now, we, on the Democratic side have in this Congress 
proposed a plan to replace the sequester. That $85 billion in 
meat-ax cuts, with a mix of cuts, which is in your budget as 
well, dealing with ag subsidies, getting rid of the direct 
payments, but also saying that we shouldn't be providing tax 
breaks to big oil companies, and that we believe we should 
apply the Buffett Rule to people making over $2 million a year.
    We heard a lot of talk during the last election from both 
candidates and all candidates about all of the tax breaks in 
the Tax Code. Well, we should get rid of some of those, and we 
should get rid of some of those for the purpose of deficit 
reduction in a balanced way. And that is what our sequester 
replacement plan does in the short term, and frankly, that is 
what it would do in the long term. So we hope we can have an 
opportunity to have an up-or-down vote, Mr. Chairman, on the 
plan that we have put forward. We put it forward for a vote, at 
least two or three times now. We have going to be in the Rules 
Committee later today asking for a vote on that proposal that 
will save hundreds of thousands of jobs and prevent this 
disruption. And I hope we can have an opportunity, as you say, 
just to have a free flow of debate, and ultimately a vote and 
let the chips fall where they may. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Van Hollen follows:]

      Prepared Statement of Hon. Chis Van Hollen, Ranking Member,
                        Committee on the Budget

    Thank you, Mr. Chairman. I want to join the Chairman in welcoming 
Dr. Elmendorf, and thank you and your team at the Congressional Budget 
Office for the professional work that you do.
    Just at the outset, let me say, with respect to the timing of the 
President's budget submission, I think all of us who were part of the 
last Congress know that we struggled until January 2nd to pass 
legislation to avoid the fiscal cliff. The result of that legislation 
was to make sure that we did not see a sharp increase in taxes on 
middle income Americans, but we asked higher income individuals to 
begin to contribute to reducing the debt over the long term.
    As CBO has said, that action did help strengthen the economy. If we 
had actually gone over the fiscal cliff, we'd be in a world of hurt. 
But it did take us until January 2nd to do it, and we didn't know how 
much revenue would be coming in, either this year or in the next ten 
years. So, it's understandable that the President needs a little more 
time on the budget.
    Look, as the Budget Committee, our challenge is to try and come up 
with a blueprint for our country's decisions on spending and taxes. 
And, while we talk a lot about numbers, ultimately it should be a 
reflection of where the American people are in terms of their values 
and their priorities.
    And I believe, and I hope we share this view, that as we approach 
the budget, our number one priority has to be expanding economic 
growth; making sure we promote job creation; making sure we strengthen 
the middle class, so that we don't have an economy that just works for 
some folks at the very top, but we have an economy that works for 
everybody in terms of rising wages and rising incomes; and a plan that 
meets the commitments we've made to people throughout the country, 
including our seniors.
    That's the overriding goal. And reducing deficits, especially over 
the long term, has to be an important part of that, but it has to be 
seen in the context of the overriding goal--job creation, strengthening 
the middle class. So I hope as we have these discussions over how we 
reduce our deficits, what's the timing and pace and target of doing 
that, we look at it through the lens of job creation, strengthening the 
middle class. And that should hold true whether we're talking about the 
short term, the medium term, or the long term.
    Over the long term, there's no doubt we see rising deficits. And 
the challenge, as we've said before, is not whether we reduce those 
deficits, but, again, the magnitude of the reduction, the timing of the 
reduction, and how we do it. And as the President said last night, we 
support taking a balanced approach to that, meaning cuts--and I would 
just remind my colleagues that over the last two years, including the 
Budget Control Act and previous actions, we will reduce spending by 
$1.5 trillion by capping discretionary spending.
    As a result of the agreement to avoid the fiscal cliff, we will 
raise $600 billion in revenue from higher-income earners. If you add up 
the interest savings on that, that's $2.5 trillion dollars in deficit 
reduction.
    Yes, we have to do more in the out years, but we believe that in 
order to do it the right way and meet our commitments to our citizens, 
and preserve economic growth, and strengthen the middle class, we've 
got to make sure to deal with that in a balanced way.
    Now, let me just say that in the short term, that means dealing 
with the sequester, Mr. Chairman. You cited the fact that CBO projects 
1.4 percent growth. None of us want to see growth that slow.
    A full 0.6 percent of that lack of growth is attributed to the 
sequester. In other words, if we were to replace the sequester in a 
balanced way, you would add 0.6 percent to growth, and translating that 
number into actual jobs--and we'll get testimony from Dr. Elmendorf--
but we're talking about hundreds of thousands of jobs lost this year if 
we don't replace the sequester.
    Now we on the Democratic side have, in this Congress, proposed a 
plan to replace the sequester--that $85 billion in meat ax cuts--with a 
mix of cuts, which is in your budget as well, dealing with ag 
subsidies, getting rid of direct payments--but also saying that we 
shouldn't be providing tax breaks to big oil companies. And we believe 
that we should apply the Buffett Rule to people making over $2 million 
a year.
    We heard a lot of talk during the last election from both 
candidates--and all candidates--about all the tax breaks in the tax 
code. Well, we should get rid of some of those, and we should get rid 
of some of those for the purpose of deficit reduction in a balanced 
way. And that's what our sequester replacement plan does in the short 
term, and frankly, that's what it would do in the long term.
    So, we hope we can have an opportunity to have an up or down vote, 
Mr. Chairman, on the plan that we've put forward. We put it forward for 
a vote at least two or three times now--we're going to be in the Rules 
Committee later today asking for a vote on that proposal that will save 
hundreds of thousands of jobs and prevent this destruction. And I hope 
we can have an opportunity, as you say, just to have a free flow of 
debate and ultimately a vote, and let the chips fall where they may.
    Thank you, Mr. Chairman.

    Chairman Ryan. Thank you. I would love to begin the debate 
right now, but we have a hearing to get into. So, Dr. 
Elmendorf, the floor is yours.

  STATEMENT OF DOUGLAS W. ELMENDORF, DIRECTOR, CONGRESSIONAL 
                         BUDGET OFFICE

    Mr. Elmendorf. Thank you, Mr. Chairman, Congressman Van 
Hollen, and to all members of the committee. I appreciate the 
opportunity to be here today, and to discuss with you CBO's 
outlook for the budget and the economy over the next 10 years. 
Our analysis shows that the country continues to face very 
large economic and budget challenges. Let me discuss the 
economy first and then I will turn to the budget.
    We anticipate that economic growth will remain slow this 
year because the gradual improvement we see in underlying 
economic factors will be offset by a tightening of Federal 
fiscal policy scheduled under current law. The good news is 
that the effects of the financial and housing crisis appear to 
be gradually fading. We expect an upswing in housing 
construction, rising real estate and stock prices, and 
increasing availability of credit will help to spur a virtuous 
cycle of faster growth in employment, income, consumer 
spending, and business investment over the next few years.
    However, several policies that will help to bring down the 
budget deficit will also represent a drag on economic activity 
this year. The expiration of the 2 percentage point cut in the 
Social Security payroll tax, the increase in tax rates on 
income above certain thresholds, and the cuts in Federal 
spending scheduled to take effect next month, will mean reduced 
spending by both households and the government. We project an 
inflation-adjusted GDP will increase by about 1.5 percent in 
2013, but it would increase roughly 1.5 percentage points 
faster were it not for that fiscal tightening.
    Under current law then, we expect the unemployment rate 
will stay above 7.5 percent through next year. That would make 
2014 the sixth consecutive year with unemployment so high, the 
longest such period since the 1930s. We expect that growth in 
real GDP will pick up after this year to about 3.5 percent per 
year in 2014, and the following few years. But the gap between 
the Nation's GDP and what it is capable of producing on a 
sustained basis, the economists refer to as potential GDP, will 
still not close quickly. Under current law, we expect output to 
remain below its potential level until 2017, nearly a decade 
after the recession started in December 2007.
    The Nation has paid and will continue to pay a big price 
for the recession and slow recovery. We estimate that the total 
loss in output relative to the economy's potential between 2007 
and 2017 will be nearly equivalent to half of the total output 
produced in the country last year.
    Let me turn then to the budget. Under current laws, the 
Federal budget deficit will shrink in 2013 for the fourth year 
in a row, and an estimated $845 billion, the deficit would be 
the first in 5 years below $1 trillion, and at 5.25 percent of 
GDP, only about half as large relative to the size of the 
economy as the deficit was in 2009. Our projections, based on 
current law, show deficits continuing to fall over the next few 
years before turning up again in the second half of the decade, 
and totaling nearly $7 trillion over the decade as a whole.
    Federal revenues are projected to reach 19 percent of GDP 
in 2015 and beyond, because of both the expanding economy and 
schedule changes in tax rules. That 19 percent figure compares 
on average of about 18 percent over the past 40 years. At the 
same time, Federal spending will fall relative to the size of 
the economy over the next several years, and then rise again. 
The decline can be traced to the caps on discretionary funding 
and a drop-off in spending attempts to go up when the economy 
is weak, like unemployment benefits. But later in the decade, 
the return of interest rates to more normal levels will push up 
interest payments to nearly their highest share of GDP in 50 
years. And throughout the decade, the aging of the population, 
a significant expansion of Federal health care programs, and 
rising health care costs per person, will push up spending on 
the largest Federal programs.
    By 2023, spending reaches about 23 percent of GDP in our 
projection compared with the 40-year average of about 21 
percent. What does this mean for Federal debt? We project the 
debt held by the public will reach 76 percent of GDP this year, 
the largest percentage since 1950. And under current laws, we 
project the debt in 2023 will be 77 percent of GDP, far higher 
than the 39 percent average of the past 40 years, and it will 
be on an upward path. Such high and rising debt relative to the 
size of the economy is a significant concern for several 
reasons: First, high debt means that the crowding out of 
capital investment will be greater, that you will have less 
flexibility to use tax and spending policies to respond to 
unexpected challenges like a recession, or a war, and that 
there will be a heightened risk of a fiscal crisis in which the 
government would be unable to borrow at affordable interest 
rates.
    Second, debt would be even larger if current laws were 
modified to delay or undo scheduled changes in policies. For 
example, if lawmakers eliminated the automatic spending cuts 
scheduled to take in effect in March, but left in place the 
original caps from the Budget Control Act, if they prevented 
the sharp reduction in Medicare's payment rates for physicians 
scheduled to occur next January, and extended the tax 
provisions that are scheduled to expire, and if no offsetting 
changes were made, then budget deficits would be substantially 
larger than our baseline projections, and debt held by the 
public would rise to 87 percent of GDP by 2023, rather than 77 
percent under current law.
    Third, debt might also be larger than in our projections, 
because even the original caps on discretionary funding in the 
Budget Control Act would reduce such spending to just 5.8 
percent of GDP in 2023, a smaller share than for any year in at 
least the past 50. Because the allocation of discretionary 
funding is determined, as you know, through annual 
appropriation acts, you and your colleagues have not yet 
decided which specific government services and benefits will be 
constrained or cut to meet those caps, and doing so might be 
quite difficult.
    Fourth, projections for the 10-year period covered in this 
report do not fully reflect long-term budget pressures. Because 
of the retirement of the baby-boom generation and rising health 
care costs, a wide gap exists between the future costs of the 
benefits and services that people are accustom to receiving 
from the Federal Government, especially in the form of benefits 
for older Americans, and the tax revenue that people have been 
sending to the government.
    It is possible to keep tax revenues at their historical 
average percentage of GDP, but only by making substantial cuts 
relative to current policies in the large benefit programs that 
aid a broad group of people at some point in their lives. 
Alternatively, it is possible to keep the policies for those 
large benefit programs unchanged, but only by raising taxes 
substantially for a broad segment of the population. Deciding 
now what combination of policy changes to make to resolve the 
budget imbalance would allow for gradual implementation of 
those changes which would give households and businesses time 
to adjust their behavior. Thank you.
    Chairman Ryan. Thank you, Dr. Elmendorf.
    [The prepared statement of Douglas Elmendorf follows:]
    
    
    
    
    
    
    
    
    
    
    
