[Senate Hearing 114-459]
[From the U.S. Government Publishing Office]
S. Hrg. 114-459
UNDERSTANDING AMERICA'S LONG TERM
FISCAL PICTURE
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HEARING
before the
COMMITTEE ON
HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
JULY 9, 2015
__________
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COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
RON JOHNSON, Wisconsin Chairman
JOHN McCAIN, Arizona THOMAS R. CARPER, Delaware
ROB PORTMAN, Ohio CLAIRE McCASKILL, Missouri
RAND PAUL, Kentucky JON TESTER, Montana
JAMES LANKFORD, Oklahoma TAMMY BALDWIN, Wisconsin
MICHAEL B. ENZI, Wyoming HEIDI HEITKAMP, North Dakota
KELLY AYOTTE, New Hampshire CORY A. BOOKER, New Jersey
JONI ERNST, Iowa GARY C. PETERS, Michigan
BEN SASSE, Nebraska
Keith B. Ashdown, Staff Director
Satya P. Thallam, Chief Economist
Gabrielle A. Batkin, Minority Staff Director
John P. Kilvington, Minority Deputy Staff Director
Troy H. Cribb, Minority Chief Counsel for Governmental Affairs
Katherine C. Sybenga, Minority Senior Counsel
Laura W. Kilbride, Chief Clerk
Lauren M. Corcoran, Hearing Clerk
C O N T E N T S
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Opening statements:
Page
Senator Johnson.............................................. 1
Senator Carper............................................... 3
Senator Enzi................................................. 12
Senator Tester............................................... 14
Senator McCaskill............................................ 20
Prepared statements:
Senator Johnson.............................................. 31
Senator Carper............................................... 33
WITNESS
Thursday, July 9, 2015
Hon. Keith Hall, Ph.D., Director, Congressional Budget Office
Testimony.................................................... 6
Prepared statement........................................... 35
APPENDIX
Chart referenced by Senator Johnson.............................. 47
Chart referenced by Senator Johnson.............................. 48
Chart referenced by Senator Johnson.............................. 49
Chart referenced by Senator Johnson.............................. 50
Chart referenced by Senator Johnson.............................. 51
Chart submitted by Dr. Hall...................................... 52
UNDERSTANDING AMERICA'S LONG-TERM FISCAL PICTURE
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THURSDAY, JULY 9, 2015
U.S. Senate,
Committee on Homeland Security
and Governmental Affairs,
Washington, DC.
The Committee met, pursuant to notice, at 10:03 a.m., in
room SD-342, Dirksen Senate Office Building, Hon. Ron Johnson,
Chairman of the Committee, presiding.
Present: Senators Johnson, Lankford, Enzi, Ernst, Sasse,
Carper, McCaskill, Tester, Booker, and Peters.
OPENING STATEMENT OF CHAIRMAN JOHNSON
Chairman Johnson. Good morning. This Committee hearing will
come to order.
I want to welcome the Director of the Congressional Budget
Office (CBO), Dr. Keith Hall, here today and certainly thank
you for your time and your appearance and your thoughtful
testimony.
The issues we are going to deal with in this hearing are
difficult. I was speaking to the Director ahead of time. How do
you convey to the American public the depth of the problem so
that we collectively can take the first step in solving any
problem, which is admitting we have got it? I have done a lot
of problem solving in my manufacturing background and you have
to first lay out the reality, understand the definition of the
problem, describe it properly, but you really have to take that
first step and admit we have really got a problem, if you have
any hope of solving them.
This Committee has a mission statement, and I do not think
we can repeat it enough. It is to enhance the economic and
national security of America. And, I think this hearing is
going to address both of those components, because I believe,
and I agree with the former Chairman of the Joint Chiefs of
Staff, Admiral Mike Mullen, when he said the greatest threat to
our national security is literally our debt and deficit, and we
are going to be talking about our deficit now.
I would define the problem we are facing in terms of our
debt and deficit not as a 10-year budget window problem, which
is so much of what we are always grappling here with our
budgets, it is the 10-year budget window. What we really have
is we have a 30-year demographic problem here. We have all the
Baby Boom generation people like Senator Carper and myself. We
have white hair. Yours is not quite as white as mine----
Senator Carper. It is getting close. That is OK. At least
we still have hair. There you go. [Laughter.]
Chairman Johnson. We are retiring at the rate of 10,000
people per day. We have made all these promises to the Baby
Boom generation and we really do not have a way to pay for
them. We have to step up to the plate and admit that.
Part of the problem is we are not admitting it as political
leadership, and I have to repeat this story because it is
pretty relevant. I was in the White House. To President Obama's
credit, he did go out to dinner with a number of us, and
partly, maybe largely because of my prodding, I asked the
President, well, if you are serious about making a dent in our
debt and deficit, make your White House staff available to us.
Let us start working. Let us try and find those areas of
agreement, which is what we are trying to do in this Committee.
Do not worry about things that divide us. Concentrate on the
areas of agreement. I know Senator Enzi is a pro at that in
terms of legislation. What can we agree on?
And, so, I brought my accounting skills. I brought that
problem definition skill. So, we were in the White House for a
2-hour meeting and President Obama came in for the last half
and, of course, he wanted everything on the table. I said, fair
enough, Mr. President. If you want everything on the table,
here is how you do it, and I slid in front of him a chart\1\
that looks something similar to this, 30 years by decade. Here
is the size of the deficit. Use your bully pulpit. Take the
truth to the American public. Make sure the American people
understand the depth of the problem so that, collectively, we
can take that first step in solving any problem, which is
admitting we have one.
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\1\ The chart referenced by Senator Johnson appears in the Appendix
on page 48.
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You know what he said to me? He said, ``Ron, we cannot show
the American public numbers that big. If we do, they will get
scared. They will give up hope.'' And, he says, ``Besides, Ron,
we cannot do all the work. We have to leave some work for
future Presidents, future Congresses.'' That is not leadership.
That is an abdication of leadership.
So, again, the purpose of this hearing is to show the
American people the truth. And, what we need to do, as much as
I appreciate all the work CBO has done, their long-term
projections--and again, let us stipulate, these are
projections. It is hard to fully understand and predict out
into the future. But, we can take a look at projections and we
can compare those to previous history. And, as much as I
understand the relevance and the necessity of looking at these
things as a percentage of gross domestic product (GDP), the
problem is, most people do not deal in percentages. We deal
with dollars. That is how we pay for things. So, dollars are
more relevant.
And, so, I want to continue to work with Director Hall and
the CBO and the economists there of trying to figure out a way
to present the reality, the depth of the problem, to the
American people so they understand it.
I have a lot of charts and graphs. We developed a one-page
income statement, which is on the chart\2\ right now, that
pretty well lays it out. I mean, by the way, that is the
purpose of any income statement. Describe reality, but describe
reality for the purpose of directing action. This one-page
income statement does that.
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\2\ The chart referenced by Senator Johnson appears in the Appendix
on page 47.