    
    Chairman Ryan. Let me get into the debt itself. We had the 
State of the Union address last night, and you know, as we all 
do, we go to the microphones and give our play-by-play analysis 
of what we thought of the speech and what we liked and what we 
didn't like. One thing stood out that gave me a real cause for 
concern. I heard it just with Mr. Van Hollen's opening 
statement, which gives me very big cause for concern, which it 
seems as if they think the heavy lifting on debt reduction, 
deficit reduction is behind us, as we have just got a little 
bit left and then we are done. The notion that we have already 
got $2.5 trillion of deficit reduction taking care of, it is in 
the bank, we are not much farther to go to finish the job. This 
calculation, this $2.5 trillion of debt reduction does not 
count the spending that took place during that time. It doesn't 
count the stimulus spending, $831 billion. It doesn't account 
for the first payroll tax holiday, $111 billion. It doesn't 
account for the second payroll tax holiday $89 billion. It 
doesn't account for the multiple unemployment extensions. It 
doesn't account for the 24 percent increase in non-defense 
discretionary spending that occurred in the first 2 years of 
the administration. It doesn't account for the disaster 
spending that has taken place annually, or the Sandy 
supplemental. It doesn't account for the debt servicing of all 
of that additional spending.
    You wash it out, you net it out, it is about $500 billion 
roughly of deficit reduction; not $2.5 trillion. But when you 
hear such projections which ignore the spending that occurred 
at the same time, I really worry that part of our government 
here, two-thirds of it, you know, the Senate and the White 
House, and our friends over on the other side of the aisle, are 
deluding themselves into thinking this is taken care of.
    Look, you say in your own report here, publicly held debt 
has doubled from 36 percent of GDP at the close of 2007, to 73 
percent on 2012, on page 3, 77 percent by 2023. I guess this is 
your new alternate fiscal scenario meaning doc fix, all of the 
other things you think Congress will do based on, you know, 
reasonable assumptions. We could go as high as 87 percent of 
GDP of publicly-held debt. Total debt is already above 100 
percent of GDP. If you could bring up chart one.
    Here is the question I have. The green is what you said 
revenues are historically, about 18.3 percent. The blue line 
are all of the tax increases the President has supported, 
endorsed, the loophole closers Mr. Van Hollen talks about, much 
of this has already been enacted, but the fiscal cliff deal 
enacted a good portion of the blue, the revenues the President 
is calling for. The red are your projections on where spending 
is going.
    So even if we got every tax increase that the President has 
called for, we are not even scratching the surface. We are not 
even getting close to fixing this problem. And so the concern I 
have is a couple of things: What happens if we don't get this 
under control? What does a debt crisis look like? What happens 
to families? What happens to a Nation if our debt continues on 
this burden, if we go to where your alternative fiscal scenario 
goes, or where your baseline projection goes, if we don't 
actually turn this around, what happens? That is question 
number one.
    Question number two is, and I am going to ask you this in 
writing, give me some different interest rates scenarios. What 
happens if interest rates rise faster than you are projecting? 
What happens to our ability to control our fiscal situation? 
What happens to our economy?
    Mr. Elmendorf. So Mr. Chairman, let me just quickly clarify 
two points on what you said so we can understand. We have not 
yet updated our long-term budget projection. I presume this 
slide is our new projections for the coming decade and your 
extrapolation beyond that, but it certainly is the case in our 
long-term outlook last year, and I presume will be true in our 
long-term outlook this year, that spending, particularly on the 
large health care programs and on Social Security, will 
continue to rise as a share of the economy over time driven 
most importantly by the aging of our population, and the rising 
number of eligible beneficiaries, and also due to other factors 
as well.
    The second point to clarify is that alternative fiscal 
scenario is not meant to be a projection of what actually you 
and your colleagues will do. As you know, it is a projection of 
what current policies would cost; in fact, we all presume that 
you will make some changes in policies over the decade, but it 
is an additional benchmark that many of you have found helpful 
in the past in addition to our standard presentation of what 
would happen under current law.
    Chairman Ryan. Because you have a new AFS baseline, what is 
the basic assumption, because we had some new things that 
happen that deal with the fiscal cliff.
    Mr. Elmendorf. So people understand, our basic projections 
follow current law. That assumes, for example, now, that the 
tax provision scheduled to expire at the end of this year, many 
of which are routinely extended, our current law projection 
assumes they will expire. In our alternative scenario, we 
extend all of those expiring tax provisions. Current law 
includes a cut in Medicare's payments to doctors at the end of 
this year. Congress has routinely pushed off that cut and made 
other changes in health care policy along the way.
    Our alternative scenario, continues, extrapolates the 
current payment rates to physicians. And current law includes 
the sequester, and many Members of Congress have argued that 
they would like to do something different instead of that. So 
our alternative scenario takes away the sequester, but leaves 
in place the original caps that Congress agreed to in August of 
2011. So under the alternative scenario, our total debt rises 
by about $2.5 trillion more over the coming decade than under 
the current law baseline projections.
    Mr. Chairman, you asked what happens if debt rises, stays 
high and rises, and there are some costs that I think are quite 
predictable, and other risks that are created. Over time, not 
under the current economic conditions, but under the conditions 
that we expect for later in the decade of nearly full 
employment in the economy, at that point in time, that large 
amount of debt will crowd out some private investment that 
would then raise wages and incomes. And the more of that, the 
higher the debt is, the more of that investment is likely to be 
crowded out, and the greater the depressing effect on wages and 
incomes.
    Economists have models to capture that and we report those 
sorts of estimates to you. But there are also risks that are 
involved. Some countries that have had very high levels of 
debt, and have not communicated or not persuaded their 
potential lenders that they have a plan for getting that under 
control, have faced a fiscal crisis, which we defined as a 
point at which the government is unable to borrow at affordable 
rates.
    Currently, our government is not at all in that position. 
Currently interest rates, Treasury interest rates are 
extraordinarily low. Our projection calls for a normalization 
of interest rates as the economy strengthens, as the Federal 
Reserve stops pushing so hard to keep interest rates low. We 
have a normalization of interest rates in our basic 
projections, but with debt high and rising, there is a greater 
risk that potential buyers of government debt will get spooked 
and will be unwilling to do so at the regular level of interest 
rates.
    If interest rates were a percentage point higher than we 
project over the entire decade, then the Federal Government's 
interest costs would be about $1.1 trillion higher. If interest 
rates were a percentage point lower than we project, then the 
Federal Government's interest payments would be about $1.1 
trillion lower. The point is, that given the large amount of 
debt the Federal Government has and will have under current law 
for the coming decade, fairly small movements in interest rates 
can have fairly large effects on government interest payments.
    Chairman Ryan. What is your normalized rate assumption? I 
don't recall off the top of my head.
    Mr. Elmendorf. So we are projecting that short-term 
interest rates rise to about 4 percent and that longer-term, 
10-year Treasury note rates rise to 5.25 percent. Those rates, 
after adjusting for inflation, are a little above inflation-
adjusted interest rates over the past several decades, 
reflecting, in our view, the effects of a higher level of debt 
relative to what we have experienced in past decades.
    Chairman Ryan. So for the comity of the committee, Mr. Van 
Hollen and I are limiting ourselves to 10 minutes. We don't 
always do that. We have a lot of people here, so I will be 
brief only to say that it seems we have this window that is 
beginning to narrow on us. As you mentioned, America is right 
now, with respect to the bond markets, the port in the storm, 
the safe haven. We are the world's reserve currency. That gives 
us a privilege. That gives us time. But if we fritter this time 
away, if we don't deal with the core problem, which is spending 
no matter what you try to do on revenues, then we will have 
lost this opportunity we have to get our fiscal house in order 
while we have low interest rates.
    The other problem, as we see it, is growth. If we keep 
chasing higher spending with higher taxes, we will sacrifice 
growth. The best way is to get people back to work, in good 
jobs, with good wages, paying taxes, and getting spending under 
control. And so when we talk about taxes and tax reform, this 
is something for the Ways and Means Committee, or something we 
will discuss here, loopholes are part of tax reform. Closing 
loopholes, which is what we proposed for years, is a necessary 
pay-for to get tax rates down, to have a globally competitive 
Tax Code, to help businesses, to create jobs, to get people 
back to work. And if we used loopholes to chase higher 
spending, then we are foregoing tax reform and missing our 
opportunity for economic growth. That I just want to make very 
clear for the record because I think we will hear a lot of 
political rhetoric to the contrary, and with that, I want to 
yield to Mr. Van Hollen for his 10 minutes.
    Mr. Van Hollen. Thank you, Mr. Chairman, and again, 
welcome, Dr. Elmendorf. First, just a little bit on the math. 
The chairman pointed out that while we will have $1.5 trillion 
in cuts over the next 10 years as a result of the spending 
caps. There were some other one-time spending measures. 
Included in those spending measures, actually, the payroll tax 
cut, which was probably the biggest single item in that issue, 
and there was actually agreement that given tough economic 
times, it was important to provide a payroll tax relief. I 
actually think we should have phased that out rather than 
having gone cold turkey, but the point is, a big chunk of that 
number had to do with lost revenue from a payroll tax cut that 
was supported by a great majority in this body.
    As I said in my opening remarks, I think that our overall 
objective here in the short, medium, and long term needs to be 
expanding the economy, growing jobs, and having a strong middle 
class. So it is absolutely true that especially as the economy 
recovers, if you continue to have high deficits, it will 
squeeze out that private investment and put upward pressure on 
interest rates. So in order to make sure we have good long-term 
economic growth, we have to grapple with the deficit, that just 
brings us back to the question of how we deal with the deficit, 
and as Dr. Elmendorf pointed out, you can have sort of two 
categorical ways. One, you could say, well, we are not going to 
do any revenue. We are going to do it all in cuts, and as you 
pointed out, you can do it all on, you know, revenue and no 
cuts.
    Both of those lead and argue to bad results. You can't 
raise revenue enough realistically to cover all of those costs, 
but cutting, as Dr. Elmendorf said, means undermining important 
commitments that we have made when it comes to retirement, 
health, and security for our seniors.
    So again, the question is how we deal with those deficits. 
Now, let me get back to the sequester issue because that is 
looming right now. Could you tell me, Dr. Elmendorf, in terms 
of the negative economic impact of the sequester, the .6 
percent, what does that translate into in terms of lost jobs?
    Mr. Elmendorf. So our estimate is, as the Congressman says, 
that the sequester alone will reduce GDP growth this year by 
0.6 percentage points, lowering the level of GDP at the end of 
the year by that 0.6 percent. We think that would reduce the 
level of employment at the end of the year by about 750,000 
jobs.
    Mr. Van Hollen. Seven hundred and fifty thousand jobs 
between now at the end of this fiscal calendar year 2013, 
right?
    Mr. Elmendorf. Yes, Congressman.
    Mr. Van Hollen. That is a whole lot of jobs, obviously, and 
we should be working overtime to prevent that kind of job loss. 
Now, if you were to replace the deficit reduction through that 
austerity program, the meat-ax cuts to the sequester, with a 
plan that accomplished the same amount of deficit reduction, 
spread over the 10-year period, you would not have that big hit 
on jobs, isn't that right?
    Mr. Elmendorf. That is right, Congressman.
    Mr. Van Hollen. Now, we have also heard a lot about the 
impact as a result of the defense cuts, and I should point out, 
this is not--it is the Congressional Budget Office's analysis, 
our analysis. The Republican leader, Mr. Cantor, had it exactly 
right last September on the floor of the House when he said 
that if we allowed that sequester to take place, ``unemployment 
would soar.'' It would set back progress on the economy. And he 
cited an estimate that the sequester would cost 200,000 jobs in 
the State of Virginia alone. That was if the sequester for the 
full year went over. We were able to prevent the sequester for 
the first 2 months through a balanced approach, I should say, a 
combination of cuts and revenue. That should be the model going 
forward and that is the model that we have applied to prevent 
the sequester.
    Now, just to be clear, since there has been a lot of 
attention focused on the jobs lost because of defense cuts, the 
cuts in the non-defense as a result of the sequester, on a 
dollar-for-dollar basis, does that result in the same amount of 
jobs lost?
    Mr. Elmendorf. The effects of cuts in defense spending and 
non-defense spending will be quite similar dollar for dollar. 
The precise timing of the economic effects depends on a timing 
in which defense spending and non-defense spending occurs. So 
in some circumstances, there could be small differences. But 
basically, Congressman, you are right. If the government is 
paying people to build battle ships, or paying people to build 
other sorts of equipment, or structures, then those will have 
comparable effects, dollar for dollar, on the economy, on 
output, and on jobs.
    Mr. Van Hollen. Right. I have never understood the logic as 
to how cuts to defense, meaning you are not building as many 
tanks or battleships somehow costs jobs, but cuts to other 
government spending somehow do not cost jobs. Obviously, when 
you investment money to build roads and bridges and other 
transportation systems, you are putting people to work doing 
things that are productive for our economy.
    If it is scientists at NIH or other people around the 
country, those are grants that are being spent to try and find 
treatments and cures for lifesaving diseases. It would be 
absolutely counterproductive in terms of the long-term 
competitiveness, let alone the health of our people, to have 
those kind of cuts take place. And on top of that, there is 
long-term negative impacts. You have got the job loss, 750,000 
jobs between now and the end of the month.
    Let me just say something, Dr. Elmendorf, about the tax 
reform. I don't know if you have done a recent estimate of the 
amount of tax expenditures in the tax code. What is your most 
recent estimate, and----
    Mr. Elmendorf. So we, in last year's outlook which was a 
longer document since we had a little more time, we had an 
extended discussion of tax expenditures. We have not updated 
that this year, but the staff of the Joint Committee on 
Taxation has released a new estimate, I believe, of tax 
expenditures, or certainly they are working on one. And tax 
expenditures amount to a very large amount of money, and I 
think many economists agree that they are really best viewed as 
a form of government spending because they are directed at 
particular people, or entities, or designed to subsidize 
particular activities, are very much analogous to the way that 
government spending is often directed at particular people, 
remedies, or designed to subsidize particular activities.
    So it is essentially a large component of spending by the 
Federal Government, even though it is recorded essentially as 
lost revenue on the revenue side of the budget.
    Mr. Van Hollen. That is right. I mean, it is spending 
through the Tax Code by saying to certain interest, sometimes 
based on policies we agree, there is consensus on, sometimes 
not, that that is revenue that will not come into the Treasury 
to help reduce the deficit. And the chairman pointed out that 
we just, you know, we passed the $600 billion tax increase 
focused on folks at the very high end of the income scale, but 
as the President pointed out in the talks with the Speaker, his 
goal was actually to achieve $1.2 trillion revenue, which I 
would point out to our colleagues is less revenue imbedded in 
that plan than in the bipartisan Simpson-Bowles plan which said 
that we should do tax reform, but in addition to reducing the 
rates, we should have a significant amount go to deficit 
reduction.
    In fact, the bipartisan Simpson-Bowles Commission Report 
would have a lot more revenue coming in than the President has 
proposed. I just want to make that clear to our colleagues. I 
would also point out that Speaker Boehner, during those 
discussions with the President, said he didn't want to increase 
rates, but he could raise $800 billion by closing these tax 
loopholes and breaks and getting rid of these tax expenditures.
    Those are all still there. None of the actions we have 
taken eliminate those tax breaks and tax expenditures that the 
Speaker was talking about, that all of the candidates in the 
past presidential election talked about, and so if we agree, 
Mr. Chairman, that those are just different forms of spending 
in the Tax Code, it seems to me we should be willing to help 
eliminate some of those tax expenditures for the purpose of 
reducing the deficit in a balanced way.
    And just to be clear, what our colleagues to date have said 
is, they are not willing to do that. They are not willing to 
eliminate any of those tax expenditures, spending in the Tax 
Code for the purpose of reducing the deficit. And we think that 
is important as part of a balanced plan, combined with targeted 
cuts, reforms, going forward.
    A last point I would say, is if you look at the chairman's 
chart, there is no doubt, there is no doubt, we have to deal 
with this issue. But as you know, you can pass changes to laws 
in this 10-year window that have a very important impact in the 
outyears, which is, of course, what your budget did last time. 
Arbitrarily, trying to squeeze all of that into the 10-year 
window, which apparently was what the Speaker had agreed to do 
as part of extending the 3-month debt ceiling, is not good 
economics. That is politics, and so I would hope that as we go 
through this process, we keep an eye on the point I raised at 
the beginning. What is the impact on the economy, short term, 
middle term, long term? What is the impact on middle class and 
jobs? Thank you, Mr. Chairman.
    Chairman Ryan. You bet. I would say balancing the budget is 
good economics, but I guess we just disagree on that. Dr. 
Price.
    Mr. Price. Thank you, Mr. Chairman. Let me follow up 
quickly on that. Mr. Director, welcome back to the committee. 
We appreciate your insight, your input. Is it better to have a 
balanced budget than not?
    Mr. Elmendorf. Well, Congressman, I think that depends on 
what your values are. The reason that CBO doesn't make 
recommendations about budget policy, is because the course that 
you and your colleagues choose depends not just on the sort of 
analysis we can provide, but on your judgments.
    Mr. Price. The level of debt that you described, 76 percent 
of public debt held right now, 87 percent going under, I guess, 
your alternative fiscal scenario, I suspect you would agree 
that a level of 87 percent is not as wise as a level of 76 
percent given the propensity for a fiscal crisis at 87 being 
higher than 76, is that right?
    Mr. Elmendorf. Yes, we certainly agree that the higher debt 
has higher expected costs and higher risks than lower debt 
would have.
    Mr. Price. And I would concur. I want to touch briefly on 
the fiscal cliff, the $600 billion increase in taxes. Would 
that--do you recall what the spending reductions were in that 
legislation, the net spending reductions?
    Mr. Elmendorf. Well, so Congressman, remember that the 
way--the cost estimate that we produced and that we produced 
for all bills, is relative to current law.
    Mr. Price. Yes.
    Mr. Elmendorf. So our cost estimate showed that legislation 
as a very large tax cut, not the tax increase that you just 
described.
    Mr. Price. Yes.
    Mr. Elmendorf. There were only small changes in spending. I 
don't remember how they netted out. There was an extra, 
additional spending in Medicare, but cutbacks in other health 
care spending. The sequester was deferred. That was paid for 
partly, as you know, through other spending reduction.
    Mr. Price. Minimal spending reductions in the fiscal cliff 
bill. So that this balanced approach that our friends on the 
other side of the aisle talk about is balanced until it isn't. 
And that is what we saw with the fiscal cliff.
    I want to touch on the whole issue of revenue. Your report 
cites that revenue has returned essentially in 2012 to the 2008 
levels, or higher than the 10-year average, basically. Is that 
accurate?
    Mr. Elmendorf. That may well be right. I am sorry, I don't 
have all of that history in front of me, Congressman.
    Mr. Price. I think that is correct. The revenue of the 
Federal Government now has returned to higher than the 10-year 
average.
    That being the case, and if we look at the deficit in 2008 
at about $450 billion, and the deficit in 2012 at $1.3 
trillion, with revenue returning essentially to 2008 level, 
then isn't it true that the thing that is driving the deficit 
to a greater degree at this point is not that the revenues are 
lower than they have been, but the spending is higher than it 
has been. Is that an accurate statement?
    Mr. Elmendorf. Well, certainly in dollar terms, 
Congressman, you are right that spending is going up very 
sharply. I think the problem that you and your colleagues face 
is that from the perspective of many Americans who are now 
starting to retire in the Baby-Boom Generation, there are 
benefits that they are expecting individually. The fact that 
there are many more of them than there were beneficiaries 10 
and 20 years ago, doesn't appear to them as an excess of the 
benefits they are getting, but it turns out, you take a given 
benefit and multiply it by a lot more people----
    Mr. Price. Yes.
    Mr. Elmendorf [continuing]. That the aggregate spending 
goes up, and that is, I think, the challenge you and your 
colleagues face is how to respond to that.
    Mr. Price. Yes, it is indeed, and we look forward to 
working through a budgetary process that will save and 
strengthen and secure those programs as opposed to moving in 
the direction of essentially lopping off funding for those 
programs at the expense of those beneficiaries. That is a 
debate that we will have.
    I want to touch again back on the 76 percent, 87 percent. 
Your alternative fiscal scenario has really been more, in the 
past has really been more accurate compared to reality, is that 
a true statement?
    Mr. Elmendorf. I suppose that is true. I mean, the single 
biggest difference, as you know, between that and the baseline, 
had been the extension of the expiring tax provisions and in 
fact, the Congress chose about a month ago to extend most of 
those expiring tax provisions. In that sense, our current 
baseline looks more like our last alternative scenario, than 
like our last baseline.
    Mr. Price. Right. So if past is prologue, then it is more 
likely that we will be closer to 87 percent public debt held as 
opposed to 76 percent? And if that is----
    Mr. Elmendorf. I think if you and your colleagues let 
current policy stand, that would be the case. Whether you will 
or not is the issue that you are debating.
    Mr. Price. The question I want to get to is, when a fiscal 
crisis occurs, when a debt crisis occurs, what is the 
triggering mechanism? What happens that results in that, the 
inability to borrow at an affordable rate as you described it?
    Mr. Elmendorf. I think a loss of confidence in the 
government's ability to manage its affairs, and to pay the 
interest on the debt makes potential investors more concerned, 
and makes them expect higher-risk premiums.
    Mr. Price. Which is not a predictable moment in time, is 
that accurate?
    Mr. Elmendorf. That is right, Congressman.
    Mr. Price. Thank you.
    Chairman Ryan. Ms. Schwartz.
    Ms. Schwartz. Thank you, and welcome to a new budget cycle. 
Pleased to be back. And these are really keen and important 
debates that we are having for our country and I do want to 
thank you, Dr. Elmendorf, for being here and outlining where we 
are. You did point to some positive news. I appreciate that, 
the fact that we are in recovery, that you are seeing some very 
positive signs in economic growth in the housing sector, you 
pointed out. And that, of course, you have heard already the 
disagreement that is making it very difficult to find a way to 
actually reduce the deficit in a fair and balanced way that 
strengthens the middle class, that grows jobs, that does not 
hurt this fragile economic recovery. We have seen economic 
growth. We saw the arguments at the end of last year that saw a 
contraction in the economy for the first time in 3 years, was 
it?
    Mr. Elmendorf. Yes.
    Ms. Schwartz. So you know, that is significant. The debates 
we have here have an effect. And of course, we believe that 
this is not just politics. There are very different economic 
theories about how we grow this economy, how we strengthen the 
middle class, how we actually are economically competitive in a 
global marketplace, and how we meet our obligations, not only 
to our children and our future, but the obligations that you 
and I have talked a good deal about, and we talked about on 
this committee, and is that our seniors. And that is what I 
wanted to ask you about.
    One of the things that we have seen again, positive news 
this week, you pointed it out, CBO has pointed it out, the 
Department of Human Services pointed it out, and some private 
sector institutes have pointed it out, that, in fact, we have 
seen slower growth in the costs of health care, in both the 
private sector and in the public sector----
    Mr. Elmendorf. Yes.
    Ms. Schwartz [continuing]. That is quite significant. When 
we came in here, we had double-digit growth in costs in the 
health care sector for a decade, 100 percent increase and more 
in both the private sector, and particularly in the private 
sector, more so than in the public sector, but in Medicare and 
Medicaid, I think that some of us would contend that we have 
seen these delivery system reforms and a very serious 
commitment that we have made to really push the health care 
system, both doctors and hospitals, to give us better value for 
our taxpayer dollar, to improve the quality of health care for 
our seniors, to deliver health care in a much more cost 
efficient way, and as a result, save taxpayer dollars and 
improve the quality of our seniors' health care.
    So particularly given the demographic problems around 
Medicare, the baby boomers, 10,000 more seniors a day. It is 
serious business. But could you speak to the fact that you have 
found, again, we have seen other reports, that have said we 
have seen very good reduction. Three percent growth rate is 
really quite something, when we have seen 10 percent a year in 
Medicare.
    I will ask you to confirm that, but I will also ask that as 
we move, which is the intention, we have legislation to do it 
as well, which is to move the way we pay physicians in this 
country, not just repeal SGR, but actually change the way we 
reimburse all physicians under Medicare, that would require 
them to pick a model that does save money and improve quality, 
and outcomes for our seniors, has the potential, and I hope can 
you actually document that we have said all physicians in this 
country move in that direction, the potential cost savings and 
cost containment, not only in the public sector, but also in 
the private sector.
    Mr. Elmendorf. Yes. Let me first quickly emphasize the 
point you made about the effects of the retirement of the Baby 
Boom generation, because the numbers are really quite striking. 
We think that, by 2023, there will be roughly 40 percent more 
beneficiaries of Social Security and Medicare than there were 
last year, 40 percent more people roughly. And that has a 
tremendous effect, obviously, on the overall cost of those 
programs.
    Ms. Schwartz. We made a commitment to those seniors that 
many of us expect us to meet.
    Mr. Elmendorf. Your point, Congresswoman, about health care 
cost growth has been absolutely right. There has been a market 
slowing in Medicare in Part A, that mostly pays for hospital 
care, and Part B, that pays for physicians, and part D, that 
pays for drugs, and in Medicaid, and in the private sector in 
the rate of health cost growth. We and other analysts think 
that part of that is because of the recession and the slow 
growth of income and loss of wealth that has reduced people's 
willingness to pay money for health care. But we think that a 
significant part of it is in fact structural. The crucial 
question is whether those structural changes are transient or 
will be enduring. And that is a topic that we are giving a lot 
of thought to and talking with outside experts. I think the 
right way to summarize the consensus is that we don't know.
    Ms. Schwartz. If we were to pass legislation this year, 
before the SGR expires or would go into effect again and see 
that kind of cuts, if we actually passed legislation, which 
honestly there has been really serious and good discussions 
between Democrats and Republicans on, on my bill, on an 
innovative way to pay physicians under Medicare, would that 
give you the tools to be able to say this is actually going to 
happen, this is the window when it is going to happen, this is 
the direction we are moving in?
    Mr. Elmendorf. I think there is widespread support, 
Congresswoman, for the idea that we should be paying health 
care providers in a different way than we are paying them 
today. And I think widespread agreement that a shift in how we 
pay providers can improve both the quality of care and keep 
costs down. Exactly what changes in Federal law will lead to 
what particular outcomes is a very uncertain business. And we 
look forward to continuing to work with you on that.
    Chairman Ryan. Thank you.
    Mr. Campbell.
    Mr. Campbell. Thank you, Mr. Chairman.
    And good to see you again, Dr. Elmendorf. So large and 
persistent deficits like we have over the long term are a bad 
thing for economic growth, job creation, and potentially have 
the debt crisis risk that you discussed, right?
    Mr. Elmendorf. Yes, Congressman.
    Mr. Campbell. Okay. But the solution to that, which is some 
kind of fiscal contraction, be it either through tax increases 
or spending reduction, can cause a reduction in short-term 
economic growth and/or job creation.
    Mr. Elmendorf. Yes, exactly, Congressman.
    Mr. Campbell. So we are in a bit of a pickle.
    Mr. Elmendorf. Yes, Congressman.
    Mr. Campbell. So the question is, how do we get out of this 
thing? Now, in Europe, Greeks and Spanish and Italians waited 
too long, and they had to do a substantial fiscal contraction 
in a very short period of time, which resulted in extremely 
high unemployment and large contraction in their GDP. Is that 
correct?
    Mr. Elmendorf. Yes. Other factors have been at work as 
well, Congressman, but yes. We think that the sharp fiscal 
austerity in some countries in Europe have contracted their 
economies.
    Mr. Campbell. Right. If we were to decide to try and fix 
this whole budget deficit in the next 2 years, or if we were 
forced to do it by debt crisis, that would plunge the country 
into recession; unemployment would go up worse than it is 
today; bad things.
    Mr. Elmendorf. Yes, Congressman.
    Mr. Campbell. Okay. So we don't want to do that. But if we 
ignore it, or we only deal with just a little bit of it, and 
the deficits go on as you show in the baseline or even worse in 
the alternative scenario, then we risk never getting to our 
potential growth and potentially have that debt crisis where a 
few years from now we would have to make that kind of overnight 
contraction.
    Mr. Elmendorf. Yes, Congressman, that is a risk, 
absolutely.
    Mr. Campbell. So it makes a whole lot of sense to try and 
solve this thing in not too short a time and not too long a 
time, which--and I don't know whether you feel comfortable 
answering this or not, but if 2 or 3 years is too short and not 
dealing with it or looking at 30 years is too long, is 
somewhere in 8 to 12 years, if it were done in an even 
approach, is that the sort of thing that might be able to 
balance and get us out of this pickle with as little damage as 
possible and as much opportunity for growth?
    Mr. Elmendorf. I really don't want to prescribe a 
particular time path, Congressman, as you know. But I think you 
are absolutely right that the longer--the risk of waiting 
longer is that by running with a high level of debt to GDP, or 
a rising level of debt to GDP, the costs build up and the risks 
build up. And in 2007, debt was 36 percent of GDP. By the end 
of this year, it will have risen by 40 percent of GDP, we 
project, to 76 percent of GDP because of the financial crisis 
and the recession and the actions taken in response to them.
    If we run at this higher level of debt and encounter 
another crisis, domestically or internationally, that room to 
expand the deficit will not be there in the way it has been 
over the last half dozen years.
    Mr. Campbell. Right. Okay. Just a couple other things here 
in my final couple of minutes. Mr. Van Hollen talked about the 
sequester and replacing it, 1-year cuts over something that 
will be over 10 years. If you were to replace the sequester 
with whatever, just a similar amount that matched year for year 
what the sequester is of other spending cuts and/or tax 
increases, now I understand the composition would have 
something to do with it, but if you do $100 billion in fiscal 
contraction, there is some negative impact on the economy no 
matter where that fiscal contraction comes from.
    Mr. Elmendorf. Yes, I think that is right, Congressman. You 
are just right that the timing is critical for the economic 
effects. The composition can also matter depending on just how 
you and your colleagues do it.
    Mr. Campbell. Right. But if we put it off, we are putting 
off the problem that we discussed we have to deal with. One 
final thing on tax expenditures--and I hate that term, but I 
know you economists like it. Let's call it tax deductions, 
credits, whatever. Is not the vast majority of those, if you 
look at home mortgage interest, charitable contribution, IRAs, 
401(k)s, other retirement plans, and health care, isn't that 
where--I mean, if you really wanted to make a big impact, you 
would have to go into those things, would you not?
    Mr. Elmendorf. Congressman, you are absolutely right, those 
are the largest components. How big an impact one could make 
dealing with other pieces we haven't quite assessed. But in 
this nice chart we had last year, the single largest tax 
expenditure relates to health care, principally the exclusion 
of health insurance from taxable income. The second largest 
involves pensions. And the third largest involves mortgage 
interest.
    Mr. Campbell. Okay. All right. Well, thank you very much, 
Dr. Elmendorf.
    Mr. Elmendorf. Thank you, Congressman.
    Chairman Ryan. Mr. Pascrell.
    Mr. Pascrell. Thank you, Mr. Chairman.
    Dr. Elmendorf, thank you for coming before us again and 
opening up a pleasant season for the next 2 years. I think that 
I want to respond to my brother from Georgia, what he said 
before, about how we have increased spending since 2008, 
beginning January 2009, when President Obama raised his hand. I 
think we are all here to roll up our sleeves and find a long-
term solution to the debt.
    But just as we know that increased revenue is not going to 
solve the entire problem by any stretch, neither--we can't cut 
our way out of our budget difficulties either. So when you look 
at what has happened in terms of budgets since 2009, January 
2009 and now, when there was an increase in spending--we can't 
just talk about that out of context. Why was there an increase 
in spending? Are we spending just to spend? Or was this the 
government's response, our response, whether you voted for it 
or not, to a very serious problem in the United States of 
America? People out of work, health care costs going through 
the roof. So how do we do it? No one else is spending. If we 
don't have private capital invested, and that started before 
the end of 2008, then how do you try to provide an atmosphere 
so that there is investment into the economy?
    And we want private investment. We know the government 
can't solve every problem. We understand that very, very well. 
But when you talk about a balanced budget, of course, it is 
preferable. But are we to think that because we have this 
tremendous deficit problem going into 2009, that all that we 
needed to do was cut across the board in view of the social and 
cultural things that were going on in this country and, by the 
way, much of the world? Are we to think that if we simply cut 
and slashed that everything would be fine?
    You have created a nemesis. You have created a situation 
where folks, you want folks to think that you want to protect 
their tax dollar when you know very, very well that in 2009, we 
had tremendous unemployment, and if the government didn't do 
anything, if there was no recovery--and we could point out 
chapter and verse where recovery helped in creating jobs, and 
not what happened in the last quarter of last year. Very 
interesting comparisons. So we had to come out of two wars; we 
never paid for them. We had to come out of two major tax cuts 
in 2001 and 2003; we never paid for that either. We didn't even 
pay for the prescription drug plan that we passed 8 years ago.
    There is a reason why we had to spend that money. And if 
anyone is trying to imply here that if we simply stopped 
spending the money--isn't that wonderful? And it is our money. 
It is the taxpayers' money--that we would be in better economic 
shape, well, the American people didn't buy that in the last 
election. They just simply did not buy it. Because they are a 
lot smarter than we think they are, all of us included, both 
sides of the aisle, both sides of the aisle. So instead of a 
trickle-down economics, which you had for 8 years--and we will 
go into how many jobs were created then and how many jobs have 
been created over the last 4 years--instead of going to trickle 
down, we got a trickle up. I prefer trickle up. I prefer that 
the little guy have a shot at prosperity and not wait for the 
big guys to drive this economy, because they certainly flopped 
on their face in 2007 and 2008, when capital was not invested 
in this country.
    Director Elmendorf, it seems to me that the most important 
way to achieve long-term deficit reduction is a balanced 
approach of revenue and spending cuts. That is what we keep on 
talking about. And in fact, according to your report this 
month, the CBO expects the deficit to shrink from 8.7 percent 
of GDP--because we don't want to quote these things because it 
doesn't fit into our script--that that will shrink to 5.3 
percent. Is that correct?
    Chairman Ryan. Thank you. Time has expired.
    Mr. Elmendorf. Yes, Congressman.
    Mr. Pascrell. Can he at least answer the question?
    Chairman Ryan. You know, we got a lot of people here. He 
said yes. But if we wait until the clock is at zero to ask our 
question, we are not going to get to these other members who 
are waiting patiently for their turn.
    Mr. Pascrell. Your point is well taken, Mr. Chairman.
    Chairman Ryan. Mr. McClintock.
    Mr. McClintock. Thank you, Mr. Chairman.
    Dr. Elmendorf, let's get to some basics here first. In 
order to pay for spending, we either tax it now or we borrow it 
now and tax it later. Are there any other ways of spending, I 
mean other than monetary policy, which is itself simply a tax 
on existing capital?
    Mr. Elmendorf. Well, the amount by which you raise taxes 
later depends on the level of debt that you are willing to 
support the country.
    Mr. McClintock. But you either borrow it or you tax it if 
you are going to spend it.
    Mr. Elmendorf. Yes, Congressman.
    Mr. McClintock. All right. So government really cannot 
inject a dollar into the economy that is not first taken out of 
the same economy either by taxing now or borrowing now and 
taxing to repay it in the future.
    Mr. Elmendorf. I think, Congressman, under our current 
economic conditions, if the government borrows money, it is not 
taking a dollar out that would otherwise be invested. It can in 
fact increase the total demand for goods and services in the 
economy, and thereby boost employment and output.
    Mr. McClintock. If the dollar is being borrowed by the 
government, presumably it is not there then to be borrowed by a 
consumer seeking to make consumer purchases, or a home buyer 
seeking to reenter the housing market, or a small business 
seeking to expand jobs.
    Mr. Elmendorf. That logic is exactly right, Congressman, at 
a point where the economy is at full employment. But that is 
not the current economic circumstances.
    Mr. McClintock. Now, would you explain the economic impact 
of debt?
    Mr. Elmendorf. So, in a fully employed economy, of the sort 
that we project for the second half of the coming decade, then 
higher debt, as I mentioned, crowds out private investment and 
reduces incomes relative to what they would otherwise be.
    And in an economy like the one we have today, the effects 
are starkly different. And in an economy like we have today, we 
think that additional borrowing to support higher spending or 
tax cuts would provide a boost to the economy in the short 
term.
    Certainly if that extra borrowing is not paid down later, 
it will weigh on the economy later. But in the short term, it 
would provide a boost to the economy.
    Mr. McClintock. But you are borrowing a dollar from the 
same capital market that would otherwise be funding loans to 
consumers or to businesses or to home buyers, for example. So 
it is the same dollar. The only question is whether it is 
borrowed by the government to spend or is borrowed by somebody 
in the productive sector to spend.
    Mr. Elmendorf. But under current conditions, Congressman, 
the demand for private borrowing is very low. There isn't a 
conflict in the credit markets. That is why the Federal 
Government's interest rates are so low right now. Under other 
conditions, there would be more of a competition for funds of 
the sort you are describing. But these conditions are unusual.
    Mr. McClintock. I would suggest you talk to some small 
business people who are desperately trying to get loans or home 
buyers who are desperately trying to get loans, and they are 
telling us they can't get them. Now, tell us about the economic 
impact of spending--or pardon me, of taxes rather.
    Mr. Elmendorf. So taxes have two kinds of effects. One is 
they just take money that households would otherwise have to 
spend. The other is they can affect the incentives for people 
to work and to save. And in our macroeconomic modeling, we try 
to capture both of those sorts of effects.
    Mr. McClintock. In fact, didn't your office estimate that 
the tax increases back to the Clinton era rates on those 
earning $200,000 as individuals, $250,000 as couples, would 
cost about 200,000 jobs?
    Mr. Elmendorf. That sounds roughly right, Congressman. I 
don't remember the specifics. You are referring to our report I 
think on the fiscal cliff from last fall. I don't remember the 
precise numbers.
    Mr. McClintock. Now, we are also told by your office that 
the sequester reductions in spending would affect about 0.6 
percent of growth, you said about 750,000 jobs, because 
government would not be spending that money on creating 
government jobs. But as we just established, government doesn't 
inject a dollar into the economy that is not first taken out of 
the economy. So I am afraid we are getting to a situation where 
we are being told that tax increases are bad for the economy, 
too much borrowing is bad for the economy, particularly in the 
future that you are projecting, and spending cuts are bad for 
the economy. And that doesn't leave us with many options.
    Mr. Elmendorf. So, Congressman, I think the effects of 
fiscal policy on the economy are different under different 
economic circumstances. That is a widely held, not universally 
held, but a widely held view among economists. And that is the 
perspective that we take. So under current economic 
circumstances, when private demand for goods and services is 
low, additional government demand through higher spending or 
the government spurring additional private demand through lower 
taxes can both increase the overall demand for goods and 
services and thus encourage businesses to hire more.
    Under different economic circumstances, of the sort that we 
usually have in this country and we expect that we will have 
again 5 and 10 years from now, then this competition you are 
describing between the government's use of funds and the 
private sector's use of funds can become acute. And that is why 
under those economic circumstances smaller government deficits 
are good for the economy.
    Chairman Ryan. Thank you.
    Mr. McDermott.
    Mr. McDermott. Thank you, Mr. Chairman.
    I have asked they put up a chart on the screen so that you 
can--a picture is always worth a thousand words.
    And it is good to see you, Mr. Elmendorf. Your budget 
analysis is very interesting. For years we have had to listen 
to the Republicans lighting their hair on fire on cable TV 
about the temporary large deficits we have. We were told if 
Simpson-Bowles was not enacted, it would be the end of the year 
as we know it. Two years later, we are going right along. And 
in fact, if you notice on that chart, the jobs are going up. We 
have had 35 months of people increasing. And the only places 
you see dips, if you check them out, are when the Republicans 
began to play roulette with the budget, when they created chaos 
about whether we were going to pay our bills internationally, 
or we have these big fights we have on the floor; the 
unemployment goes up because business doesn't have any 
confidence. They are not going to hire anybody.
    And it seems to me that what you said is that the long-term 
problems in this country really are about health care costs, as 
Ms. Schwartz has already pointed out. When I came to Congress 
in 1988, we were talking about the big problem that was going 
to come in 2011. Well, it is here. The Baby Boomers are now 
enrolling in Medicare, and it is going to go from 40 million to 
60 million. And that has been absolutely predictable, and 
nobody wanted to deal with it until it is now. It is nothing 
new. It is not we are suddenly having massive spending, except 
we are honoring our commitments to the people in this country.
    And it seems to me that the issue really here is whether we 
are going to tear the safety net out, say to seniors, we are 
not going to cover you. You are on your own. You and your 
family go find out whatever you want.
    But what is interesting is I think we have a triumph to 
talk about. And I want to talk a little bit about that. 
Medicare spending, as I understand it, is flat per person. Is 
that correct?
    Mr. Elmendorf. I don't have those precise numbers in front 
of me, but you are certainly right, Congressman. It has slowed 
very sharply in the past few years from what it was before.
    Mr. McDermott. And in my reading of your analysis, at least 
you give some credit, if not a good bit of credit, to the fact 
that we enacted the Affordable Care Act. Is that correct?
    Mr. Elmendorf. So, Congressman, we have not attributed the 
slow down to any particular factors, like the Affordable Care 
Act. What we have said is that we think part of it is related 
to the recession; part of it is structural. The structural part 
can have a number of possible causes. One could be providers 
thinking about the current and incipient effects of the 
Affordable Care Act. But they are also driven by pressures from 
private insurers. I think providers are driven by their own 
sense that they are not providing care in as efficient a way as 
possible. And we have not tried at this point to--well, we 
tried to think through, but we have not said anything, because 
we don't know about what factors are driving those structural 
changes. If we understood better what factors were driving 
them, we would understand better what the prognosis was as 
well.
    Mr. McDermott. That is my point. If you pass a law, even 
the threat of passing the law, under the Clinton 
administration, suddenly health care costs kind of leveled off. 
And again, we see it when the Congress acts, that we basically 
see the flattening of costs.
    Now you can't directly tie it, point A to point B, but you 
know that the whole United States is watching what the Congress 
is doing. And when we don't pay our debts, they stop hiring. 
That is clear. I mean, you can look right at the graph and 
trace it down to the time when it happened, and you can see how 
it happened.
    I think that the thing that is most amazing about this is 
that the industry, the medical-industrial complex is actually 
responding because they know it is not sustainable. And my 
question to you is the effect of throwing people off of 
Medicare, or raising--let's raise the age to 67 or 70 before 
you can get on. What would that effect, how would that affect 
the economy? Do you have an idea?
    Mr. Elmendorf. Congressman, it depends a lot on what else 
is going on and exactly how that provision would be structured. 
We wrote a report early last year about the effects of raising 
the eligibility age for Social Security and for Medicare. And 
we talked about the consequences. Certainly some people who 
aren't on Medicare would end up on other Federal health care 
programs. Some people we think would end up without insurance. 
Some people would choose to work longer to maintain their 
employer-sponsored health insurance. There is a whole 
combination of responses that we think would occur.
    Mr. McDermott. So the real issue here is how do we control 
health care costs.
    Mr. Elmendorf. That is a very important question, 
obviously, Congressman.
    Chairman Ryan. Mr. Garrett.
    Mr. Garrett. Greetings. And this will follow up on our 
private conversation initially, and maybe some of the points 
when I was out of the room with regard to interest rates. And 
so one number that I heard, maybe somebody threw this out to 
you, because you were saying that we are at here now, basically 
zero, right, projection over the 10-year, going up around 
three. And so the interest payment on the debt is going to 
increase during that period of time. I think the one number 
that you threw out to us is $1.1 trillion for a 1 percent 
increase in interest. You base that--you basically factor that 
in to your projections over the 10-year, going from zero up 
to----
    Mr. Elmendorf. Right. So the increase in interest rates 
that we show is the underlying feature of our projection of 
Federal interest payments.
    Mr. Garrett. Right. So one of the other uncertainties is 
the maturation dates that the Fed has on the securities going 
out, that it is inverted, right, between long and short. Do you 
take that into consideration as well? In other words, one of 
the numbers I heard was that you could look at a 3 percent 
increase--3 percent, you would look at around $140 billion 
increase in year one, and that would only last for 2 to 3 years 
as the maturation date changes for the securities. Are you with 
me on that?
    Mr. Elmendorf. So you are right, Congressman, that our 
projections of government's interest payments depend not just 
on the level of interest rates at that moment in time in the 
financial markets, but what the Federal Government has issued 
when, and when it is rolling over those maturing securities 
into new securities.
    Mr. Garrett. And so I guess one of the multiple bottom 
lines of this is we are going through the whole sequester issue 
trying to save roughly a hundred billion dollars, maybe $86 
billion with interest payments, and that basically pales in 
comparison if interest rates go up just 1 percent.
    Mr. Elmendorf. Yes, that is right, Congressman. Now, a 1 
percentage point higher level of interest rates in an entire 
decade would be a sizable change.
    Mr. Garrett. Well, we could do everything--well, a sizable 