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In one page, it shows pretty much the financial situation
of America on an income basis, and it shows that Social
Security will pay out about $14 trillion more in benefits than
it takes in the payroll tax over the next 30 years. Medicare
pays out about $34 trillion more. And then the rest of the $103
trillion deficit over 30 years which we are going to be talking
about today is interest on the debt. Three elements--Social
Security deficit, Medicare deficit, and interest on the debt--
drive that $103 trillion unsustainable deficit. We need to
understand that.
But, let me just throw out one more little factoid here
that I think, hopefully, will grab the attention of the
audience, of the Members of the Committee, and hopefully the
American public. We are all witnessing pretty much the collapse
of Greece's welfare system, how unsustainable that model is.
And, again, we hear this all the time. I have been here now
4\1/2\ years and I have heard witness after witness talk about
how our current fiscal situation in America is unsustainable.
Let us just do a comparison.
We calculated this number as of the end of the first
quarter, so they are comparable between Greece and America.
Today, or at the end of March, in America, every American's
share of our current Federal debt as of March 31, 2015--every
American's share, my share, my kid's share, my grandchild's
share--is $56,710. By comparison, the share of every Greek's
share of their debt in Greece is $30,786. So, Americans, on an
individual basis, our share of our Federal debt is almost
double what Greeks' share is of their Federal debt.
Now, why do we not have the riots in the streets? Why do we
not have a financial crisis today, like Greece has? Well,
because we are the world's reserve currency and we can
effectively print money to fund this debt. Greece's creditors
have run out of patience. At some point in time, America's
creditors are going to run out of patience. They are going to
look at America and say, you are not very serious in coming to
terms with the debt and deficit. We are not going to loan you
any more money. Or, we are certainly not going to loan it at
that interest rate. And, at that point, interest rates spike.
For every one percent increase in interest rates, that is $180
billion more that is added to our interest payments.
That is what we are dealing with. That is what we have to
try and convey. That is what we have to admit.
So, again, I would ask unanimous consent to enter my
opening statement into the record.\1\
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\1\ The prepared statement of Senator Johnson appears in the
Appendix on page 31.
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With that, I will turn it over to Senator Carper for his
comments.
OPENING STATEMENT OF SENATOR CARPER
Senator Carper. Thanks, Mr. Chairman.
I, too, would welcome Dr. Hall. Thanks. It is very nice to
see you again.
And, I would ask that my full statement be made a part of
the record.\2\
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\2\ The prepared statement of Senator Carper appears in the
Appendix on page 33.
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I just want to respond and maybe add a couple of thoughts
for us to keep in mind. Harry Truman used to say the only thing
that is new in the world is history we never learned or forgot,
and I want us just to go back in time a little bit. It is not
that long ago we actually had four balanced budgets in a row,
and we had a Republican Congress and we had a Democratic
President, Bill Clinton. And, when he left office, he turned
over a surplus and we had the strongest economy on earth. We
were flying high.
Eight years later, the next administration turned over an
economy that was going down and some were afraid we were going
to go down for the count. The week that this President, the
current President, this Vice President, were sworn into office,
that one week alone, we lost 600--628,000 people signed up for
unemployment insurance. Think about that, 628,000. Two-and-a-
half million people lost their jobs in the last 6 months of
2008. Another 2.5 million lost their jobs in the first 6 months
of 2009. The budget deficit that year was $1.4 trillion.
And, we have slowly but surely climbed out of here, and it
is not just because of this administration, it is not because
of the Congress. It is a lot of factors, and I hope--Presidents
get blamed for stuff when it goes badly. They also sometimes
get credit when things go well. But, we are in a hell of a lot
better shape than we were, I think, 6\1/2\ years ago.
The deficit for this year is--when the deficit hit $1.4
trillion, it was about 10 percent of GDP. Ten percent, that is
a lot. It is still about 3 percent of GDP. We think that is a
lot.
I am an old State Treasurer. I was Treasurer of Delaware
when we had the worst credit rating in America. We were tied
for dead last with Puerto Rico. We were in such bad shape that
we would sell tax-exempt revenue anticipation notes--just to
meet payroll and make our pension payments. We were the best in
the country in overestimating revenues and underestimating
spending. That is how we got to have the worst credit rating in
the country. So, I bring sort of the thinking of an old State
Treasurer and an old Governor to these jobs.
I think there are, like, three things--let us just think of
a pie chart of how we spend money in the Federal Government.
Over half of it, entitlement spending. Over half of it is
entitlement spending. About 5 to 10 percent is debt service.
The biggest part of what is left is defense spending, and then
the remainder is non-defense discretionary spending. We could
wipe out entirely non-defense discretionary spending and we
would still have a deficit. So, we have got some work to do
here.
The Bowles-Simpson Commission said there are really maybe
three things we need to focus on, and one of those is
entitlement spending that does not savage old people or poor
people, but actually finds a way to save money in these
programs, make sure they are going to be around for our kids
and our grandchildren, and that is our challenge, and I think
we have to be up to that. We cannot walk away from that.
I think we are chipping away at the growth in health care
costs, which used to be going up by 18 percent of GDP. We are
down now about 17.5 percent. We are trending down in terms of
health care costs as a percent of GDP. We have to continue to
bring that down--find out what works, do more of that. So,
entitlement reform, No. 1.
No. 2, tax reform. Bowles-Simpson says broaden the base.
Let us lower the rates. Whatever revenues we generate, we make
sure that some of that goes for deficit reduction. I think that
makes a lot of sense.
And, the last thing that they said to do was to look at
everything that we do, everything we do in government and say,
how do we get a better result for less money, every single
thing.
I am sure everybody on the Committee remembers something
that one of our constituents said to us, maybe at a hearing,
maybe at home, that we just have never forgotten. I will never
forget a town hall meeting when I was a Congressman. I used to
do a lot of town hall meetings then. A woman said to me, ``I do
not mind paying taxes, I just do not want you to waste my
money.'' That is what she said. ``I do not mind paying taxes, I
just do not want you to waste my money.''
One of the reasons I want to be on this Committee is
because we really focus on finding ways not to waste people's
money, not to waste taxpayers' money.
So, I am delighted that you are here, Dr. Hall.
Let me say maybe one last thing. The idea of budgeting
for--we used to budget for, like, year to year to year to year,
and then maybe 5-year budgets and 10-year budgets, now we look
out as far as 20 years. If you actually look out 20 years and
look how much money we will actually save by implementing most
of the Affordable Care Act (ACA), we save hundreds of billions
of dollars over the next 20 years, even more than that. If we
could somehow figure out how to do something close to
comprehensive immigration reform, we would save hundreds of
billions of dollars and our GDP would grow, as well.
And, the last thing I would say is this. If we can somehow
put our heads together and put our heads around a way to fully
fund a 6-year transportation plan, robust 6-year transportation
plan--McKinsey Global Institute just gave us these numbers.