change and a historically accurate change. In other words, we 
are at historically low numbers right now.
    Mr. Elmendorf. Yeah, I mean above and beyond the increase, 
I was suggesting that we have built into our projection, which 
is a return of interest rates to slightly above their 
historical average level. Further increases are certainly 
possible. But I am just noting a percentage point difference 
for the entire decade is a fairly large difference.
    Mr. Garrett. Let me turn real quick over to the FHA. The 
FHA revealed in their housing industry report that cash 
reserves are down 45 percent from last year, and chances of 
future losses on the current outstanding portfolio could exceed 
50 percent is not out of the norm, which would require 
potentially that the taxpayers would have to bail out the FHA 
going forward. Further, the report shows from the FHA that they 
are overleveraged right now. They are at a leverage ratio of 
400 to 1, which sort of makes Bear Stearns, Lehman Brothers, 
and the rest sort of--and the GSEs even--pale in comparison. 
Have you examined the FHA's report and the budgetary 
implications on that in your projections?
    Mr. Elmendorf. Let me say two things, Congressman, quickly. 
First, as you know, when you refer to a government bailout, 
there is no explicit action by the Congress that would be 
required. It is simply the case that if people don't pay back 
their mortgages and the FHA is on the hook, that taxpayers will 
suffer those losses.
    Mr. Garrett. They have a line of credit due the Treasury. 
They don't have to come to Congress, but the Treasury can 
basically give them the money without us authorizing. Did you 
take that into consideration?
    Mr. Elmendorf. Yes. The second thing I would say is that as 
you know, again to explain to others, there is a few years of 
FHA lending that has turned out particularly poorly in terms of 
delinquency and default rates. And we have not done a separate 
projection of what the draw on the Treasury might ultimately 
be. If there is a change, it would turn up, as you know, as a 
credit reestimate in the budget. But we don't have a specific 
projection that I am aware of, of what the FHA----
    Mr. Garrett. Would that be something that you could do and 
take a look at?
    Mr. Elmendorf. I think we could take a closer look at it, 
yes. We have to talk with you more specifically. And I don't 
know about the data that we can get. But yes, we could try.
    Mr. Garrett. That would be very helpful to us over in 
Financial Services and Approps as well.
    So last question is with regard to Medicare. As you well 
know, there is a law in place that says when costs exceed 
revenues by 45 percent, something has to happen, right? That 
the President has to issue a report on how to solve the 
problem, correct?
    Mr. Elmendorf. Yes.
    Mr. Garrett. Okay. So has that ever been triggered?
    Mr. Elmendorf. So that threshold has been exceeded for a 
number of years, I think, Congressman.
    Mr. Garrett. Was that triggered in 2009?
    Mr. Elmendorf. I don't know the precise years, Congressman, 
but I would take your word for it.
    Mr. Garrett. Would you believe 2009, 2010, 2011, 2012?
    Mr. Elmendorf. I would believe it, Congressman.
    Mr. Garrett. Have you scored the President's proposal in 
response to that?
    Mr. Elmendorf. We have never scored a specific response to 
that. We have estimated the President's----
    Mr. Garrett. Has the President ever, as required by law, 
provided a report as required in the law?
    Mr. Elmendorf. I am not aware of any, Congressman.
    Mr. Garrett. So he has violated the law in that sense?
    Mr. Elmendorf. I am not a lawyer, Congressman.
    Mr. Garrett. But he was required to do so.
    Mr. Elmendorf. There is a requirement for a proposal to be 
made. I am not aware of any proposals having been made. I may 
be unaware, and I am not in a position of speaking to the 
legalities.
    Mr. Garrett. You would have scored it had he done it, would 
you not?
    Mr. Price [presiding]. The gentleman's time has expired.
    Mr. Elmendorf. Well, it depends. As you know, we estimate 
the President's budget once a year. Otherwise, we estimate 
things that you and your colleagues bring to us, not the 
administration directly.
    Mr. Price. Thank you, Dr. Elmendorf.
    The gentlelady from California, Ms. Lee.
    Ms. Lee. Thank you very much, Mr. Chairman.
    First of all, let me just say it is an honor to serve on 
this committee. And I hope to work with this committee to 
create a useful road map for the American people, one that will 
create jobs, lift people out of poverty and into the middle 
class, grow our economy for everyone, and reduce the deficit.
    And let me thank you, Mr. Director, for your testimony and 
for being here.
    Our budget is not only a road map to fiscal responsibility, 
but it is also a moral document. It shines a light on what the 
priorities are of our government and who we are as a country. 
Our Nation's budget must reflect our values, and it must raise 
enough revenue so that we can invest in our people and meet our 
Nation's challenges head on.
    While our economy continues to slowly recover, I believe we 
also must focus on lifting the millions of Americans who are 
living in poverty up the economic ladder and into the middle 
class. And so, in addition to looking at policies that 
strengthen the middle class, I will continue, as a member of 
this committee, to remind this committee that nearly 50 million 
people live in poverty; 16 million are children. And this is 
unacceptable.
    Now, unless Congress acts by March 1, the sequester will 
slash thousands of jobs, which we have heard earlier, and 
economic security of the middle class, but it will also push 
the poor and low-income individuals really over the edge. It 
will eviscerate any gains our recovering economy has made in 
recent years.
    So there is no question that we need to prevent these cuts 
from taking place, and we must do so in a way that protects 
investments that create and continue this economic growth. So I 
think we need to take a hard look at the loopholes and tax 
expenditures in our Tax Code that allow some of the wealthiest 
individuals and businesses to not pay their fair share.
    But also we need to look at the ongoing waste, fraud, and 
abuse going on over at the Pentagon. And so, you know, I can't 
for the life of me figure out how we can budget when the single 
largest discretionary item on our budget cannot be audited. We 
need the Pentagon to pass an audit so we can get to know where 
the money and where our tax dollars are going, and adequately 
set priorities.
    Now let me just ask you about the CBO report on the 
American Recovery and Reinvestment Act. I would just like to 
ask you, Mr. Director, can you explain how our government's 
targeted investment in the American people and in our Nation's 
critical infrastructure, how that created jobs and how it 
helped to begin to grow the economy?
    And also, if we invested in a program that provided 
coordinated benefits in social services that lifted the long-
term economic stability and incomes, let's say half the 
families living in poverty, what impact would that be and what 
impact would that have overall in terms of our economic growth?
    Mr. Elmendorf. So, Congresswoman, as you know, we have 
estimated consistently for the past 4 years that the Recovery 
Act, taking effect at the time it did with the economic 
circumstances the country faced, increased output and jobs 
relative to what would have happened in the absence of the 
Recovery Act.
    And we think it did that by some additional direct 
government purchases, by giving money to State and local 
governments that they then used to purchase goods and services, 
or to provide benefits, and by cutting taxes to Americans that 
let them then spend more money themselves. And that additional 
demand for goods and services filled in part, only part, but 
part of the great shortfall in demand that had come about in 
the wake of the bursting of the housing bubble and the 
financial crisis. So we think the path of output and employment 
has been higher than it would have been otherwise because of 
that act. And we think that this year, with an economy stronger 
but not that strong yet, that easing of fiscal policy, such as 
a deferral of the sequester, would boost output and employment 
this year relative to what would occur under current law.
    You also asked about longer-term effects of policy. I think 
those effects are ones that we worry about, but are harder to 
know for sure. So if the government can strengthen the 
economic--can strengthen people's skills, help them have better 
education and more training, that should make them more 
productive over time. But the overall economic effects will 
also depend on how the government does that and where the money 
comes from to do it. So spending a dollar in a certain place 
can be good for the economy, but in the longer run, it does 
come out of something else. And you think of the overall 
economic effects, we need to think about what it is coming out 
of in addition to what it is going into.
    Mr. Price. The gentlelady's time has expired.
    The gentleman from Oklahoma, Mr. Lankford.
    Mr. Lankford. Thank you, Mr. Chairman.
    Thank you. I want to be able to continue on that same line 
of conversation about the long-term impact. Is there an 
economic benefit to balancing our budget? Not adding to 
additional, let's say, principal year after year. Is there a 
benefit to our economic development as a Nation?
    Mr. Elmendorf. Well, I think, yes, Congressman, a smaller 
deficit, all the way down to zero, can be better for the 
economy in the medium and long run than a large deficit. But 
what the economic effect is ultimately depends on how you do 
that.
    Mr. Lankford. How you get it. Right. I understand that, is 
the how you get there to the balance point also matters.
    Mr. Elmendorf. Yes.
    Mr. Lankford. And that has to be done in a way that is 
judicious and that makes sense for the economy itself.
    I interact with a lot of families that have a challenge of 
understanding this as they walk through the document. And they 
want to know how this applies to their individual family. So 
can you help bring that down to the individual family? What is 
the effect of a $16.5 trillion debt on a family? And what is 
the effect on how that grows, let's say as you mentioned, $7 
trillion over the next 10 years? What effect does that have on 
an individual family? Now, I know you can't name the family and 
the address and say this family will lose their job, this 
family will benefit. I get that. But the overall impact on a 
family.
    Mr. Elmendorf. I think, Congressman, over the next few 
years, with a weak economy, the government borrowing in order 
to keep taxes lower and spending higher helps the average 
family by producing more demand for goods in the economy and 
thus increasing the chance they will be employed and get paid 
more.
    But as you go into the second half of the coming decade, 
when we think people will mostly be back at work, then the 
government's borrowing is competing with the borrowing that 
households want to do for their mortgage borrowing. It competes 
with the borrowing that the businesses they work for may be 
trying to do. And at that point, that competition for borrowing 
makes it harder for businesses to invest. That will tend to 
limit the extra equipment that workers have to work with. And 
because of that, it will tend to lower their wages and their 
family incomes relative to what would have happened if instead 
the government had not been borrowing so much in the credit 
markets.
    Mr. Lankford. Right. And that is not something you can just 
shut off and say, for the next 5 years, we are going to have 
the sugar high, and then once we get 5 years out, we are going 
to balance immediately, and then we will correct that. That is 
something that has to be corrected when?
    Mr. Elmendorf. Well, so balancing immediately would have 
the consequences we have been discussing.
    Mr. Lankford. Right. I understand. That would be too risky.
    Mr. Elmendorf. The exact timing is a matter of trade-offs. 
And we have written about this before. The sooner that the 
Congress acts, the lower the level of debt is likely to be 5 
and 10 years from now. On the other hand, the sooner the 
Congress acts, the greater the contraction would be in the 
short term.
    Mr. Lankford. Short term and long term. This is, do you 
like it right now, or do you like it 5 years from now or 6 
years from now?
    Mr. Elmendorf. Yes, that is right.
    Mr. Lankford. Basically have to be able to deal with the 
consequences and the issues. So you are saying on the current 
path, we can postpone the pain for 5 years, but it is coming.
    Mr. Elmendorf. I think it is coming, yes, Congressman.
    Mr. Lankford. Okay. Let me ask you a question about the 
size of the interest. We talk a lot about the interest rates 
and such. Project out. I mean you talk about another $7 
trillion being added to the debt. What are we talking about of 
the actual dollar size of an interest payment based on your 
projection? Right now, we are paying around, give or take a few 
billion, around dollar $300 billion a year in interest 
payments. What is your best guess on getting out to the end of 
the 10-year window what we are paying in interest in a single 
year?
    Mr. Elmendorf. So, Congressman, our projection for this 
year, fiscal year 2013, is the government would spend $224 
billion on interest payments. We project that would grow to 
$857 billion in 2023. That is an increase as a share of GDP 
from about 1.4 percent to 3.3 percent, or almost 2 extra 
percent of GDP devoted to net interest payments.
    Mr. Lankford. All right. So current path, that is with the 
SGR cuts, that is with everything else----
    Mr. Elmendorf. Yes.
    Mr. Lankford [continuing]. Current path by the end of the 
next decade, we are paying $857 billion just in interest.
    Mr. Elmendorf. Yes. Just in that single year.
    Mr. Lankford. How many things do we have in our budget that 
are $857 billion?
    Mr. Elmendorf. Not very many, Congressman. It would be one 
of--there is a nice picture in our outlook--this would be one 
of the largest components of Federal spending. Those who have 
the outlook in front of you, figure 1-3, you can see that by 
2023 the major health care programs as a group and Social 
Security as a group would be more than net interest payments, 
but the net interest payments would be higher than defense 
spending. It would be higher than all nondefense discretionary 
spending. And it would be higher than all mandatory spending, 
all the benefit programs apart from Social Security and the 
major health care programs.
    Mr. Lankford. Thank you.
    I yield back.
    Mr. Price. Thank you.
    The gentleman from Rhode Island, Mr. Cicilline.
    Mr. Cicilline. Thank you, Mr. Chairman.
    I want to thank Chairman Ryan and our Ranking Member Van 
Hollen for the warm welcome, and look forward to serving on 
this committee.
    And thank you, Dr. Elmendorf.
    I think I have not heard from an economist or read the 
thinking of an economist who has not said that we have to 
approach this serious economic challenge by a balance of 
reducing spending and generating new revenues. And I think 
there is really no question that the President's articulation 
of that model is something that we have to do so that we both 
do it in a way that is properly timed but also which is at the 
same time making the investments that are necessary to grow our 
economy. But clearly we have to reduce spending, and so we are 
going to have to make choices about what we invest in. And so I 
am wondering if you would share some thoughts with us in terms 
of getting the most bang for our buck. What are the kinds of 
policies that, when we are engaging in spending, we are likely 
to produce the greatest economic growth and the greatest help 
to our economy? Because not all spending is the same. So, in 
that regard, in particular, I am interested to know your 
thoughts about infrastructure spending, really rebuilding the 
crumbling infrastructure of our country in sort of the old-
fashioned WPA way, which leaves behind an asset which 
contributes to economic growth and our ability to move goods 
and services and information to compete in the global economy 
and, at the same time, puts people to work immediately but 
leaves behind a valuable asset. How does infrastructure in 
particular relate to economic growth when we are making choices 
about how to do spending? And secondly, if you would speak to a 
proposal the President spoke about last night, which is a 
proposal to allow millions of American homeowners to refinance 
their homes at a lower interest rate, the market rates today, 
which I suspect, not being an economist, would produce, on 
average, I think they said $1,200 a year in new spending 
opportunities for families, provide substantial economic 
relief, help stabilize the housing market. But I also expect it 
would be a huge economic generator in terms of job creation. So 
if you could speak to those two issues.
    Mr. Elmendorf. Yes, Congressman. So when we talk about bang 
for the buck, sometimes we talk about that in the short-term 
context and sometimes in the medium- or long-term context. And 
the interests can be different. In the short term, what matters 
most is how much of the extra dollar of government spending or 
how much of the lost dollar of taxes is spent and how quickly 
it is spent. Giving more money to spending increases or tax 
cuts to lower-income people tend to be more effective than 
doing the same for higher-income people because they tend to 
spend a larger share of the difference.
    In infrastructure spending, a lot of that gets spent, but 
depending on the project, it may get spent somewhat slowly. So, 
in that sense, infrastructure can have a high bang for the buck 
ultimately, but it may not have as large a bang for the buck 
right now. Because certain projects just take a while to get 
started on.
    In the medium term and long term, infrastructure 
investment, if devoted to high-return projects, can in fact 
have a big effect on the state of the economy. About half of 
nondefense discretionary spending can be viewed as investment 
either in physical structures or in people in the form of 
education and training. Not all that money is spent well, but 
some of it is clearly spent for things that the private sector 
would not otherwise provide. And some of those projects then 
can have high rates of return and can boost the economy in 
significant ways over time.
    I think the one concern that people have raised about the 
cutbacks in discretionary spending as a share of GDP that are 
in place under the sequester, but even under the original caps, 
people have expressed concern that that can end up limiting the 
investment that the Federal Government does. Of course, it is 
hard to know for sure because you and your colleagues haven't 
made those specific choices yet.
    On helping households to refinance in the way the President 
discussed last night, I don't know precisely what his proposal 
is. We will see that when he releases his budget. But we have 
in the past done analysis of different ways of encouraging more 
refinancing. We think that can have a positive effect on the 
economy in addition to helping those households. The overall 
effect depends crucially on how many households end up 
refinancing. So it depends crucially on how a program is 
designed, who is eligible, what the incentives are to 
households and to the lenders to do something differently than 
they are doing under current law. So the effects in the 
aggregate can vary a lot across different ways of doing that. 
But dollar for dollar, it can be effective, as we reported in a 
report about a year or so ago.
    Mr. Cicilline. When you say it depends on the amount, 
obviously the more Americans who are able to take advantage of 
it. If it is an easy program to administer, lots of eligible 
Americans, it will have a greater and more positive impact.
    Mr. Elmendorf. Yes. Exactly, Congressman.
    Mr. Cicilline. Thank you.
    Mr. Price. The gentlelady from Tennessee, Mrs. Black.
    Mrs. Black. Thank you, Mr. Chairman.
    And thank you, Dr. Elmendorf, for being today. I think I 
can thank you for the this budget outlook, although it does, as 
you read through it, certainly bring up a lot of concerns about 
where we are going and the huge challenges that we will expect 
going down the road. And as I was reading through here, I made 
some notes where I see a lot of things are unsustainable. 
Social Security is unsustainable, and without reform, it will 
go bankrupt in 2033. Medicare is unsustainable. Hospital 
insurance trust funds end in 2023. Social Security Disability 
Insurance, which we don't talk very much about, and I think 
that is really an important topic that I would love to see 
either this committee or some other committee take a look at, 
because I got concerned about this last year when I started 
reading about it, it will go bankrupt in 2016. A big concern.
    And then, on the education side, Pell Grants, $1 billion 
shortfall in fiscal year 2015, and then annual shortfalls of $5 
billion or more from fiscal year 2016 through 2023. All of 
these programs, as we are looking at them, it is very, very 
scary to see that they are going to go bankrupt unless we have 
some form of reform.
    But let me now turn to look at the health care issue, 
because CBO cites that rising health care costs as a leading 
driver of our debts and our deficits. And the Federal Exchange 
Subsidies alone are expected to cost $1.2 trillion, while the 
Medicaid expansions are expected to reach $638 billion. In 
knowing all this, will this increase in spending--well, first 
of all, the Affordable Care Act, or the ObamaCare, adds another 
trillion dollars in new health care entitlement spending. So 
here we go again, more health care entitlement spending. But 
will this increase in spending, with the Medicaid expansions 
and the new exchange subsidies, reduce health care cost growth 
as we look at the growth down the road?
    Mr. Elmendorf. Well, Congresswoman, the Affordable Care 
Act, as you know, had a number of different pieces with 
different sorts of effects. The expansion of insurance coverage 
we now estimate will cost $1.3 trillion over the 2013 to 2023 
period, those 11 years.
    Mrs. Black. And Dr. Elmendorf, let me just interrupt you 
there to make sure that I understand, this is $1.3 trillion 
more than what was anticipated in previous outlooks of the 
program. Is that correct?
    Mr. Elmendorf. No, no, Congresswoman. I am saying that the 
costs of the coverage expansion relative to a world that did 
not have that coverage expansion.
    Mrs. Black. Okay.
    Mr. Elmendorf. There will be extra costs to the Federal 
budget of $1.3 trillion.
    Mrs. Black. But extra costs.
    Mr. Elmendorf. We have made many, many changes to our 
projections of the costs of the Affordable Care Act coverage 
expansion, but they have netted out to actually very little 
change on balance for any given period of years. Our estimates 
through 2019 are now actually slightly below what they were 
when we first estimated the effects of that expansion 3 years 
ago. As one moves the budget window further along, though, then 
of course one ends up with larger numbers for this expansion, 
and for all, really almost all, existing Federal programs, and 
for tax revenue, because the economy is growing over time. So 
this particular part of the law raises Federal costs in order 
to subsidize health insurance for people in particular ways. 
The law also included changes to Medicare that have the effect 
of bringing down the growth rate of Medicare spending over 
time. Taking those pieces together, we think the law has 
increased the Federal Government's budgetary commitment to 
health care in the long run. Because ultimately those coverage 
expansions outweigh the Medicare savings, the law as a whole--
in addition included changes in tax provisions--and as a whole 
we think it is a small deficit reducer. But the government's 
commitment to health care is increased because of the 
Affordable Care Act.
    How those Medicare changes will affect the growth of 
Medicare spending we made our best estimate of, but it is an 
uncertain business. And whether those changes in Medicare would 
spill over to the private sector we don't know either. So we 
have not offered a view about whether the--and we don't do 
estimates of total national health expenditures. So we really 
tried to focus what we have done what we have said to the 
Federal budgetary effects.
    Mrs. Black. And yet all of this, and I brought the chart up 
that you were actually referencing, this figure, to show that 
the major health care programs are the greatest amount of money 
that is spent in any one particular category. And we are 
showing that it does grow.
    Mr. Elmendorf. Yes.
    Mrs. Black. It doesn't come down, it doesn't curve down and 
level out.
    Mr. Elmendorf. Yes.
    Mrs. Black. It continues to grow. And yet despite this, and 
this is the point I want to make at the end of the day, is yet 
despite this, we know that there are going to be people out 
there, more people that will be uninsured than previously 
expected, because there are a lot of dynamics that are also 
occurring here that are going to cause that reaction that we 
will have more people uninsured.
    Mr. Price. The gentlelady's time has expired.
    Mr. Elmendorf. I am sorry, Mr. Chairman, but we project 
that the law will greatly reduce the number of uninsured 
Americans relative to what would be the case without that law 
in force.
    Mr. Price. The gentlelady's time has expired.
    With apologies to the gentlelady from Florida for not 
recognizing her in order, Ms. Castor is recognized for 5 
minutes.
    Ms. Castor. Thank you, Mr. Chairman.
    And thank you, Dr. Elmendorf, for being here today and 
sharing your economic budget outlook.
    I think there are positive signs that should not be 
overlooked that our economy is growing and we are adding jobs. 
That is consistent with what I see back home in Florida. There 
is greater construction work and more cranes popping up across 
town. Housing prices are up. So if you are a seller, I guess 
that is pretty good news. We have a seen a significant drop in 
unemployment.
    The tourism industry has rebounded quite strongly after the 
BP disaster. And if you are fortunate to have money in the 
stock market in the past few years, you have done very well.
    Last year I asked you if you we had more people working 
across America, would our debt and deficit situation be largely 
improved? You said, yes. And I assume you still believe this is 
the case.
    Mr. Elmendorf. Yes.
    Ms. Castor. Correct?
    Mr. Elmendorf. Yes.
    Ms. Castor. But it seems like we still have significant 
headwinds to getting past that 7.5 percent unemployment rate. 
And in your outlook, in your early testimony, you said that you 
don't see great improvement there in the near term. So talk 
about the headwinds to greater employment across the economy, 
especially what is in the control of the Congress? What are the 
current policies that are in place that prevent us from 
lowering that unemployment rate?
    Mr. Elmendorf. So, Congresswoman, I think you described 
well a number of the factors that we see, underlying factors 
that are leading to economic growth. But as we have said, we 
think that the remaining parts of what had been the fiscal 
cliff of a few months ago, the remaining parts are still a 
substantial damper to economic growth this year. And one of the 
things that Congress might do to boost economic growth this 
year is to not let that fiscal tightening take effect. Of 
course, as you know----
    Ms. Castor. Is this the sequester?
    Mr. Elmendorf. Yes. So there are a number of pieces of 
that, but one crucial piece is the sequester. And we think that 
if the Congress were to not have the sequester, then that would 
strengthen output this year and would lead to about 750,000 
more jobs in the fourth quarter. At the same time, of course, 
as you know, that if there aren't offsetting changes made 
later, then that extra debt would become a drag on the economy 
in the medium term and long term.
    Ms. Castor. That is what I am hearing from folks at home, 
our major employers. For example, we have a large port. If we 
reduce infrastructure spending, they anticipate cutbacks, and 
private businesses especially. Our large research university, 
they rely a lot on innovation and science and medical research. 
They are also telling me, along with the Cancer Research 
Institute, very significant damage to what they are doing, but 
a loss of jobs. Our large school district, the ninth largest 
school district in the country, and a large Air Force base, the 
MacDill Air Force Base, civilian workforce projection.
    So, colleagues, we really--time is short. And I think what 
we are hearing today, if we want to address the debt and 
deficit, let's not do this to ourselves. Let's not self-inflict 
a wound that will set us back further, put us back, dig us in 
deeper on long term deficit and debt reduction. I think this is 
a warning sign, and Dr. Elmendorf is being very clear with us 
that we have got to work together and replace the sequester. 
That doesn't mean we are going to shirk our responsibility to 
address the long-term debt, the medium-term debt.
    But if we are going to be stuck with this 7.5 percent 
unemployment rate, that is not sustainable, to borrow a word 
that has been used this morning quite a lot.
    Dr. Elmendorf, are there other policies that could help us 
that are within the control of the Congress to create more 
jobs?
    Mr. Elmendorf. So, Congresswoman, you can think of them in 
a few categories. I think there are a number of changes in 
fiscal policy, higher spending, or lower taxes than are under 
current law. And we have done, as you know, a few reports in 
the past few years of trying to evaluate the bang for the buck 
of different sorts of changes in tax and spending policy. 
Turning off the sequester would be one item on that list, but 
there are other items as well.
    Ms. Castor. Did you also mention immigration in your 
outlook?
    Mr. Elmendorf. So we don't talk about it in the outlook. Of 
course, we have done other work on immigration. I think 
immigration can be a very positive force--more immigration can 
be a very positive force for the economy in the medium term and 
long term, depending on exactly what the reforms were that 
Congress might consider. Those reforms wouldn't take effect 
quickly enough to provide a big boost to the economy this year 
and next year.
    In terms of the short-term boosts, in addition to changes 
in fiscal policy, there are possible changes--I think just 
greater certainty about the course of fiscal policy would help. 
And maybe other changes that could be made as well.
    Mr. Price. The gentlelady's time has expired.
    The gentleman from Texas, Mr. Flores.
    Mr. Flores. Thank you, Mr. Chairman.
    Dr. Elmendorf, thank you for joining us again. Let's talk 
about a different subject for a minute. When you looked at the 
President's budget from last year, can you tell me when that 
budget balanced?
    Mr. Elmendorf. In our estimate of it, Congressman, it never 
reached a balanced budget.
    Mr. Flores. Okay. And what would--would you say that the 
spending and revenue profile in that budget was one that would 
help create a sustainable economy?
    Mr. Elmendorf. Well, Congressman, we did think the economy 
would be sustained, yes. So we did an analysis of the economic 
effects of that budget. I don't remember the precise numbers. 
We still think the economy would be growing. But as I have said 
on many occasions, a path that had less government debt would 
by later in the decade and beyond lead to a stronger economy 
all else equal. And it depends on what else is occurring.
    Mr. Flores. Even the OMB by its own admission said that 
debt beyond the 10-year window was going to reach unsustainable 
levels, and the economy would suffer as a result of that.
    What would the economic impact be if we were to raise taxes 
by $85 billion for the rest of this fiscal year starting on 
March 1 vis-a-vis having a $85 billion cut due to the sequester 
that also starts on March 1?
    Mr. Elmendorf. Well, Congressman, that would depend on the 
nature of the tax increase.
    Mr. Flores. Let's assume for a minute it is done through 
tax rates, tax rate increases.
    Mr. Elmendorf. I don't want to be difficult, it would still 
depend, as you know, on whose tax rates were cut. But in 
general, we think that----
    Mr. Flores. Let's just say we raised it on the top 1 
percent again, include small business owners and----
    Mr. Elmendorf. So if the sequester were replaced by an 
equivalent dollar amount of increase in tax rates on high-
income people, we would think that would be an improvement for 
the economy because we think that the propensity to spend of 
those high-income people would be smaller, dollar for dollar, 
than would be the spending that would arise from the sequester.
    Mr. Flores. So the lady on the corner that owns the dry 
cleaning store, when she has her taxes increased dramatically, 
is going to hire as many people and invest as much in the 
economy and continue with her expansion plans that she had 
prior to that tax increase?
    Mr. Elmendorf. Well, so I think, Congressman, that the lady 
on the corner would find that more people would come in with 
dry cleaning if they were the people who were working for the 
government or working on government contracts of the sort that 
would be increased by taking away the sequester. And I am not 
trying to play a game here, but I think that is the effect we 
have in mind, which is that what businesses are most concerned 
about now is weak demand for their products.
    Mr. Flores. So, I mean, under that line of thinking, what 
you do is you raise the taxes to 100 percent on high-income 
people, and then spend all their money on government contracts.
    Mr. Elmendorf. So, Congressman, you posed a particular 
question. We do try to be careful about extrapolating out.
    Mr. Flores. It was more rhetorical than anything.
    How do you gauge the strength of this recovery over the 
last 4 years versus other economic recoveries post-World War 
II?
    Mr. Elmendorf. This has been a markedly weaker recovery.
    Mr. Flores. Okay. How does it compare to the recovery that 
we had during the 1981-1988 time frame? Or even you can go 
through 1993 if you would like to.
    Mr. Elmendorf. This has been a much weaker recovery than we 
had in the early 1980s.
    Mr. Flores. Okay. All right. The next thing, what was the 
10-year cost of the Affordable Care Act when it was enacted? Do 
you remember that? Your cost estimates? Gross costs, not the 
deficit impact.
    Mr. Elmendorf. Yes, right. As you know, the deficit impact 
we thought was a slight deficit reduction.
    Mr. Flores. Right.
    Mr. Elmendorf. The cost of the coverage expansion may be 
what you are referring to over the 10-year window at the time. 
I don't know that number offhand. As I mentioned a little 
earlier, the number of the cost of the coverage expansion over 
that 10 years we now think would be smaller by a little bit 
than we thought at the time. But as you know, the budget 
window, the 10 years that we now provide projections for has 
moved out in time through 2023. And that increases the 10-
year--the current 10-year cost defined in that way is higher.
    Mr. Flores. Okay. And again switching subjects for a 
minute, does the CBO look at unfunded obligations like what the 
actuarial obligations are of Social Security, of Medicare, 
Medicaid? Does CBO look at those?
    Mr. Elmendorf. Yes, Congressman. So, in our long-term 
budget outlook, we include the cost of those programs, and we 
include comments on the Social Security Trust Fund and the 
Medicare Hospital Insurance Trust Fund.
    Mr. Flores. But do you discount those back and say, this is 
what the net unfunded obligation is for Social Security today?
    Mr. Elmendorf. Yes, we do, Congressman.
    Mr. Flores. Okay. Do you have those numbers off the top of 
your head?
    Mr. Elmendorf. I am sorry, I don't. It is substantial, 
Congressman.
    Mr. Flores. It is tens of trillions of dollars between 
Social Security and Medicare. Correct?
    Mr. Elmendorf. I think that is right. We talk about this 
usually as a share of GDP, because we think that is a useful 
way to measure the burden on the economy.
    Mr. Price. The gentleman's time has expired.
    The gentleman from New York, Mr. Jeffries, is recognized 
for 5 minutes.
    Mr. Jeffries. Thank you, Mr. Chairman.
    You were just asked whether this has been a more robust or 
a weaker recovery than the ones I guess post-World War II, 
including the ones in the 1980s. And I think you testified that 
this was a weaker recovery. Is that correct?
    Mr. Elmendorf. Yes, that is right, Congressman.
    Mr. Jeffries. Would it also be fair to say that in 2008 
this country confronted the worse economic crisis and collapse 
that we have experienced in the history of the republic with 
the exception of the Great Depression?
    Mr. Elmendorf. Yes, that is right, Congressman.
    Mr. Jeffries. Okay, and the economy, since 2009 under this 
administration, is moving in the right direction based on any 
reasonable objective economic measure, wouldn't that be 
correct?
    Mr. Elmendorf. So the GDP has been growing since the summer 
of that year, yes, Congressman.
    Mr. Jeffries. Let's take a look at some other numbers. So 6 
million private-sector jobs have been created over the last 
several years, is that correct?
    Mr. Elmendorf. Yes, I think so, Congressman. It depends on 
the point at which you start that tally.
    Mr. Jeffries. Okay, and I believe about 500,000 
manufacturing job have been created in America over the last 
few years, is that right?
    Mr. Elmendorf. That may be. I don't know that offhand.
    Mr. Jeffries. Okay, I think unemployment, the unemployment 
rate is at or near its lowest level in the last 4 years, is 
that right?
    Mr. Elmendorf. Yes, Congressman, I think that is right.
    Mr. Jeffries. Okay, and home prices are rising at the 
fastest rate in the last 6 years, is that correct?
    Mr. Elmendorf. Yes, Congressman.
    Mr. Jeffries. And I think home purchases are up 
approximately 50 percent at this point in time?
    Mr. Elmendorf. They are rising a good deal. I don't know 
the exact number.
    Mr. Jeffries. And I think we have also reduced the deficit 
by about $2.5 trillion in the last several years, is that 
correct?
    Mr. Elmendorf. Sir, we have not tried to do a calculation 
like that. How much has been accomplished so far depends very 
much on the point in time at which one starts counting, and the 
benchmark one is comparing to, so we have not done that 
calculation ourselves.
    Mr. Jeffries. Okay, so it seems though, based on, you know, 
any reasonable economic measure, the economy is clearly moving 
in the right direction.
    The question has been asked a few times today, is there any 
economic benefit to balancing the budget? I would like to ask a 
different question. Is there any economic benefit to simulating 
economic growth in the country at this moment in time?
    Mr. Elmendorf. Yes, Congressman, there is.
    Mr. Jeffries. And what would be the best way, in your 
estimation, as you have examined this question, to stimulate 
economic growth?
    Mr. Elmendorf. Well, so the ultimate choices depend on 
people's judgments, your judgments, on behalf of your 
constituents as to what you think the government should or 
shouldn't be doing. But we have said that we think cuts in 
taxes or increases in spending that put money into people's 
hands where it is spent quickly, can provide a crucial boost to 
the demand for business services and encourage businesses to 
hire workers, which then gives them income, which allows them 
to spend more, and so on.
    Mr. Jeffries. And you have indicated that the best way 
perhaps to increase consumer demand is to make sure that we 
increase the amount of money that is placed into the hands of 
low income or modest Americans, is that right?
    Mr. Elmendorf. I think in terms of the bang for the buck, 
lower income Americans tend to spend a larger share of extra 
money they get, or reduction in taxes that they enjoy.
    Mr. Jeffries. And do you think it would be reasonable to 
conclude that an increase in the minimum wage, that was 
proposed recently by the President, and has been advocated by 
others, which would therefore place a greater degree of money 
in the hands of low income or modest income workers would lead 
to an increase in consumer demand, and therefore be good for 
the economy?
    Mr. Elmendorf. We have not studied a particular increase in 
the minimum wage carefully, Congressman. I think there are 
various specs at work. I think you are right, some people would 
get paid more, which they could then spend and would presumably 
spend. It is also true, though the evidence is mixed, we think 
there would probably be a small reduction in employment because 
the cost of workers would go up.
    We have not tried to work through those effects or others. 
It also, of course, depends on how much the minimum wage is 
increased, and how the increase compares with what is the 
current minimum wage in many States, and in many States, of 
course, there is different minimum wage, a higher minimum wage 
than the Federal minimum.
    Mr. Jeffries. I think the greatest reduction in employment 
at least that we could possibly face in the short term would be 
to allow the sequestration to take place, is that correct, we 
would loss about 750,000 jobs in your estimation?
    Mr. Elmendorf. I think, again, the Congress could examine a 
range of fiscal policy options, but of the things that are 
about to happen under current law that you all talk about a 
lot, the sequester, taking away the sequester would have a 
noticeable effect, in our judgment, on output and jobs over the 
rest of this year.
    Mr. Jeffries. Now, you mentioned that a loss in confidence 
in the government's ability to manage its affairs could trigger 
the fiscal crisis where our ability to borrow at affordable 
rates is reduced, is that right?
    Mr. Elmendorf. Yes.
    Mr. Jeffries. And would it be reasonable that confronting a 
fiscal cliff in January, a potential debt ceiling default, in 
March sequestration, debt ceiling default in February, 
sequestration in March, government shutdown in April, another 
potential debt ceiling default in May, could perhaps shake the 
confidence of some investors in our ability to deal with our 
responsibilities?
    Mr. Elmendorf. Yes, Congressman. We think that perennial 
crisis mode of fiscal policy over the past few years is 
reducing people's confidence. How big an effect that is, we 
don't know.
    Mr. Price. The gentleman's time is expired. The gentleman 
from Indiana, Mr. Rokita.
    Mr. Rokita. Thank you, Mr. Chairman. And thank you, Doctor, 
for being back with us. I think by anyone's objective measure 
in this town or country, we would consider you a smart man, an 
intelligent man, a good economist, right?
    Mr. Elmendorf. I can't comment on that.
    Mr. Rokita. That is why it befuddles me, although it is 
certainly the member's privilege and prerogative, it strikes me 
that some of us want to speechify rather than use this precious 
time to engage you in conversation through some questioning. 
And that is, for the record, I would like to say, I really 
appreciate Mr. Jeffries' line of questioning. I will try to 
continue on in that regard.
    Speaking of speechifying, we have heard that it is 
impossible to get ourselves out of this debt situation through 
spending cuts alone. And I just want to understand if I am 
correct that the CBO projects that revenue will double from 
2012, the 2012 level at $2.4 trillion to $5.0 trillion by 2023?
    Mr. Elmendorf. Yes, Congressman.
    Mr. Rokita. Okay, and that this year alone, revenues will 
grow my $259 billion from the previous fiscal year level?
    Mr. Elmendorf. Yes, Congressman.
    Mr. Rokita. Yes. According to your report, revenues have 
averaged just under 18 percent of the economy in recent 
history. Am I correct that you project under current law that 
revenues will rise to over 19 percent?
    Mr. Elmendorf. Yes, Congressman.
    Mr. Rokita. And isn't that above the historic average since 
World War II?
    Mr. Elmendorf. Yes, Congressman.
    Mr. Rokita. Am I correct that in a letter you wrote to Mr. 
Boehner last year, you estimated that the President's 
Affordable Care Act, or Obamacare will increase revenues. I 
would say ``taxes,'' but increase revenues by a trillion 
dollars?
    Mr. Elmendorf. Yes, Congressman, that is right.
    Mr. Rokita. Yeah, and that is because why?
    Mr. Elmendorf. That is because the law included a number of 
changes in tax rules that collect more money.
    Mr. Rokita. Increase taxes, in other words.
    Mr. Elmendorf. Yes, yes, exactly.
    Mr. Rokita. I think most people are focused on the tax 
increases that hit higher income tax payers. But am I correct 
that the payroll tax holiday expired as part of the fiscal 
cliff deal or not being included in the fiscal cliff deal?
    Mr. Elmendorf. Yes, yes.
    Mr. Rokita. Okay, great, thank you. Now, when you talked in 
your opening remarks to the public debt, I think, interject if 
I have these numbers wrong. You said that the public debt was 
76 percent of our gross domestic product, the value of goods 
and services this whole country, man, woman, and child 
generates in a year?
    Mr. Elmendorf. That is the projection for end of this year, 
yes, Congressman.
    Mr. Rokita. Seventy-six percent. But going back to Mr. 
Flores' line of questioning, that is not the whole picture, 
right? I mean, go through the definition of public debt and why 
I think it might be higher that if you include what is missing 
from the Social Security Trust Fund, et cetera.
    Mr. Elmendorf. So in addition to the debt that is held by 
private citizens here and abroad, and by the Federal Reserve 
system, there is also a substantial amount of government debt 
that is held by other government accounts, the most prominent 
of which, the largest of which is the Social Security Trust 
Fund. That debt is honest-to-goodness government debt, backed 
by the full faith and credit of the government. We don't 
include it in the debt measure that we focus on, nor do most 
analysts, because we and most analysts look at the government 
as a unified whole, and when we do projections of future 
spending, we take account of future Social Security and 
Medicare, other components of spending, so we capture the 
future obligations of those programs under current law in the 
way we do our projections of spending.
    Mr. Rokita. So we----
    Mr. Elmendorf. So when we look at the debt, we look at the 
debt the government owes to outside the government.
    Mr. Rokita. So you don't calculate that debt until that 
debt becomes due, so when the Social Security Trust Fund has an 
IOU and gives it to the other hand of government to pay that 
IOU, that is when you count it, at that time, right?
    Mr. Elmendorf. Yes, and as you know, we actually produce 
projections of this larger--of gross debt. We report them in 
this outlook, but we don't focus on them.
    Mr. Rokita. If I wanted to include the Social Security 
Trust Fund in my remarks to constituents, and trying to educate 
America to what is really happening here, what would be the 
debt-to-GDP ratio if you included the trust fund and any other 
significant debt?
    Mr. Elmendorf. I am sorry, Congressman, I actually don't 
know that. I don't know that number.
    Mr. Rokita. Do you think it would be over 100 percent?
    Mr. Elmendorf. That seems plausible, yes, Congressman.
    Mr. Rokita. Okay, thank you. And with the remaining time I 
have, and remember, when I started my questioning, I 
complimented you about how smart you were, certainly relative 
to me, so take you in this vein. If I was a taking your credit 
card application, your personal one, and under the question, 
occupation, would it be plausible for you to tell me you are an 
economist?
    Mr. Elmendorf. Yes, Congressman.
    Mr. Rokita. Okay. So you are familiar with the Austrian 
School, the Chicago School----
    Mr. Elmendorf. Yes, Congressman.
    Mr. Rokita [continuing]. The Keynesians, the neo-Keynesians 
and all that?
    Mr. Elmendorf. Yes, Congressman. You and I have discussed 
this before, I think.
    Mr. Rokita. Okay, which one do you prefer, and why are the 
other ones inferior, which school?
    Mr. Elmendorf. So I think the consensus view in the 
economics profession, is that what people think of as Keynesian 
economics, which is the output in employment depend on the 
demand for goods and services, answers important questions 
about what will happen in the economy when unemployment is very 
high, as it has been over the past several years, but the 
consensus also thinks that over the medium term and long term, 
when unemployment is not generally so high, that what we think 
of as neoclassical economics is a better guide to what happens 
in the economy.
    Mr. Rokita. And even Keynes thought that you have got to 
stop the spending at some point.
    Mr. Elmendorf. I don't know.
    Mr. Price. The gentleman's time has expired.
    Mr. Rokita. My time is expired, I am told. I yield back.
    Mr. Price. The gentleman from Wisconsin, Mr. Pocan.
    Mr. Pocan. Thank you, Mr. Chair, and thank you, Dr. 
Elmendorf. It is a pleasure to be on the committee, especially 
with so many people from Wisconsin. I know Mr. Ryan and I share 
a county. Back home we have neighboring districts. So it is 
great to be here representing my State.
    Dr. Elmendorf, you know, one of the top priorities, as I 
look at it, is growing the economy. How can we create more jobs 
right now to really get things going? That is the best way to 
get out of the deficit situation, and when, you know, 
especially before being here, watching the news, it seems like 
all they ever talk about is deficit reduction as the economic 
plan as if Congress can't walk and chew gum. And I think we can 
do both.
    And part of that is how do we help grow the economy to help 
create those jobs. When I was on our joint committee on finance 
back home in the legislature, I used to be the chair of the 
committee, and we had to approve every single recovery dollar 
that, stimulus dollar that came through Wisconsin that came 
from Congress. And at that time, you know, anecdotally I have a 
small business. I heard from small business owners who benefit 
from it, but more importantly, at that committee we had the 
road building industry, and the vertical construction industry.
    So, you know, road building, and building, buildings--not 
exactly your most liberal entities--put out a report saying 
that 54,000 jobs were saved or created just in the State of 
Wisconsin, thanks to those stimulus dollars, and some other 
minor things we did in the legislature. And you know, I look at 
that and then I look at what the President said yesterday about 
kind of investing it back again. And then I saw a release from 
Speaker Boehner yesterday, and he said in his release, tonight 
he offered them little more than the same stimulus policies 
that have failed to fix our economy and put Americans back to 
work.
    And you know, I know Wisconsin is a very unique place 
because those of us from there are very proud to be from there. 
I think we have very commonsense Midwestern values, but our 
experience was very different than that comment. I was just 
curious. I believe the CBO has done a report on the ARRA 
effects. Were there, indeed, is it unique to Wisconsin or were 
there total job increases across the country because of those 
investments?
    Mr. Elmendorf. So Congressman, we think that there were 
more, there were more jobs and more output produced because of 
the Recovery Act.
    Mr. Pocan. And what kind of numbers jobs are we talking?
    Mr. Elmendorf. So it varies over time because the spending 
and the tax reductions from the Recovery Act varied over time. 
At the peak effect of the Act, in 2010 and 2011, we think there 
were between basically half a million and 3.5 million 
additional jobs.
    Mr. Pocan. Okay, so up to 3.5 million. And then were there 
additional jobs since then through that peak period?
    Mr. Elmendorf. Yes, so there continues to be, in our 
estimate, slightly more employment than would otherwise be the 
case. But most of the money from that, both the spending side 
and the tax cuts has now been spent, so the effects are 
dwindling.
    Mr. Pocan. So because of the job increase, I think it is 
fair to say, too, that it reduced the unemployment rate during 
that period?
    Mr. Elmendorf. Yes, Congressman.
    Mr. Pocan. Okay, and how about the effect on economic 
growth in that period? Did it have any net effect to the 
economy?
    Mr. Elmendorf. Yes, we think it boosted economic growth in 
2009 and 2010 by a considerable extent and brought down the 
unemployment rate again, particularly, in 2010 and 2011.
    Mr. Pocan. Okay, so you know, I just think as we look at 
what we are talking about, you know, so often people talk about 
whether you raise taxes or you cut spending, as if those are 
the only two alternatives on the table, and I think maybe 
sometimes in Washington, those are the only two alternatives 
people seem to look at. But from those of us who come from the 
heartland or maybe are new around here, you know, I have had a 
small business since I had hair, and it was dark. All right, so 
I come from a little different perspective, but it does seem 
that there is another way that if we can actually help to 
increase people getting to work and getting jobs and if they 
are paying taxes, that trajectory we saw on spending is the 