Here is what they said. One-point-eight million new jobs
created and GDP to grow by 1.5 percent a year annually and that
is worth doing, and it is also worth paying for, as well.
I will leave it at that. We are glad you are here and look
forward to hearing from you.
I am going to be in and out. We are working in Finance on
transportation funding right now, so I need to be in and out,
so I apologize for that. But, thanks for joining us.
Chairman Johnson. Good luck to you in those endeavors.
So, it is the tradition of this Committee to swear in
witnesses, so if you would please rise and raise your hand.
Do you swear the testimony you will give before this
Committee will be the truth, the whole truth, and nothing but
the truth, so help you, God?
Mr. Hall. I do.
Chairman Johnson. Thank you. Please be seated.
Our sole witness today is Dr. Keith Hall. He is Director of
the Congressional Budget Office. On April 1, he became the
Director. He has previously served as Chief Economist at the
International Trade Commission, a Senior Research Fellow at the
Mercatus Center at George Mason University, Commissioner of the
Bureau of Labor Statistics, Chief Economist for the White House
Council of Economic Advisors, and Assistant Professor at the
University of Arkansas. Dr. Hall.
TESTIMONY OF THE HONORABLE KEITH HALL, PH.D.,\1\ DIRECTOR,
CONGRESSIONAL BUDGET OFFICE
Mr. Hall. Thank you. Chairman Johnson, Senator Carper, and
Members of the Committee, thank you for the opportunity to
testify on the Congressional Budget Office's recently released
assessment of the long-term outlook for the Federal budget.
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\1\ The prepared statement of Mr. Hall appears in the Appendix on
page 35.
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CBO has frequently expressed concerns about the likelihood
that, under current law, the Federal Government's debt will
rise over the next few decades to a level rarely seen in U.S.
history and we are pleased to provide some analysis that will
help this Committee focus attention on that worrisome prospect.
Let me first talk about that projected increase in debt.
CBO's long-term outlook for the Federal budget has changed
little since last year. If current laws remain generally
unchanged in the future, we expect that Federal debt held by
the public will decline slightly relative to GDP over the next
few years as the economy continues to move toward greater
recovery from the Great Recession.
After that, however, the effects of our aging population
and rising health care costs will become more apparent and
growing budget deficits will push debt back to and above its
current high level. The deficit will grow from less than 3
percent of GDP this year to more than 6 percent of GDP in 2040.
At that point, the already high Federal debt held by the public
would have risen above 100 percent of GDP.
When making comparisons between amounts of debt in
different years, CBO typically expresses debt as a percentage
of GDP. Although that measure is not perfect, there are other
ways of putting the amount of debt into perspective. This has
the advantage of giving some indication of the ability of the
United States to reduce or eliminate debt in the future. It
accounts for changes in price levels, population, output, and
income over time, all of which are important in assessing the
sustainability of the budget. Just as a household's income and
assets are a measure of how much debt it can reasonably bear,
GDP broadly conveys the means available to finance debt held by
the public.
I should reiterate that CBO made these projections under
the assumption that current law remain the same. In that case,
rising incomes would push tax revenues to a level that is high
by historical standards relative to GDP. Also, spending for
programs other than Social Security and the major health care
programs would be quite low by historical standards relative to
GDP. If the law did change in a way that kept revenues and
spending for those programs close to their historical averages,
the result would be even higher Federal debt.
Though the long-term outlook has worsened dramatically
since 2007--in that year, CBO projected that the Federal debt
would be below its historical average in each of the next 25
years if current laws at that time had remained unchanged. But
then some major changes came along, specifically the Great
Recession and some significant alterations to tax and spending
laws.
In 2009 to 2012, budget deficits were the largest relative
to the size of the economy in any year since 1946, causing the
government's debt to soar. The total amount of Federal debt
held by the public nearly doubled during that period and is now
about $13 trillion. That is equivalent to about 74 percent of
the economy's annual output, a higher percentage than at any
point in U.S. history except a brief period around World War
II.
Under current law, debt is projected to rise continuously
relative to the size of the economy in the long run. That path
could not be sustained indefinitely. Investors would eventually
begin to doubt the ability of the government to cut spending or
raise revenues by enough to pay its debt obligations. Such a
fiscal crisis would present policymakers with extremely
difficult choices and would probably have a substantial
negative impact on the country.
Unfortunately, there is no way to predict with any
confidence whether or when a fiscal crisis might occur in the
United States. In particular, there is no identifiable tipping
point in the debt-to-GDP ratio to indicate that a crisis is
likely or imminent. All else being equal, however, the larger a
government's debt, the greater the risk of a fiscal crisis.
Of course, budgetary outcomes are uncertain. Under current
law, unexpected changes in the economy, demographics, or other
factors could probably lead to outcomes different from those
that we have projected. Nonetheless, our analysis shows that
under a wide range of possible outcomes, tax and spending
policies under current laws will probably leave the Federal
debt in 2040 at a much higher level than it is now, which is
already elevated by historical standards.
So, how large would policy changes need to be to lower the
trajectory of Federal debt? To put the Federal debt on a
sustainable path for the long term, lawmakers would have to
make significant changes to tax and spending policies by
reducing spending for the large benefit programs below the
projected amounts, letting revenues rise more than they would
under current law, or adopting some combination of these
approaches. The size of such changes would depend upon the
amount of Federal debt that lawmakers considered appropriate.
Just holding Federal debt at its current high level of 74
percent of GDP until 2040 would require significant changes in
tax and spending policies. A combination of increases in
Federal tax revenues and cuts in non-interest Federal spending
relative to current law of about 1.1 percent of GDP in each
year for 25 years would be needed. In 2016, this would be a
spending and/or a tax revenue increase totaling about $210
billion, and more than that for each year after that.
Many combinations of policies could be adopted to meet such
a goal. We have illustrated some of those in one of our figures
from the written testimony that has been distributed to you.
For example, if those changes came from increases of equal
percentage in all types of revenues, they would represent an
increase of 6 percent relative to current law for each year
between 2016 and 2040. In 2016, for example, an average middle-
income household would have to pay $750 more in taxes, and more
than that each year afterwards.
Or, if the cuts came from cuts of equal percentage in all
types of non-interest spending, that spending each year would
have to be 5.5 percent less than projected. If the reduction
was applied across the board to all types of non-interest
spending, an average 65-year-old in the middle of the earnings
income who retires in 2016 would see a reduction of about
$1,050 in his or her initial annual Social Security benefits,
more than that in each year afterwards.
The more ambitious goal of returning public debt by 2040 to
its average level over the past half-century, which is 38
percent of GDP, would require more than that. This would
require a revenue increase and/or interest spending decrease
totaling 2.6 percent of GDP every year. This means an average
middle-income household would have to pay $1,700 more in
Federal taxes in 2016 and larger amounts in subsequent years.
Or, by cutting non-interest spending across the board, average
Social Security benefits for a 65-year-old in the middle of the
earnings distribution would have to drop by $2,400 in 2016 and
by larger amounts in later years.