problem on that chart, we could start to then close up that 
trajectory by bringing in real revenue without raising taxes on 
anyone just by having more people becoming taxpayers. Is that a 
fair assessment?
    Mr. Elmendorf. So you are right Congressman, that if more 
people worked and they earned more money, that could have a 
substantial positive effect on the budget. The question is what 
policies the Congress might enact and what the cost of those 
policies would be for the budget.
    Mr. Pocan. Got you. And then when people have talked about, 
too, you know, when there is a dollar expended to do that, I 
mean, just like in business, if I invest in something you have 
got a cost to do that, but I would make a profit off of that 
ultimately. So there may be a 20, 40, 60, 80 percent, whatever 
the cost is depending on their product, ultimately, you still 
could have a net gain, correct? So having that investment, if 
it is the right policy and it creates jobs, can help close that 
trajectory?
    Mr. Elmendorf. It is possible, Congressman, but if the 
government invests in something, even if that project earns a 
fairly high return for the economy as a whole, the government 
will collect only a small share of that higher return in future 
tax revenue. So funding projects that would pay for themselves 
by the Federal Government, I wouldn't want to rule out. But on 
the other hand, I think you should view that as a very high 
bar----
    Mr. Price. The gentleman's time is expired. The gentleman 
from Georgia, Mr. Woodall, is recognized for 5 minutes.
    Mr. Woodall. I thank you, Mr. Chairman, and I want to say 
how proud I am that we have a Georgian sitting as vice chairman 
of the committee this cycle. My freshman colleague from 
Wisconsin talks about commonsense Midwestern values. It is 
those commonsense Georgia values that they give me great hope 
off of this institution. So congratulations to you in that new 
role.
    So I do want to talk about the common ground we have with 
Wisconsin. In fact, Rhode Island, the gentleman from Rhode 
Island, Mr. Cicilline was talking earlier about the great 
public works programs, and before we started our questioning, 
and I just wanted to read from FDR's State of the Union speech 
back in 1935 when he said: ``I am not willing that the vitality 
of our people be further sapped by the giving of cash or of 
market baskets. We must preserve not only the bodies of the 
unemployed from destitution, but also their self-respect, their 
self-reliance, their courage and their determination.''
    He called the payments going out at that time a narcotic, a 
subtle destroyer of the American spirit. And I would certainly 
hope as we talk about revenues, and I think about refundable 
tax credits as being these cash payments, anything we can do to 
work together to redirect those cash payments into those real 
jobs that provide real benefits to the human spirit, not just 
to the pocketbook, I would look forward to working together on. 
But thinking about my common Georgia upbringings, Director, I 
wanted you to help me with some things.
    I heard a lot of discussion about, we can't get to balanced 
budgets just by cutting spending. There has to be a revenue 
component. And my friend from Indiana pointed out that revenue 
was going to double over the next 10 years under your 
projection?
    Mr. Elmendorf. Yes, Congressman.
    Mr. Woodall. So our revenue component, if we do nothing 
more, we are going to double revenues to the Federal Government 
over the next 10 years?
    Mr. Elmendorf. Yes, Congressman, that is our projection.
    Mr. Woodall. Now, thinking about the cutting of the 
spending that we are going to be doing over the next 10 years, 
if we do nothing over the next 10 years, how much will spending 
fall below current levels?
    Mr. Elmendorf. In dollar terms, Congressman, as you know, 
we expect the spending at the end of the decade will be quite a 
bit higher than spending is now.
    Mr. Woodall. Well, you say in dollar terms. What if we did 
it as a percentage of the economy to adjust for inflation, then 
how much lower would spending be in 10 years than it is today?
    Mr. Elmendorf. Well, as a share of the economy, we project 
outlays in 2023 will be 22.9 percent, and last year they were 
22.8 percent.
    Mr. Woodall. So over the next 10 years, they are not going 
down either?
    Mr. Elmendorf. There is a dip and then there is an increase 
again.
    Mr. Woodall. Okay. So just to be clear, tax is going to 
double over the next 10 years in real dollar terms, spending 
not going to decline over the next 10 years either in real 
dollar terms, or nominal dollar terms?
    Mr. Elmendorf. That is right, Congressman. That is right. 
As you know, as I mentioned earlier there will be roughly 40 
percent more beneficiaries of the largest, most expensive 
Federal programs a decade from now than they are today, and 
that is a critical factor driving those numbers.
    Mr. Woodall. Unquestionable, which leads me to believe, 
when you have serious people looking at these issues as we do, 
that no one is actually talking about cutting spending. We are 
just arguing about how much more we are going to increase 
spending. Are we going to increase a whole lot more? Are we 
going to increase it a little more because there are folks out 
there that we have to keep commitments to. As useful as I find 
the baseline, I can't tell you how much I appreciate the work 
that you do. I am glad that you do it instead of me doing it. I 
tell folks, the best part of my job is really smart people are 
willing to invest time in me to make me smarter.
    But something I don't understand. You mentioned in your 
testimony that the alternative fiscal scenario assumes the 
sequester doesn't go into effect because you have had some 
members mention that. But does the baseline assume that the war 
in Iraq and Afghanistan comes to an end and that money ceases 
going out the door?
    Mr. Elmendorf. No. So what we do for, and have done for 
years----
    Mr. Woodall. Maybe a follow onto that. Does it assume that 
the Sandy supplemental spending was just a one-time effect and 
also won't go on?
    Mr. Elmendorf. No, Congressman. The answer to both parts of 
the question is that our projections of discretionary spending 
have never been about the cost of doing particular sorts of 
programs. They have always been extrapolations of the latest 
funding Congress has provided, with the one crucial exception 
now of the caps on most discretionary spending. But the current 
funding for overseas wars and the funding that Congress has 
provided for, really to Hurricane Sandy, we have extrapolated 
those with inflation, the way we have traditionally done 
discretionary spending as a whole.
    Mr. Woodall. And why is that? I mean, here we have done an 
alternative scenario because some Members have suggested that 
something might happen, and yet we baked into the baseline, 10 
years of Sandy aid, which we know with absolute certainty will 
never happen. What is the reason for that?
    Mr. Elmendorf. So Congressman, I think for the things that, 
as you know, our table of alternative policies includes numbers 
that allow you and your colleagues to subtract those particular 
provisions if you would like, to construct your own projections 
of the budget balance. The reason we view those as somewhat 
different from the provisions in the alternative scenario, is 
the alternative scenario has a set of permanent features of law 
that the Congress has, in the past, extended or deferred taking 
effect. Whereas discretionary spending, as I said, has never 
been about particular programs, so we have written other 
reports, for example, on veterans' health care, which is 
indiscretionary spending. We think that providing the level of 
care people now get to the people who are now eligible will be 
more expensive 10 years from now than is captured in the 
discretionary baseline.
    Mr. Price. The gentleman's time is expired.
    Mr. Elmendorf. Hurricane Sandy may not recur, but other 
storms may come, other wars may come. So we try not to judge 
what the level of discretionary spending that you all would 
like to have in the future.
    Mr. Price. The gentleman's time is expired. The gentleman 
from California, Mr. Huffman.
    Mr. Huffman. Thank you, Mr. Chairman, and it is an honor to 
serve with you on this committee. Thank you, Dr. Elmendorf for 
your testimony. It has been very useful. I have a pretty quick 
question here. We have spent most of our time today discussing 
the deficit, our debt, and the health care costs that are the 
big driver of future expenditures. But a couple of my 
colleagues have brought up Social Security, and so I just 
wanted to ask you, Dr. Elmendorf, if you could please explain 
the extent to which Social Security contributes to the deficit 
and the public debt that we saw illustrated on the chart. And 
also, if you assume that we should be focused like a laser beam 
on bringing the deficit down so that we can get our debt under 
control, would you agree that the discussion of reducing Social 
Security costs is a bit of a red herring?
    Mr. Elmendorf. So Congressman, starting a few years ago and 
continuing indefinitely into the future under current law, the 
Social Security benefits that are being paid out exceed the 
Social Security tax revenues that are being collected. The 
Social Security Trust Fund also receives, as you know, interest 
payments on the debt that it holds. So at this point in time, 
Social Security benefits, as I said, are greater than tax 
revenue, a little less than the tax revenue plus the interest 
payments, but on a unified budget basis, where the interest 
payments from one part of the government to the other wash out, 
Social Security taxes benefits and taxes actually are 
increasing the budget deficit. And if you look in our 
projections out half a dozen years or so, by that point, the 
benefits will exceed the tax revenues plus the interest 
payments that will be paid in, so that the Social Security 
Trust Fund as a whole will be suffering annual deficits.
    Mr. Huffman. At what point--excuse me, at what point does 
Social Security begin to contribute to the deficit?
    Mr. Elmendorf. Well, again, Congressman, on a unified 
budget basis, taking account of just the tax revenues, the 
dedicated tax revenues, and the benefits, it is contributing 
the deficit now. If one instead looks at just the balance in 
the Social Security Trust Fund, that balance is, the annual 
balance is positive now, but will be negative within about a 
half dozen years. I am looking for the exact number and I can't 
find it, but it is changing quickly.
    Mr. Huffman. Okay.
    Mr. Price. The gentleman yields back? The gentleman yields 
back his time.
    Mr. Elmendorf. Actually, Mr. Chairman, I do have the number 
to fully answer the question. Which is we think that by 2021, 
the Old-Age and Survivors Insurance Trust Fund will have an 
annual deficit. The Disability Insurance Trust Fund is 
currently an annual deficit. Taking those pieces together as 
people often do, we think the overall Social Security Trust 
Funds will be running annual deficits beginning in 2017.
    Mr. Price. Thank you. The gentleman from Ohio, Mr. Renacci.
    Ms. Moore. Excuse me, Mr. Chairman.
    Mr. Renacci. Thank you, Mr. Chairman.
    Mr. Price. The gentlelady from Wisconsin.
    Ms. Moore. I do have time constraints, and I do believe 
that I have been overlooked.
    Mr. Price. The gentlelady is up following Mr. Renacci.
    Ms. Moore. Well, is he, how many Republicans have we taken?
    Mr. Price. We have gone back and forth, Republican, 
Democrat. Mr. Huffman just had the time.
    Ms. Moore. Okay, I am so sorry.
    Mr. Price. That is all right. The gentleman from Ohio.
    Mr. Renacci. Thank you, Mr. Chairman, and thank you, 
Doctor, for being here. I just want to go back to my 
colleague's question on Social Security because I do have a 
question on it. But the CBO baseline shows, and you previously 
mentioned that Social Security will run a cash deficit of $1.3 
trillion over the next 10 years. Is that a true statement?
    Mr. Elmendorf. That may be, Congressman. I don't have that 
number in front of me, I am afraid.
    Mr. Renacci. Okay, going back to some of the discussions 
that have occurred, and it has been an interesting day for me. 
I have been a businessman most of my life, only been here a 
couple of years. So when I look at the business of the Federal 
Government as to how it is going, and how my current business 
is ran, my small business is ran back home, I would be scared 
to death of the trajectory direction that we are going. And I 
think you said that continuing under the current policies, it 
is just not sustainable, is that correct?
    Mr. Elmendorf. Yes, Congressman.
    Mr. Renacci. Okay. One question earlier, somebody talked 
about jobs, net jobs created over the last 4 years. Is that a 
negative number or a positive number, net jobs?
    Mr. Elmendorf. I am sorry, Congressman, I don't have that 
number.
    Mr. Renacci. Okay. Let's go back to tax rates. And again, 
as a business owner, when my tax rates increased, I was 
concerned and would not employ more people. That was an easy 
answer for me. And if I didn't have any certainty and 
predictability of what those rates were going to be, I 
definitely didn't do much as far as the future. Do you have any 
correlation to the raising marginal rates and how it affects 
the economy, because we have talked a little bit about that?
    Mr. Elmendorf. Yes, Congressman, so when we modeled the 
effects of big changes in fiscal policy like the President's 
budget proposals each year, our models explicitly include the 
effects of changes in tax rates on people's work effort and on 
our saving behavior. We recently did a reexamination of the 
assumed amount of response that we have with a lot of 
consultation with outside experts, and made some adjustments in 
what we do and published reports describing how we read the 
evidence. But it is certainly the case, in our view of the 
research literature, that higher tax rates will tend to 
discourage work effort, and saving.
    Mr. Renacci. So as we talked about earlier, you heard that 
if we--if we add taxes, if we do a balanced approach, when 
marginal tax rates go up, that is also going to slow the 
economy down?
    Mr. Elmendorf. That is right, Congressman. Again, all else 
equal. So the crucial question is what else is going on in the 
Federal budget.
    Mr. Renacci. Do you think that comprehensive--well, 
actually, let's go back to the fiscal cliff. When we passed the 
fiscal cliff here recently, do you think people moved their 
taxable income? Was there a shift in taxable income and a 
change in what they were going to do knowing the rates were 
going up?
    Mr. Elmendorf. Yes, Congressman. I think that both 
corporations and individuals behaved differently the last part 
of last year, not--based on their expectation and their 
uncertainty about what was going to happen with the fiscal 
cliff.
    Mr. Renacci. So we will see a jump up maybe in receipts 
this year because of that?
    Mr. Elmendorf. And in fact, Federal receipts were strong in 
January, and that may be--that is, I think, part of the story. 
There is also, of course, the end of the temporary reduction in 
the payroll tax, and other factors.
    Mr. Renacci. Let's talk a little bit about capital gains, 
which I know also changed. Capital gains rates could lead to--
in 2012, JCT and the CBO said that higher tax rates on capital 
gains could lead to a level of inefficiency and conversely, 
lower capital gain rates could, in fact, encourage investment. 
Do you agree with that statement?
    Mr. Elmendorf. Yes, Congressman.
    Mr. Renacci. Do you believe an increase in the capital 
gains tax could increase the long-term productivity.
    Mr. Elmendorf. So you said the----
    Mr. Renacci. Increase.
    Mr. Elmendorf. Increase.
    Mr. Renacci. Assuming that we are increasing capital gains.
    Mr. Elmendorf. All else equal, Congressman, no, we don't 
think that an increase in the tax on capital is going to boost 
investment output in the future. The question, again, I 
emphasize, is all else is not usually equal. If that money is 
used to reduce borrowing, then that reduction in borrowing has 
a positive effect on the economy.
    Mr. Renacci. My colleague earlier talked about revenues 
doubling over the next 10 years in your projection, and 
spending going up significantly. Do you have an idea how much 
spending is going to go up over the next 10 years?
    Mr. Elmendorf. I don't have that number calculated, 
Congressman. We think spending this year will be about $3.5 
trillion, and in 2023, will be pushing $6 trillion. But I don't 
know the percentage change, I am afraid.
    Mr. Renacci. Okay. I yield back at this time.
    Mr. Price. The gentleman yields back his time. The 
gentlelady from Wisconsin, Ms. Moore, for 5 minutes.
    Ms. Moore. Thank you so much, Mr. Chairman, and thank you, 
Dr. Elmendorf, for appearing today. I have seen how you have 
done this very delicate dance all morning as Members have 
attempted to get you to agree with their approach about how to 
reduce the deficit, about how to grow the economy. What is more 
important? Is this tax policy better or worse? So I do 
appreciate your indulgence and your patience in this. But what 
I guess I learned and heard from you today, is that ultimately, 
we make the decisions around here about what happens, and that 
you know, it is, you know, all things are not equal.
    So for example, the American Taxpayer Relief Act of 2012 
the so-called fiscal cliff thing we did New Year's Day, it 
doubled the deficit, didn't it? It went from like $2.3 trillion 
to $4.6 trillion, and all, you know, and in that, I think we, 
for example, did not extend the payroll tax relief, and so 
therefore, we didn't help poor people there. We did things like 
make the unemployment insurance until December 31st of this 
year, whereas we increased the estate tax relief, went back to 
former law, made that permanent so that couples up to $10 
million have an exemption.
    So when we think about this provision, for example, in 
terms of long-term debt and the stimulative ability, or lack 
thereof, do you have an assessment of this particular--this 
particular policy with respect to long-term deficit reduction?
    Mr. Elmendorf. So Congresswoman, you actually understated 
the point. We thought deficits under current law had been $2.3 
trillion over the decade, and the New Year's law added about 
$4.7 trillion to deficits over the decade, so it essentially 
tripled the deficits under current law. That change greatly 
increased government borrowing. It also reduced tax rates. 
Those two changes have opposing effects on future output. We 
haven't actually done a specific estimate of the economic 
effects of that law, but as I said before, the level of 
government borrowing has an important--negative higher 
borrowing has a bigger negative effect on future economic 
outcomes, and I think that----
    Ms. Moore. My time is waning, but I think that, you know, 
you have really made the point that all--that there are 
consequences of policy, and here this was an initiative, I 
think, that helped wealthier people more because the Bush era, 
Obama era, whatever people want to call it, tax rates, 
disproportionately helped richer people. Same thing with tax 
expenditures. We heard discussion here earlier about. And 
Greenspan calls them not tax expenditures, but tax 
entitlements. Isn't it, in fact, true that the tax expenditures 
almost equal the Medicare, and Medicaid, and the Social 
Security all together; that they almost equal that amount, and 
that they disproportionately go to wealthier people? I mean, 60 
percent of our tax entitlements go to, you know, maybe 20 
percent of the wealthiest people?
    Mr. Elmendorf. So Congresswoman, in our report last year we 
showed that tax expenditures through the individual income tax, 
and the payroll tax were larger than government spending on 
Social Security, larger than spending on defense, larger than 
spending on Medicare. The distribution varies a good deal 
across tax expenditures. Some of them benefit higher income 
people disproportionately, others are more focused on lower 
income people. We have some work underway.
    Ms. Moore. There is a lot of complaints, Dr. Elmendorf, 
about the 50 percent of people who don't pay any income tax, 
and so, I mean, the tax expenditure program for homeowners, and 
for charitable donations which are good tax expenditures, there 
is a lot of waste in it as well. I just want you to stipulate 
in your testimony here that, in fact, there is a lot of 
spending that is done through tax expenditure programs, and it 
increases the income disparity.
    Mr. Elmendorf. So I think, Congresswoman----
    Ms. Moore. Very regressive.
    Mr. Elmendorf. Many economists agree that tax expenditures 
are best thought of as government spending, even though they 
appear in the budget as----
    Ms. Moore. And are they regressive?
    Mr. Elmendorf. We have work underway on the distribution of 
tax expenditures, and it is not finished yet and I don't want 
to speak ahead of our not having completed that analysis.
    Mr. Price. The gentlelady's time is expired.
    Ms. Moore. Thank you for your indulgence, Mr. Chairman.
    Mr. Price. Thank you, the gentleman from Indiana, Mr. 
Messer, for 5 minutes.
    Mr. Messer. Mr. Chairman, I am the final questioner today.
    Mr. Price. I think that is accurate and we appreciate you 
turning on your mic.
    Mr. Messer. Yeah, I was going to say, I have already eaten 
up my time without the mic. Thank you, Mr. Chairman, and thank 
you, Doctor. I just made the point I am the final questioner 
today. I appreciate that. Somebody gets to do it and today it 
is me. Doctor, I want to thank you for your eloquence. Thank 
you for your knowledge and wisdom and thank you for your 
stamina at today's committee hearing.
    Mr. Elmendorf. And yours, Congressman. You are one of the 
few people who actually sat through an entire hearing. And you 
too, Congressman.
    Mr. Messer. Well, you know, when you are new here you want 
to learn and I appreciate the knowledge that I have been able 
to gather today. I want to focus just for a second on a comment 
that you made earlier. I want to make sure that I have it 
accurate. You mentioned that by, was it 2023, we would have 40 
percent more recipients of Medicare and Social Security than 
today?
    Mr. Elmendorf. Roughly yes, Congressman.
    Mr. Messer. You know, there is a lot of rhetorical energy 
spent around this building, appropriately so, making the point 
that we want to make sure we keep our commitments to those who 
have invested through a lifetime in Social Security and 
Medicare, certainly a commitment I intend to keep. I know of no 
one on either side of the aisle who believes any differently. 
If you saw that number and saw that we were going to increase 
by 40 percent by 2023, but you also knew that we were going to 
increase our workforce by 40 percent by 2023 so that you had 
the same number of taxpayers footing the bill for those 
benefits, or at least per recipient, then you wouldn't be 
nearly as alarmed by that number as you might be in a scenario 
that is far different. And so----
    Mr. Elmendorf. Yes.
    Mr. Messer. I was hoping that you could comment just a 
minute about maybe the historical trend of how many taxpayers 
we have had per recipient in those programs, and where we are 
going in that same trend.
    Mr. Elmendorf. Yes, Congressman. So we project that the 
labor force will grow much more slowly in the coming decade 
than it has grown in over the past several decades. And there 
are two main reasons for that: One is the retirement of the 
baby boom generation. They came into the labor force. They 
boosted the labor force growth, and as they retire, they will 
be holding it down. And the second is an end to the 
longstanding increase in women's labor force participation, 
which, again, pushed up the participation rate late in the late 
century, but has been pushing the other direction. But it has 
not been doing that now.
    So the labor force growth will be a good deal slower going 
forward than it has been in the past. A lot of that is outside 
of the control of the Congress, but there are policies that 
Congress can enact or not that can have effects on labor force 
participation and policies on both the tax and spending sides 
of the budget.
    Mr. Messer. Yeah, and you know, I know you are probably 
reluctant to just throw out numbers that you may not have 
access to right in front of you, but could you talk just a 
little bit at least--if you have the numbers, great, but in the 
last 10, to 20, to 30 years how many workers per recipient did 
we have? What are the likely trends by 2023, for example?
    Mr. Elmendorf. I know that I have one fact, which is that a 
few years ago, 21 percent--a few years ago, the population age 
65 or older was 21 percent of the population between ages 20 
and 64. So 65 or older relative to those of working age, 20 to 
64, that share was 21 percent a few years ago, and it will be 
37 percent 25 years from now.
    Mr. Messer. Which would lead to, there will be fewer people 
paying for each recipient later?
    Mr. Elmendorf. Yes.
    Mr. Messer. If you can get those numbers to me, I would 
appreciate it. I would like to see whatever we are able to get 
track of.
    Mr. Elmendorf. Yes, Congressman. Yes.
    Mr. Messer. I just would want to make this very simple 
point, rightly so. A lot of energy is spent talking about the 
injustice that would fall to those who have invested and paid 
in over their lifetimes if they did not receive the benefits 
that they rightly should receive, but probably not enough 
energy is spent talking about the injustice to the next 
generation, those who will pay far more into a program that 
through which they may receive far less if nothing is done 
either. And so as we focus as a body on the importance of the 
justice of making sure that current recipients and those 
nearing retirement receive those benefits, I hope we spend 
equal energy thinking about the next generation and how we 
preserve these programs for them.
    Mr. Elmendorf. I would just say, Congressman, we produce a 
report every summer or fall on the Social Security program 
which lays out just the points you are making about the ratio 
of workers to beneficiaries, and about the effects of--the 
differential effects of the program on people born in different 
birth cohorts and at different points in the income 
distribution.
    Mr. Messer. I would love to see that.
    Mr. Price. The gentleman yield back. I want to thank 
Director Elmendorf for being with us today, for his wisdom and 
his patience. I am charged with asking unanimous consent. The 
members have 7 calendar days to submit questions for the 
record, and without objection, so ordered. This hearing is 
adjourned.
    Mr. Elmendorf. Thank you, Congressman.
    [Questions submitted for the record and their responses 
follow:]

          Questions Submitted for the Record by Chairman Ryan

             sensitivity of projected deficits and debt to
                  higher-than-projected interest rates
    Please provide how higher-than-expected interest rates would affect 
federal budget deficits and debt held by the public over the next 
decade. The three interest rate scenarios are as follows: 1) interest 
rates rise to their average levels over the 1991-2000 period, 2) 
interest rates rise to their average levels over the 1981-1990 period, 
and 3) interest rates follow a path that is consistent with the average 
of the 10 highest projections shown in the October 2012 and February 
2013 releases of Blue Chip Economic Indicators. This is an update of an 
analysis that CBO did for Chairman Ryan on February 24, 2011.
         additional information on the impact of the sequester
    CBO has provided the Budget Committees with estimates of the impact 
from the automatic sequester on budget functions 050 (National Defense) 
and 570 (Medicare). The sequester's impact on non-defense accounts has 
been assigned to function 920 (Allowances), which is a non-specific 
classification used for programs and policies that are not easily 
classified into a more specific budget function. With publication of 
the OMB Report Pursuant to the Sequestration Transparency Act of 2012 
(P.L. 112-155), information is now publically available on the impact 
of the sequester on an account-by-account basis. With this new 
information available, I am requesting that CBO provide an estimate of 
the non-defense sequester impact on a function-by-function basis in 
order to give the Budget Committee greater precision on understanding 
the impact of the sequester on non-defense budget functions.
               primary balance and budget sustainability
    Based on CBO's recent budget outlook, if the fiscal year 2023 
deficit was reduced to the level of net interest projected under the 
current law baseline, what is known as primary balance, would that 
stabilize the federal government's debt as a share of GDP and put its 
fiscal position on a sustainable path?
            additional information on macroeconomic feedback
                    resulting from deficit reduction
    CBO's report on Macroeconomic Effects of Alternative Budgetary 
Paths provides information on additional deficit impacts resulting from 
macroeconomic feedback under various budgetary paths. To better 
understand these results, I am requesting CBO to provide information on 
the revenue and outlay components of the ``Effects on primary 
deficits'' displayed in Table B-2 of the report.

       Questions Submitted for the Record by Hon. Luke Messer, a 
          Representative in Congress From the State of Indiana

    As a member of the Committee on Education and the Workforce, and 
its Subcommittee on Higher Education and Workforce training, I am 
especially interested in slowing the rapidly rising cost of higher 
education. College costs too much. Parents are scrimping and saving and 
spending their nest eggs to pay for their children's education while 
trying to make ends meet in this sluggish economy.
    Between 2001 and 2012, federal financial aid in constant dollars 
increased 140 percent. However, over the same period, published tuition 
and fees for in-state students at public four-year colleges increased 
by an average of 5.6 percent faster than the rate of inflation. In last 
year's State of the Union address, the President said ``we can't just 
keep subsidizing skyrocketing tuition; we'll run out of money.'' Last 
night, the President said ``taxpayers cannot continue to subsidize the 
soaring cost of higher education.''
    I am concerned that well-intentioned Federal education subsidies 
are hyper-inflating the cost of higher education, leading to more 
borrowing, higher interest payments, less disposable income, and slowed 
economic growth, essentially creating an ``education bubble'' not 
dissimilar to the housing bubble that nearly crippled the economy 
several years ago.
    I have several questions on this topic for Dr. Elmendorf:
    1. Do you believe the current rate of tuition inflation is driven 
in part by federal education subsidies?
    2. Might rising college costs be constrained by more carefully 
targeting and measuring the effectiveness of federal education 
assistance?
    3. What role has federal education assistance like Pell Grants 
played in subsidizing rising tuitions?
    4. CBO's February baseline shows the Pell Grant program facing a 
funding cliff in Fiscal Year 2015 and annual shortfalls in subsequent 
years through the budget window. Do you believe the current structure 
of this important program is sustainable?

          Question Submitted for the Record by Mr. Van Hollen

    How do today's discretionary funding levels compare with pre-
recession funding levels?

         CBO's Responses to Questions Submitted for the Record

                       ranking member van hollen
    Question: How do today's discretionary funding levels compare with 
pre-recession funding levels?