Regardless of the chosen goal for Federal debt, you as
lawmakers would face tradeoffs when deciding how quickly to
carry out policies. The sooner significant deficit reduction
was implemented, the smaller the government's accumulated debt
would be, the smaller the policy changes would be needed to
achieve the particular long-term outcome, and the less
uncertainty there would be about what policies could be
adopted.
Even if policy changes to shrink deficits in the long term
were not implemented for several years, making decisions about
them sooner rather than later would tend to increase output and
employment in the next few years. Such decisions could hold
down long-term interest rates, reduce uncertainty, and enhance
businesses' and consumers' confidence.
Thank you.
Chairman Johnson. Thank you, Director Hall. Again, thank
you for appearing and thank you and your staff at CBO for all
your hard work.
I think the question is, how do we grab the American
people's attention with numbers, with financial data. I am an
accountant, you are an economist. I like numbers. You like
percentages. It is a difficult problem. It is something I have
been grappling with for, literally, 4\1/2\ years.
One of my attempts in this was really with a couple
amendments that I offered that were adopted unanimously in our
budget process this year. The guts of it says the Congressional
Budget Office shall provide a projection of Federal revenues,
outlays, and deficits for the 30-year period beginning with the
budget year expressed in terms of dollars.
This is kind of what I had in mind, and I want to keep
working with you. I would really prefer this was a
Congressional Budget Office chart so that we did not have to
take the detailed information and try and grapple with it and
come up with our interpretation, so it was incredibly
authoritative, because this is extremely important, that we
have a nonpartisan organization, an agency like yourselves,
that definitively say, this is what this projection results in,
in dollar terms, because, again, people do not pay for their
electricity bill and food in percentages. They use dollars. So,
Americans understand dollars.
Let us start here, and this is your alternate fiscal
scenario, done by decade. I think this lays it out pretty
simply, and coming from the business side, I like the KISS
principle, keep it simple. First decade, about $10 trillion of
projected deficit, according to your alternate fiscal scenario.
The second decade, $28 trillion. The third decade, $66
trillion, for a whopping total over the next 30 years,
projected deficit by your alternate fiscal scenario of $103
trillion.
Now, again, we are becoming immune to these massive
numbers. Who can really understand them? So, I have added to
this chart\1\ the dollar value of all private assets. The net
asset base of America is $116 trillion. That is what we are
looking at over the next 30 years.
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\1\ The chart referenced by Senator Johnson appears in the Appendix
on page 48.
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Now, I want to talk--let us take that one down and put up
the next chart,\2\ because this is where I will convert to
percentages on a relative basis, and it is really going to be
the base of my first question. The numbers you were talking
about in your testimony, it was really based off your baseline,
correct, your baseline projection. I am showing the alternate
fiscal scenario.
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\2\ The chart referenced by Senator Johnson appears in the Appendix
on page 49.
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For me to take a look at projections--this is what I did in
business, I would do my budgeting process--I would always take
a look at history. Are these numbers relevant? Do they compare
to history? So, what I have done--again, trying to keep it as
simple as possible--I have laid out percentage of GDP for these
spending categories the prior 30 years, from 1985 to 2014. Then
I have CBO's baseline projection. And the third column is CBO's
alternate fiscal scenario.
So, let us just--again, trying to keep it simple--
entitlements, total entitlements, Social Security and health
care, the last 30 years, about 7.7 percent of GDP, and under
both scenarios, that is expected to rise to 13.1 percent. Now,
that is--health care is the more difficult one to really
project. Social Security is pretty darn close, right? I mean,
we know because of demographics, actuarial math, that type of
thing, we have a pretty good handle on Social Security over the
next 30 years coming in with about a $14 trillion deficit in
terms of what we pay out in benefits versus the payroll tax, is
that correct?
Mr. Hall. That is right. Health care definitely has more
uncertainty.
Chairman Johnson. But, again, so--but, this does show the
dramatic increase, 7.7 percent to 13.1.
Now, on defense, the last 30 years, on average, we spent
about 4.2 percent, and this includes the 1990s where we really
went pretty low historically as a percentage of GDP. According
to your baseline, CBO's baseline says over the next 30 years,
we will spend about 2.6 percent of GDP. The alternate fiscal
scenario is 3.4. So, I guess when I take a look at this,
understanding the problems in the world, OK, the threats to our
national security, I look at that and I go, that is probably
not realistic that we are going to be able to get away with
spending only 2.6 or only 3.4 when historically we spent about
4.2 percent. I mean, would you disagree with that?
Mr. Hall. Well, our numbers came from averages, right, so
the 2.6 percent is under current law and the bigger number was
something close to long-term averages. But, you are exactly
right that one of the uncertainties that are there in our
forecast is something like a major war, another recession,
something like that that would make the picture of the deficit
look much worse.
Chairman Johnson. Even 4.2, you take a look at the last 50
years, what we had during the Korean War, I think we were at 10
percent. During the 1970s and 1980s, I think we were 8 and 7
percent. We are at historically low percentages of GDP spending
already on defense.
Let us go on to all other spending in the Federal
Government. Over the last 30 years, it has been about 6.2
percent of GDP. Your baseline says it will drop down to 4.6
percent. Your alternate fiscal scenario is 5.9 percent, OK. And
then interest, again, it is the plug figure, and it depends on
what we think interest rates will be, and nobody really knows
that.
But, I guess the point I am trying to make, if you are
really looking at how realistic are these projections, baseline
versus alternate fiscal scenario, it kind of gives you a range
of projections, I mean, I would look at this, and one of the
reasons I use alternate fiscal scenario, I would say of the
more likely scenario based on 30 years' prior history, I would
just kind of look at alternate fiscal scenario. You could maybe
even make an argument that that might still be low as projected
deficits. Would you comment on that.
Mr. Hall. Well, we wanted to be careful about predicting
what Congress was going to do.
Chairman Johnson. I understand.
Mr. Hall. So, the regular baseline is under current law,
but our alternate fiscal scenario is trying to look at the way
that Congress has behaved in the past. And, so, we did make an
effort to do that----
Chairman Johnson. Oh, I know, and Congress is very
difficult to predict----
Mr. Hall. Yes.
Chairman Johnson [continuing]. Other than we will continue
to be somewhat dysfunctional.
Let me go, with my remaining seconds here, let me go with
the last point. No, first of all, leave on--I want to talk
about revenues, because the last 30 years, on average, we have
generated about 17.2 percent of GDP in terms of revenue of the
Federal Government. Now, if you go back 50 years, it has
probably been more around 18.1 percent. So, your baseline shows
about 19 percent average over 30 years. The alternate fiscal
scenario is really pretty much about that 50-year average.
Now, let us go to the last chart\1\ here. This is a chart
that shows what percentage of GDP we have raised in revenue
comparable to the top marginal tax rate. How much are we going
to try and punish success and how effective are we at punishing
success and dramatically increasing the percentage of revenue
we raise as a percentage of GDP? You can see, going back to the
late 1950s when we had a top marginal tax rate of 91 percent--
now, I think that would give pleasure to a fair amount of
people who would like to do that, let us stick it to the rich
guys. We still only had about 18.1 percent average. Look how
steady that is, regardless of the top marginal tax rate--at 91
percent, at 70 percent, or 50 percent, or 28 percent, or 39.6
percent.
---------------------------------------------------------------------------
\1\ The chart referenced by Senator Johnson appears in the Appendix
on page 50.
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So, I guess I want you to comment on our ability as a
Federal Government to try and punish success and do it
successfully so that we actually increase revenue to the
Federal Government, because to me, it is somewhat of a fool's
errand, and when you start dramatically increasing marginal tax
rates, I would say you dramatically increase the disincentives
for people to take the kind of risk taking that actually helps
grow our economy.
Mr. Hall. Well, I do not want to comment too much about
specific tax policy things, but you are absolutely right that
tax revenue has been fairly much around 18, 19 percent. There
has only been a brief time where it was as high as 19 percent,
to where we projected under our extended scenario, under
current law. So, that is one of the things that I think is a
caution, is under our, just our regular extended scenario, tax
revenues get to a historically high level and we still have a
really significant problem 25 years down the line.
Chairman Johnson. Does this chart not basically show that,
yes, we can attempt to increase revenue as a percentage of GDP
by increasing marginal tax rates, but people change their
behavior. I mean, this kind of gets back to the static versus
dynamic scoring debate----
Mr. Hall. Right.
Chairman Johnson [continuing]. That I think this is a
pretty darn good argument that if we are going to change tax
policy, we really do need to understand the dynamic effect of
those tax policies on people's behavior, and in some way,
shape, or form--and trust me, there is a real complexity here
in terms of deductions and what type of income, which I think
is kind of silly, too, to have different rates on different
types of income, income is income from my standpoint--we should
dramatically simplify our tax code and I think you might have a
little more responsiveness if it were not so complex.
But, anyway, it is just very difficult to really take more
than 18 percent away from the American public, is that not kind
of--is that not what that chart pretty well shows?
Mr. Hall. Historically, yes. It just has not been done. And
let me just say, too, in part of our forecast, we do have a
dynamic component in our economic forecast that underlies this
and we do have some dynamic effect of the tax rate being to an
historically high level. So, that actually does impact economic
growth.
Chairman Johnson. OK. Well, thank you.
Our next questioner is another accountant, Senator Enzi.
OPENING STATEMENT OF SENATOR ENZI
Senator Enzi. Thank you, Mr. Chairman. I appreciate you
doing this hearing. I know from experience that solving
problems early is usually less expensive than solving problems
late.
I used to be the Mayor of Gillette and we had some
infrastructure problems that we needed to solve and that
required us to have some debt. I had to appear before Standard
and Poors (S&P) and Moody's and answer how I was going to pay
off this debt, and I was kind of stunned by some of the
questions because they were all about our retirement system. We
were a very young community, so we had everybody at the
beginning of their retirement cycle, but what I discovered is
that the questioners were on a panel to save New York City,
which had a policy of pensions of full retirement at a very
young age.
Currently, Greece and other countries across Europe are
experiencing economic crises that are due to their pension and
entitlement promises that they cannot afford. Given CBO's long-
term outlook on the challenges we face, are there any lessons
that we can draw from their problem in a short amount of time?
Mr. Hall. Yes. Actually, I do think there is a very
important lesson. Greece is going through a very difficult
experience, and I think the main thing we ought to take from
this is that it is extremely difficult to make fiscal policy
decisions under the pressure of a financial crisis. So, this is
my ``hurry up and make decisions.'' If you wait until the debt
gets very large in the United States and we get something close
to a fiscal crisis, then it is very difficult to find fiscal
policy decisions that will solve your problem.
Senator Enzi. In your testimony, you mentioned that Social
Security would have to be, I think it was a $1,050 reduction in
payments, and then more each year. Could you expound on that a
little bit more.
Mr. Hall. Sure. What we did was we figured out a fixed
percentage of savings we would need to have from spending on
Social Security, and the reason that it comes out to that, we
were trying to look at something like an average person, what
are the costs in 2016, and that number would go up. That is a
yearly number, and it would go up based basically on GDP
growth. If GDP growth went up, that number would go up and
incomes went up. So, that was an effort just to give you some
idea of a nice, simple impact on average people.
Senator Enzi. But you meant that it would be just a few
additional dollars each year, not a total $1,050 additional
reduction?
Mr. Hall. Oh, right. Yes, that is right.
Senator Enzi. I am trying to----
Mr. Hall. That is right.
Senator Enzi. Because, otherwise, pretty quickly, people
would be at zero.
Mr. Hall. Oh, right. Right. Yes. No, that is a fixed
amount, in percentage terms, anyway.
Senator Enzi. What effect do you think that the collapse of
Greece, if they do not meet their Sunday deadline, will have on
interest rates for us? Will that make us a more secure country
or will people worry about putting their money anywhere as far
as buying bonds?
Mr. Hall. Well, so far, the Greek crisis has not had a lot
of effect, but probably the biggest effect is going to be
through the exchange rate, and it would probably modestly
affect our trade balance with the Eurozone. And, if Greece were
to--so, I think in that respect, it would be fairly minimal.
But, if they were to exit the Eurozone, I think we might get a
bit more of effect, where the dollar would appreciate a bit
further, Treasury rates would actually fall a little bit, and
U.S. equity prices might fall a little bit if they actually
pull out of the Euro.
Senator Enzi. Because I keep worrying what will happen with
our budget if the interest rate goes to a norm for the United
States instead of hovering around the less than 2 percent that
we are at now, which costs us $235 billion a year.
Mr. Hall. Right.
Senator Enzi. If that more than doubles, we will be
spending more on that than we will be on national defense or
all of the rest of the spending that we do that we have control
over. There is a whole lot that you point out that we do not
have control over.
Now, former Canadian Prime Minister Paul Martin told the
Budget Committee a year ago that the No. 1 problem facing
Canada during their fiscal crisis in the 1990s was interest
payments on the debt. According to Martin, the problem was that
the Canadian people would not believe that writing checks to
pay interest would hurt as much as writing checks to the
government to pay for health care or for living expenses.
Dr. Hall, what is the CBO's long-term outlook for interest
payments on the debt in the country, and how does this compare
to the amount that we will be spending on health care, for
example?
Mr. Hall. Sure. Well, this year, we forecast that our
payment, the interest payments on the debt are equal to about
1.3 percent of GDP. And in 25 years, under current law, that is
going to go all the way up to about 4.3 percent of GDP. So,
that is a pretty significant increase. And, of course, that is
going to be sensitive to exactly how much interest rates go up
over time.
Also, right now, net Federal health care spending is about
5.2 percent of GDP and it will go up to about 8 percent. So, in
25 years, our interest payments will be about 4.3 percent. Our
Federal health care spending will be about 8 percent.