    Answer: With discretionary appropriations in 2013 based on H.R. 933 
as passed by the House (including the effects of the sequestration in 
March) and on P.L. 113-2, the Disaster Relief Appropriations Act, 2013, 
total discretionary budget authority would be 5.4 percent higher this 
year than it was in fiscal year 2007 (the year before the recession 
officially began). Total annual discretionary budget authority 
increased by $57 billion over that period--from $1,070 billion in 2007 
to an estimated $1,127 billion in 2013 (see the table below).
    That difference is affected by a decline in funding for the wars in 
Iraq and Afghanistan and the substantial appropriations made in 2013 in 
response to Hurricane Sandy (funding in 2007 included some funding in 
response to Hurricane Katrina and other hurricanes). War-related 
funding dropped from $170 billion for 2007 to $92 billion (including 
the effects of sequestration) for 2013, a reduction of $78 billion. 
However, the funding for 2013 related to hurricane relief and recovery 
was $40 billion higher than the amount provided for similar activities 
in 2007.
    Excluding appropriations for those purposes, discretionary budget 
authority rose from $892 billion in 2007 to $987 in 2013, an increase 
of about 11 percent. During that period, prices (as measured by the 
consumer price index for urban consumers) rose by 13 percent, and 
nominal gross domestic product (GDP) increased by 16 percent. As a 
result, discretionary appropriations--based on the House-passed 
appropriations for 2013 and excluding funding for overseas contingency 
operations and hurricane relief--declined by 2.2 percent in real 
(inflation-adjusted) terms between 2007 and 2013 and dropped from 6.4 
percent of GDP to 6.2 percent of GDP over that period.

      DISCRETIONARY BUDGET AUTHORITY IN FISCAL YEARS 2007 AND 2013
------------------------------------------------------------------------
                                      Billions of dollars
                                  --------------------------  Percentage
                                                 Estimated      change
                                   Actual 2007      2013
------------------------------------------------------------------------
War-Related Funding..............          170           92        -46.0
Hurricane Relief Funding.........            7           48        545.5
Other Funding....................          892          987         10.7
                                  --------------------------
      Total......................        1,070        1,127          5.4
------------------------------------------------------------------------

                     ecade. The three interest rate scenarios are 
as follows: 1) interest rates rise to their average levels over the 
1991-2000 period, 2) interest rates rise to their average levels over 
the 1981-1990 period, and 3) interest rates follow a path that is 
consistent with the average of the 10 highest projections shown in the 
October 2012 and February 2013 releases of Blue Chip Economic 
Indicators. This is an update of an analysis that CBO did for Chairman 
Ryan on February 24, 2011.

    Answer: To estimate the effect that higher interest rates would 
have on the budget, CBO has updated the analysis it did in February 
2011 (that earlier analysis is available on CBO's website at 
www.cbo.gov/publication/22039).
    For scenarios 1 and 2, we have assumed that by 2017, interest rates 
would rise to and then remain at the levels that Treasury interest 
rates averaged during the 1990s (scenario 1) or 1980s (scenario 2). 
Thus, over the 2018--2023 period, rates for 3-month Treasury bills 
would be 4.9 percent under scenario 1 and 8.8 percent under scenario 2, 
compared with 4.0 percent in CBO's baseline projections (see Table 1 
below). Similarly, rates on 10-year Treasury notes would average 6.7 
percent between 2018 and 2023 under scenario 1 and 10.6 percent under 
scenario 2, compared with 5.2 percent in the baseline projections.
    For scenario 3, we have based the assumed path of rates on the 
average of the 10 highest forecasts from the Blue Chip Economic 
Indicators: Rates for 2013 and 2014 come from the February 2013 Blue 
Chip report, and rates for 2015 through 2023 come from the October 2012 
Blue Chip report (the most recent report with longer-term projections). 
Following the procedure used in our 2011 analysis, we have adjusted the 
Blue Chip forecast upward by 30 basis points to account for significant 
interest rate movements since that report was released. Under that 
scenario, interest rates for 3-month Treasury bills would be much 
higher from 2015 through 2017 than in CBO's baseline projections and 
would be 4.5 percent from 2018 through 2023, compared with 4.0 percent 
in the baseline projections.
    The budgetary effects of those alternative interest rate paths 
would be minimal in 2013 but substantial over the coming decade. 
Relative to CBO's baseline projections, interest payments between 2014 
and 2023 would be $1.4 trillion higher under scenario 1, $6.3 trillion 
higher under scenario 2, and $1.1 trillion higher under scenario 3 (see 
Table 2 below). Cumulative deficits and debt held by the public at the 
end of the 2014--2023 period would be higher by similar amounts.
    CBO strives to create baseline budget and economic projections that 
are in the middle of the distribution of possible outcomes. As a 
consequence, CBO sees an equal risk of interest rates' being higher or 
lower than in its baseline projection. Lower interest rates would imply 
lower federal interest payments, and the budgetary effects of 
differences in interest rates relative to CBO's baseline would be 
roughly symmetric.
    It is important to note that the estimates in Table 2 do not 
account for the effects on the federal budget of other differences in 
economic conditions that would probably accompany higher interest 
rates. For example, interest rates could be higher than in CBO's 
baseline because inflation could be higher than CBO anticipates. 
Indeed, inflation was higher during the 1990s, and much higher during 
the 1980s, than CBO projects for the next decade: Inflation as measured 
by the consumer price index averaged 5.1 percent annually during the 
1980s and is projected by CBO to average 2.2 percent over the coming 
decade. If CBO assumed that inflation over the next decade matched the 
average seen during the 1980s, to parallel the assumption about 
interest rates, projected tax revenues would be much higher than in 
CBO's baseline projections, and federal spending would be moderately 
higher. On balance, those two effects would reduce deficits.
    Not only was inflation higher in the 1980s and 1990s than is 
currently projected for the next decade, real interest rates (nominal 
rates adjusted for inflation) were also higher during those periods 
than in CBO's baseline projections for the coming decade. If real 
interest rates over the next decade ended up matching those historical 
values, it might be because the economy (and thus demand for credit) 
was stronger than in CBO's projections. In that case, revenues would be 
greater than the amounts projected in the baseline, offsetting some of 
the increase in interest costs.
    The causes of higher interest rates would also affect the conduct 
of monetary policy by the Federal Reserve. Changes in both interest 
rates and the magnitude of the Federal Reserve's purchases and sales of 
securities would affect remittances by the Federal Reserve to the 
Treasury (which are counted in the budget as revenues). Without knowing 
what overall economic conditions would be under those three scenarios, 
and thus what actions the Federal Reserve would take, it is not 
possible to estimate how the Federal Reserve's remittances to the 
Treasury might differ from the amounts in CBO's baseline projections.

         TABLE 1.--CBO'S ESTIMATE OF THE TREASURY INTEREST RATE SCENARIOS REQUESTED BY CONGRESSMAN RYAN
                                            [Percent, by fiscal year]
----------------------------------------------------------------------------------------------------------------
                                      2013   2014   2015   2016   2017   2018   2019   2020   2021   2022   2023
----------------------------------------------------------------------------------------------------------------
                                             Rates on 3-Month Bills

CBO's Baseline.....................    0.1    0.1    0.2    1.0    2.9    4.0    4.0    4.0    4.0    4.0    4.0
Scenario 1.........................    0.1    0.1    0.2    1.7    4.0    4.9    4.9    4.9    4.9    4.9    4.9
Scenario 2.........................    0.1    0.1    0.4    3.6    7.4    8.8    8.8    8.8    8.8    8.8    8.8
Scenario 3.........................    0.2    0.4    2.6    4.0    4.4    4.5    4.5    4.5    4.5    4.5    4.5
                                             Rates on 10-Year Notes

CBO's Baseline.....................    1.9    2.5    3.2    4.1    4.9    5.2    5.2    5.2    5.2    5.2    5.2
Scenario 1.........................    2.2    3.4    4.5    5.5    6.4    6.7    6.7    6.7    6.7    6.7    6.7
Scenario 2.........................    2.7    4.7    6.7    8.6   10.1   10.6   10.6   10.6   10.6   10.6   10.6
Scenario 3.........................    2.2    2.9    4.7    5.6    5.7    5.7    5.8    5.8    5.8    5.8    5.8
----------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office.

Note: Scenarios 1, 2, and 3 were specified by Congressman Ryan as alternatives to CBO's baseline
  projections.14,i1,s30,4,4,4,4,4,4,4,4,4,5,5,5,5
Scenario 1.........................      2     13     32     66    104    136    162    190    218    246    274
Scenario 2.........................      4     33     85    201    355    529    671    833    103  1,185  1,378
Scenario 3.........................      3     11     55    126    138    122    120    129    137    147    157
Source: Congressional Budget Office.

Note: Scenarios 1, 2, and 3 were specified by Congressman Ryan as alternatives to CBO's baseline projections.

    Question 2: Additional Information on the Impact of the Sequester--
CBO has provided the Budget Committees with estimates of the impact 
from the automatic sequester on budget functions 050 (National Defense) 
and 570 (Medicare). The sequester's impact on non-defense accounts has 
been assigned to function 920 (Allowances), which is a non-specific 
classification used for programs and policies that are not easily 
classified into a more specific budget function. With publication of 
the OMB Report Pursuant to the Sequestration Transparency Act of 2012 
(P.L. 112-155), information is now publically available on the impact 
of the sequester on an account-by-account basis. With this new 
information available, I am requesting that CBO provide an estimate of 
the non-defense sequester impact on a function-by-function basis in 
order to give the Budget Committee greater precision on understanding 
the impact of the sequester on non-defense budget functions.

    Answer: The best information to answer this question is contained 
in backup data for the Office of Management and Budget's OMB Report to 
the Congress on the Joint Committee Sequestration for Fiscal Year 2013 
(March 1, 2013). Those data are not yet available. CBO will provide you 
with these functional breakdowns when the data become available.

    Question 3: Primary Balance and Budget Sustainability--Based on 
CBO's recent budget outlook, if the fiscal year 2023 deficit was 
reduced to the level of net interest projected under the current law 
baseline, what is known as primary balance, would that stabilize the 
federal government's debt as a share of GDP and put its fiscal position 
on a sustainable path?

    Answer: Assuming primary budget balance in 2023 would lower CBO's 
deficit projection for that year from $978 billion to $857 billion, or 
3.3 percent of GDP (all else being equal). However, that is not enough 
information to know whether the federal government's debt as a share of 
GDP would be stable in that year. That answer would depend on the ratio 
of debt to GDP in the previous year, and on output and interest rates 
in 2023, which in turn would depend on the path of deficits in prior 
years.

    Question 4: Additional Information on Macroeconomic Feedback 
Resulting from Deficit Reduction--CBO's report on Macroeconomic Effects 
of Alternative Budgetary Paths provides information on additional 
deficit impacts resulting from macroeconomic feedback under various 
budgetary paths. To better understand these results, I am requesting 
CBO to provide information on the revenue and outlay components of the 
``Effects on primary deficits'' displayed in Table B-2 of the report.

    Answer: Those revenue and outlay components are shown in the table 
below. The amounts in the table represent only the macroeconomic 
feedbacks; the underlying changes in revenues and outlays that produced 
different paths for the deficit, and thus different macroeconomic 
conditions, were not specified in the report.
    The estimated macroeconomic feedback effects on primary deficits 
consist largely of changes in revenues; the estimated changes in 
primary outlays are relatively small. Changes in the amount of interest 
paid on federal debt held by the public are similar in magnitude to the 
changes in revenues.
    CBO estimated the additional deficit impacts resulting from 
macroeconomic feedbacks for that report using a simplified analysis 
that took into account changes in taxable income and interest rates, 
among other factors. That analysis did not incorporate a detailed 
program-by-program analysis, as do CBO's regular budget projections.

            BUDGETARY IMPACT OF ECONOMIC EFFECTS OF ILLUSTRATIVE PATHS, FISCAL YEARS 2014 TO 2023, RELATIVE TO PROJECTIONS UNDER CURRENT LAW
                                                                  [Billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                 Total,
                                                                2014    2015    2016    2017    2018    2019    2020    2021    2022    2023   2014-2023
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                        Increases (-) / Decreases (+) in Deficits

$2 Trillion Increase in Primary Deficits
  Effect on primary deficits
    Revenues.................................................       7      11       7       2      -5      -9     -13     -18     -23     -28       -70
    Noninterest spending.....................................       *      -1       *       *       1       2       1       *       *       *         3
                                                              ------------------------------------------------------------------------------------------
      Net effect on primary deficits.........................       7      12       8       2      -6     -11     -14     -18     -23     -28       -71
  Debt service...............................................       *      -1      -3      -5      -5      -6      -9     -12     -16     -22       -79
                                                              ------------------------------------------------------------------------------------------
    Effect on Total Deficits.................................       7      11       5      -3     -11     -17     -23     -30     -39     -50      -151
$2 Trillion Reduction in Primary Deficits
  Effect on primary deficits
    Revenues.................................................      -7     -11     -11      -4       4       9      13      17      22      28        61
    Noninterest spending.....................................       *       1       2       1       *       1       2       2       2       2        13
                                                              ------------------------------------------------------------------------------------------
      Net effect on primary deficits.........................      -7     -12     -12      -5       3       8      12      16      20      26        47
  Debt service...............................................       *       *       1       2       3       4       6       9      13      17        57
                                                              ------------------------------------------------------------------------------------------
    Effect on Total Deficits.................................      -7     -12     -11      -3       6      12      18      25      33      43       103
$4 Trillion Reduction in Primary Deficits
  Effect on primary deficits
    Revenues.................................................     -14     -23     -23     -13       7      18      26      34      44      55       112
    Noninterest spending.....................................       *       2       3       2       *       1       2       2       3       4        19
                                                              ------------------------------------------------------------------------------------------
      Net effect on primary deficits.........................     -15     -25     -26     -15       6      17      24      32      41      52        92
  Debt service...............................................       *       2       2       2       3       6      10      16      22      30        94
                                                              ------------------------------------------------------------------------------------------
    Effect on Total Deficits.................................     -14     -24     -24     -13       9      23      35      48      63      82       186
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office.

Notes: The illustrative paths are described in detail in Congressional Budget Office, Macroeconomic Effects of Alternative Budgetary Paths (February
  2013), at the beginning of the section ``Budget Deficits Under Three Illustrative Paths.''

The primary deficit equals revenues minus noninterest spending. Debt service is the change in the deficit that would result from changes in the amount
  of interest paid on the public debt (including the effects of changes in interest rates). The effect on total deficits is the sum of the effect on
  primary deficits and debt service.

Negative numbers indicate that deficits under the path are larger than those under CBO's baseline, which incorporates an assumption that current laws
  generally remain unchanged; positive amounts indicate that deficits are smaller.

* = between -1 and 1.

                           congressman messer
    Question 1: Do you believe the current rate of tuition inflation is 
driven in part by federal education subsidies?

    Answer: CBO has not studied the extent to which federal education 
subsidies affect tuition inflation. In fiscal year 2012, the federal 
government provided about $106 billion in direct student loans, $33 
billion for Pell grants, and $9 billion for education benefits for 
veterans. That federal assistance probably has contributed to increases 
in listed tuition rates, at least in some cases. The potential for 
federal subsidies to contribute to higher tuition rates probably 
depends on the share of students receiving aid at different types of 
educational institutions--such as public, private nonprofit, and for-
profit schools--as well as the institutions' financial objectives and 
constraints. For-profit schools have the largest share of students 
receiving federal subsidies (64 percent in 2007--2008), and one study 
found that for-profit schools where students can use federal aid charge 
tuition 75 percent higher than similar schools where they cannot use 
federal grants.\1\ However, some unknown portion of that 75 percent 
difference may represent higher costs that schools incur to meet the 
Department of Education's requirements for participation in federal 
student financial aid programs.
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    \1\ Stephanie Reigg Cellini and Claudia Goldin, Does Federal 
Student Aid Raise Tuition? New Evidence on For-Profit Colleges, Working 
Paper 17827 (National Bureau of Economic Research, February 2012), 
www.nber.org/papers/w17827.

    Question 2: Might rising college costs be constrained by more 
carefully targeting and measuring the effectiveness of federal 
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education assistance?

    Answer: To the extent that federal aid has an effect on tuition 
rates, reducing the amount of such aid could reduce the effect. If the 
same total volume of aid was targeted so that more of it went to 
students who would not otherwise attend college, it would be more 
effective in stimulating demand for postsecondary education but, as a 
result, would tend to increase any effect on tuition rates. CBO does 
not expect that increased monitoring or measurement of the 
effectiveness of federal assistance would have a significant impact on 
tuition rates.

    Question 3: What role has federal education assistance like Pell 
Grants played in subsidizing rising tuitions?

    Answer: CBO has not studied the effect that Pell grants or other 
federal aid has had on rising tuition. However, there is some evidence 
that federal assistance has been a factor in tuition rates at for-
profit schools. The evidence for an impact of federal subsidies on 
tuition rates listed by other types of institutions is weaker, perhaps 
in part because such subsidies make up much lower shares of their total 
revenues. Data from a recent study of the Pell Grant program indicate 
that the grants account for 14 percent of revenues at for-profit 
schools eligible to distribute federal aid, 7 percent at nonselective 
public schools, 4 percent at nonselective nonprofit private schools, 2 
percent at selective public schools, and 1 percent at selective private 
schools.\2\
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    \2\ Lesley J. Turner, ``The Incidence of Student Financial Aid: 
Evidence from the Pell Grant Program'' (draft, Department of Economics, 
Columbia University, April 2012), www.columbia.edu/?ljt2110/LTurner--
JMP.pdf (1 MB).
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    A related question is the impact of federal education subsidies on 
the ``net tuition'' rates students face after subtracting their 
schools' own financial aid from the listed tuition rates. The study on 
Pell grants estimated that institutions capture 16 percent of the value 
of the grants by reducing their own aid to recipients.\3\ However, the 
estimated capture rates varied widely, from essentially zero for public 
institutions to close to 80 percent for selective private schools.
---------------------------------------------------------------------------
    \3\ Ibid.

    Question 4: CBO's February baseline shows the Pell Grant program 
facing a funding cliff in fiscal year 2015 and annual shortfalls in 
subsequent years through the budget window. Do you believe the current 
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structure of this important program is sustainable?

    Answer: Under current law, funding for the Pell Grant program comes 
from both discretionary and mandatory sources. In 2009, the Congress 
began supplementing the discretionary portion of the program with 
funding provided outside the regular appropriation process. The 
combination of supplemental funds and the budget authority provided in 
the regular appropriation process allowed the discretionary portion of 
the program to support a maximum award level of $4,860. In the future, 
maintaining the award level at $4,860 would require either large 
increases in the regular appropriations (which would have to be 
accommodated under the annual caps on discretionary spending enacted as 
part of the Budget Control Act of 2011) or significant additional 
supplemental funding.

    [Whereupon, at 12:44 p.m., the committee was adjourned.]

                                  
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