But, let me just point out one thing, though, that between
2015 and 2040, our health care spending is going to go up by
about, by our forecast, by about 2.8 percentage points. I know
I am using a lot of percentages. I apologize. But, interest is
going to go up by 3 percentage points of GDP. So, actually, the
increase in the cost of interest will be more than the increase
in the cost of health care under our projection.
Senator Enzi. But 12.3 percent of GDP between the two will
be a considerable amount.
Mr. Hall. Yes.
Senator Enzi. Now, you have also projected--CBO has
projected for many years--and I realize you have only been
there a short time, we appreciate all your efforts during that
time--but CBO has projected for many years dramatically
increasing outlays for federally funded retirement programs. I
keep going back to the retirement programs. Indeed, CBO has
also argued that revenues will be woefully insufficient to pay
for these programs, which means that the government's borrowing
requirement will be dramatically increased, as well.
You suggested recently in testimony before the Budget
Committee that this public sector borrowing will crowd out
private borrowing, which will slow the pace of economic growth.
Will this slower pace of growth also reduce worker
productivity? Could this reduction in worker productivity
result in slower wage and slower growth and fewer job
opportunities?
Mr. Hall. Yes, it will, and in our forecast, there is an
interesting little rule of thumb. For each dollar that the
deficit rises, domestic investment falls by between 15 and 50
cents. So, there is a pretty big impact. And the effect of that
deficit on investment, because it crowds out private
investment--people's savings get pulled into funding the
government rather than funding the making of goods and
services--will lead to a smaller capital stock in the economy,
less investment, which makes workers less productive and then
decreases wages as a result, and we do have some estimates of
the amount of income, the average income, how much lower it is
because of the borrowing.
Senator Enzi. Can you repeat that very first part? For each
dollar----
Mr. Hall. Yes. For each dollar that the deficit rises,
domestic investment falls by between 15 cents and 50 cents.
Senator Enzi. Thank you. My time has expired.
Chairman Johnson. First of all, Dr. Hall, no need to
apologize for using percentages. This is incredibly complex,
there is no doubt about it, and that is what we are trying to
do, is work with you to try and simplify it as much as possible
so we all can understand it.
But, I will make a commitment, by the way. This is just a
first in a series of hearings. This is the overall macro look
at the budget, trying to come up with some method of
simplifying it. We are going to drill down into Social
Security, a special hearing on that. We will do it on Medicare.
We will probably talk about interest and the effect on the
economy from that standpoint, as well.
So, this is just the first in a series of hearings we are
going to certainly have under my Chairmanship because this is
so incredibly important and because it is complex. It is one of
the reasons I do not think we have grabbed the American
public's attention, which is what we need to do if they are
going to, like I say, admit we have the problem to put pressure
on us to fix it. Senator Tester.
OPENING STATEMENT OF SENATOR TESTER
Senator Tester. Thank you, Mr. Chairman. Thank you for
holding this hearing. Thank you, Dr. Hall, for your testimony.
As I look out into the crowd, there are a ton of young
folks here. Are you guys all interns? Raise your hand if you
are an intern.
[Show of hands.]
That is good. Well, I appreciate you being here, because,
quite frankly, this conversation we are having today impacts
you, actually, more than it impacts me, because you will be
around a lot longer, I hope, and it is good to have you all
here.
Dr. Hall, you talked about the Great Recession and you
talked about what transpired, and in that Great Recession that
we had, when I got here in January 2007, and I think in about
June 2007, I got notification from the Treasury Secretary that
we were on the edge of a financial meltdown, or shortly
thereafter. But, since that time, when our revenues have
dropped and the safety nets like unemployment insurance kicked
in, which caused our debt to explode, we have reduced our
cumulative deficits by about $4.5 trillion since 2010.
And, before that, as the Ranking Member had pointed out, we
did have a balanced budget situation in the 1990s, which was
followed by Vice President Cheney, I believe, saying the debt
does not matter, which was followed by a tax cut and a war, all
put on the credit card at the same time. That is when the
economy was booming.
And, so, to have the debt that we have today, with the
economic downturn and some of the policies that were put in
effect 10 or 12 years ago, should be no surprise to anybody. I
am going to leave this Committee and go to an Appropriations
Subcommittee in a second--we had a Defense Appropriations
Committee where we used an overseas contingency account gimmick
to take and put $40 billion additional dollars into that
account all on the credit card and nobody is asking anything
about it.
Why? Because it is about war, and we can fight wars all
over the world and that is OK. We do not need to have France's
help, or England's help, or Australia's help, or any of our
allies' help. We will do it all on the taxpayers of this
country.
So, if we want to deal with the debt and the deficit, we
can talk about Social Security and we can talk about Medicare,
and we need to, but if we do not talk about what we are doing
with foreign policy in this country and how we are going to
deal with infrastructure, highway infrastructure that is worn
out that will leave the kids in this audience--and if you are
under 30, I will call you a kid--with the lack of ability to
have a 21st century economy, or many of you are probably going
to college and you know you are going to walk out the door with
$40,000 or $50,000 in debt and you are not going to be able to
buy a house. That is a negative impact on the economy. Or, the
fact we do not have an immigration bill and we are not funding
research and development, so we are funneling all those jobs to
India and Brazil and China and other places around the world.
So, debt and deficit is important, Mr. Chairman, and if we
do not take a look at a lot of the policies that get us here, I
will tell you what Mr. Bernanke told me when he left office at
the Fed. When I said, is the most important thing we are
looking at the debt, and he said, no, the most important thing
you need to look at is handing the people in this audience, the
next generation, a 21st Century economy, because if you do not,
you will never pay that debt down. We are not handing these
folks a 21st Century economy because we are saddling them with
so much debt, personal debt right out of the chute.
We can solve this problem. It is going to take a lot of
tough decisions. I think there are people around this dais that
are willing to do it, and I think there are people in the
Senate that are willing to do it, and I also think there are a
lot of folks in the Senate that would rather play politics with
this than get to the point, and that is the point I want to
make.
The question I have for you, Dr. Hall, is this. You talked
about the debt. You talked about projections on the debt. Can
we tackle this effort by spending cuts alone?
Mr. Hall. Well, I want to avoid that issue because it is
not my job, in a sense. It is your decision to----
Senator Tester. I know that.
Mr. Hall [continuing]. Obviously, it would be----
Senator Tester. I just want your estimation. You do not
need to get political. You can just say yes or no, and if they
beat you up for it, they will beat you up for it regardless,
so--these are good people. They will not do that.
Mr. Hall. Well, actually, the scenarios I just gave you
were ways to hit targets totally by spending and totally by
revenue. So, I did give you sort of the two extremes there.
Senator Tester. All right. And you are not on this side of
the dais, but if you were on this side of the dais, would you
be looking at both or would you just be looking at spending
cuts or tax increases?
Mr. Hall. Well, again, it is--as a CBO Director, it is not
my job to recommend policy. I will talk to you about the
possible impact of specific things, and we actually have a
document or two giving you some options and what the likely
effects would be on how to improve the budget situation.
Senator Tester. Well, I appreciate that, although I was
hoping for a better answer, a more direct answer, but that is
the way it is.
I want to just say that I think the debt is very important
to handle. I think the American people are very concerned about
this. I hear about it every time I go home. Every time I go
home, I hear about this. And, I think that if we are able to
work together, as I said earlier, in a bipartisan way, we can
come to solutions. But, it is going to require some revenue and
it is going to require some cuts. So far, we have been cutting
to the tune of four in dollars in cuts for every one dollar in
increased revenue. I, quite frankly, do not think that is
sustainable for a 21st Century economy.
Thank you, Mr. Chairman. Thank you, Dr. Hall.
Chairman Johnson. Thank you, Senator Tester.
I do want to respond a little bit. If you want a 21st
Century economy, there are some pretty easy elements that we
need to concentrate on. For example, let us not artificially
drive up the cost of energy. If you want to manufacture things,
you need power. Cheap power is better than expensive power. Let
us reduce the regulatory burden instead of dramatically
increase it, and let us simplify our tax system so we have pro-
growth policies. Even with meager economic growth, we have
increased revenue to the Federal Government since 2009 by more
than $900 billion, with meager economic growth.
Second point, the total cost of the wars since 2001 is
probably under $2 trillion----
Senator Tester. You are not taking into account----
Chairman Johnson. I am saying in terms of the effect on the
budget deficit today. Less than $2 trillion. We have increased
our debt by almost $8 trillion in just 6 years. So, yes, the
wars are part of it, certainly not the answer. And in terms of
infrastructure spending, totally agree. We should dramatically
increase what we are spending on infrastructure for a 21st
Century economy. The shortfall in the Highway Trust Fund is
about $15 billion per year in an almost 4,000-billion-dollar-a-
year budget. Can we not find $15 billion of lower-priority
spending and let us spend it on a higher priority? So, that
would be my response to that.
Senator Tester. My response to that would be we just came
through the worst recession since the 1930s and that is what
caused that $6 billion to go up, income going down, expenses to
go up. The other thing is, is we just had a hearing here
yesterday with a gentleman from your State that raised
chickens, poultry industry. Is that low priority spending? It
depends on whose ox is being gored here.
Chairman Johnson. And we are going to work to make sure
that we take care of that situation, as well. That is why we
had the hearing.
Senator Tester. Oh, I know. But, what I am saying is, is
that it was important, and the fact is that somebody living in
the middle of downtown Miami might say, the subsidies we give
to crop insurance is just not important.
Chairman Johnson. No, again, I was not saying that was
lower priority. We can find $15 billion of lower priority
spending.
I believe it is Senator Ernst.
Senator Ernst. I am not able to stay.
Chairman Johnson. Sorry about that. Senator Booker.
Senator Booker. I am on the same thing, sir, so
unfortunately, I have to go.
Chairman Johnson. Senator Carper. I have plenty of
questions, so----
Senator Carper. Dr. Hall, the first question I have for you
is how is it going?
Mr. Hall. It is going well. If you mean the budget, it is
concerning.
Chairman Johnson. It is a mess.
Senator Carper. People ask me, not all the time, but quite
a bit, what keeps me up at night, and I am the senior Democrat
on this Committee and we focus a lot on cyber attacks and all
kinds of attacks on our country, lone wolves. Those are the
kind of things that keep me up at night.
Same question for you. What keeps you up at night, at least
on the professional side?
Mr. Hall. Oh, on the professional side, it is sort of my
job, is making sure that you have the information you need,
Congress has the information it needs to make some tough
decisions every day.
Senator Carper. I have a couple of questions that I want to
read, and then a couple of questions I just want to, like, ask
off the top of my head. I will take this one that my staff has
been good enough to provide for me.
But, if you go back a couple of years--I want to ask about
long-term forecasts. It is important for us to, of course, plan
for the future and make sure the policies that we put in place,
they make sense and they are affordable, not just for now, but
for the long run.
But, if someone in 1985 attempted to project our economic
and Federal budget outlook like this year, in 2015, I think
even the best models could never have accounted for so many
factors that have since played a part. We had no idea in 1985,
for example, that the Internet would exist, that what happened
on 9/11 would come about, the war in Afghanistan, two wars in
Iraq, the rise of China and India, the 2008 financial crisis,
the Great Recession would happen. A projection made in 1985
would have failed even to account for the savings and loan
crisis that began the following year that some of us lived
through.
My question would be, how do we strike the right balance
here? Knowing that there are so many unknowns, how do we strike
the right balance?
Mr. Hall. Well, that is difficult, and, I think one of the
things that we strive to do is give you our best estimate. We
all know it is probably not going to be right, but we also try
to give you some idea of what sort of uncertainty is there.
For example, in the long-term budget outlook report, we go
through some scenarios where we change the mortality rate,
where we change productivity, it is higher or lower than it has
been historically. We change ranges of interest rates and et
cetera to give you some idea of what sort of range of outcomes
you really could have 25 years from now, besides our point
estimate. And, that is to make exactly this point, that things
change. It is very hard to predict the outcomes.
But, I think one of the things that we are in a position of
saying, though, is under almost any reasonable sort of
scenario, the Federal debt 25 years from now is going to be at
a very high level and we are headed on a path where it will be
unsustainable under just about any of these scenarios under
current law, no matter what reasonably happens to productivity
or reasonably happens to interest rates, and that is part of
our message today.
Senator Carper. OK. Thanks. I think we would all agree that
some level of debt is reasonable and running a deficit is
sometimes necessary. I always--the two most common words we
hear about, in times of war, in an economic recession to try to
prime the pump and get the economy moving. How would you
explain to the American people the difference between, say,
reasonable debt and unreasonable debt--or unreasonably high
levels of debt?
Mr. Hall. Sure. Well, it is a complicated thing. It is one
of the reasons that it is so hard to talk about this. And, I
would suggest they think about themselves, they think about
businesses. is it OK for a household to run debt? Well, yes.
How much debt is too much debt? It is not easy to say. It
depends upon how big the household is, what the household's
prospects are. But, at some point, if a household or a business
works up debt, it gets to a level where there is a real concern
that it is not sustainable. But, that is sort of a way to think
about it.
So, there is no easy, hard and fast rule about how much
debt is too much debt because you cannot say that. You cannot
look at Starbucks and say, how much debt is too much debt for
Starbucks, because you have to look at a lot of things and
investors have to make a decision. That is sort of the same
thing here for the United States. There is nothing wrong with a
running debt, but at some point, you have to think about is the
debt too much? Is it getting to where it is going to be very
difficult to pay it back over time, and I think that is what we
are pointing out, is that we are getting to a level where it is
getting very high and it is going to be very difficult to pay
it back if we keep our current trends.
Senator Carper. I am not going to be able to make a perfect
analogy here, but I am going to try. Say you have, on the one
hand, you have a family, and they are trying to decide what to
spend their money on, and if they do not have enough to--for
example, one of the spouses or both the spouses want to go back
to school, and maybe one spouse will work full time the other
spouse go back to school and get a better education, be able to
get a better job, or maybe they want their kids to be able to
go to school finish school and be more--not just more
productive, but actually be able to raise their income, too, or
maybe have a choice to want to be able to get to work and you
have to go work someplace where you cannot take transit, so
maybe you invest in a car.
Those are investments that are designed to enable a family
to increase their income. But, when you think about the Federal
Government spending money--and the family, they could decide to
spend their money to go on a vacation to Hawaii instead of
investing in the kinds of things we talked about. In the
Federal Government, we can invest in things that actually
enhance our long-term economic growth or not, and one of the
things I focus on a lot, as my colleagues know, is making sure
we are making smart investments in transportation
infrastructure, because there is a big payoff there. What are
some things that we ought to be investing in? What are some
things that we ought to be investing in that maybe we are doing
enough of, or maybe not enough of, that will help grow our
economy?
Mr. Hall. Well, I am in a position where I cannot give
policy advice, but it is certainly true that the type of
spending the government had has an impact. One of the things
that I think is very interesting about our long-term budget
outlook is that if you look under current law and go forward,
spending on everything else besides the Social Security and
health care goes down to a low level, and it is still
unsustainable.
So, my point is that, to a large degree, the big problems
here are crowding out perhaps the sort of spending that you are
talking about, which can help support economic growth. So, that
is sort of part of the message here, I think, that spending on
things like that can be worthwhile, but you have to consider,
especially if you are going to pay for it with debt, is it
going to have an impact on the economy that you want it to have
if you are paying it with debt versus something else.
Senator Carper. All right. Good. Thanks.
Chairman Johnson. Senator McCaskill.
OPENING STATEMENT OF SENATOR MCCASKILL
Senator McCaskill. Thank you.
I do think it is frustrating, because I think there are a
lot of misconceptions in America about the budget process and
the difference between a deficit and a debt----
Mr. Hall. Right.
Senator McCaskill [continuing]. And the difference between
austerity and stimulus from an economic perspective. There were
a lot of hysterics around the stimulus, but if we look at the
data, I think you would agree, Doctor, that the data show the
countries that engaged in stimulus did a much better job of
navigating out of the hole than those countries that went with
an austerity program. Would that be an accurate description of
the growth in the various nations, based on the policies they
embraced after we fell off the cliff?
Mr. Hall. Well, CBO has weighed in, and there is a
consensus in the economics profession that the stimulus did
have an effect on economic growth----
Senator McCaskill. A positive effect.
Mr. Hall. Yes.
Senator McCaskill. But, it is counterintuitive that, when
the government is in a bad place because of an economic
downturn, that it spends more money, I mean, because all of us
in our homes----
Mr. Hall. Right.
Senator McCaskill [continuing]. If you are having a bad
time, you spend less money. So, it is one of those things that
is frustrating, because I think it is complicated----
Mr. Hall. Right.
Senator McCaskill [continuing]. For people to step back and
realize that stimulative spending is, in fact, a positive for
the economy, and, in fact, I think that you would agree, there
is a robust debate among the economic community now as to
whether or not the stimulus was large enough.
Mr. Hall. Right. Yes, that is true, and let me sort of
pivot back to the budget issue, in my mind. The debt has gotten
so large, and under current law it is going to get so large,
our ability to respond to a future crisis like this is going to
be very limited because we have worked up so much debt. And
that is one of the concerns, I think, about having such a large
debt, is this sort of uncertainty and what could happen with
the economy, what could happen with a number of things. So,
there is risk involved with having debt this high.
Senator McCaskill. So, on the debt, one of the frustrating
things as we look at public policy is that we look at the
scoring and we try to figure out what it is going to cost. But,
you all, for a lot of legitimate and valid reasons, do not ever
score the positives of policies--for example, prevention. There
is no question that several things contribute to lower health
care costs, including spending more money on activities that
help prevent illness. But, of course, that is never scored.
Another example would be what we save by having everyone
have some skin in the game. By that, I mean the Cadillac
policies where nobody has to go in their pocket for anything
and they see their health care as free, as opposed to people
who have deductibles and copays, what impact that has on,
ultimately, the amount of what health care costs are in this
country.
I mean, those are two examples. I could give you a lot of
other examples. Could you speak to the failure to quantify the
money we save with public policy that prevents the spending of
money and to calculating only how much money we are spending.
Mr. Hall. Well, when we score things, we do try to take
that into account when there is sufficient evidence, where
there is some good research and we can----
Senator McCaskill. Give me an example of where you have.
Mr. Hall. I can tell you on something we are working on. We
have not gotten there yet, but we are looking very hard at the
issue of obesity. We have been asked to look at the effects of
obesity on health and et cetera going forward. That has turned
out to be a very difficult thing to sort of quantify, as to
whether that has an effect that is measurable in a budget. But,
that is something, actually, where----
Senator McCaskill. But, we know it does.
Mr. Hall. Well----
Senator McCaskill. It is just quantifying it is hard,
right?
Mr. Hall. Quantifying it is hard, and the research is not
as straightforward as you might hope. But, we are working on
that. We may get there----
Senator McCaskill. Not if you take into account the onset
of adult diabetes and what we are spending. I mean, all you
have to do is turn on the TV. Every third ad is for a blood
monitor, all of which we are paying for, right?
Mr. Hall. Right. And, like I say, if we can work out some
solid estimates and solid evidence that that is actually true,
then that will play into what we do.
Senator McCaskill. So, can you give me an example where CBO
has taken into account money that we will save by preventing
certain activities or changing people's behavior?
Mr. Hall. Can I get back with you on that? I am sure we can
dig up something----
Senator McCaskill. Because I have always been told, ``well,
we cannot--that does not count'', and certainly on the health
care bill----
Mr. Hall. Right.
Senator McCaskill [continuing]. They did not count anything
for the prevention, and there is obviously a lot of prevention
now that is occurring, because people are not having to go in
their pocket for prevention. They are able to go and get
avasectomy----
Mr. Hall. Well, we are happy to write up something on our
views on that.
Senator McCaskill [continuing]. Mammograms and so forth----
Mr. Hall. Right.
Senator McCaskill [continuing]. Without having to pay for
them, and I do not think that that was ever taken into account,
even though the health care bill did say it was going to bring
down the deficit, and it has, has it not?
Mr. Hall. Well, yes, our forecast is--that is right, that
the ACA, on the whole, does do that.
Senator McCaskill. OK. Great. Thank you, Mr. Chairman.
Chairman Johnson. Thanks, Senator McCaskill.
I do want to address a little bit in terms of stimulus.
What you spend money on is pretty important, correct?
Mr. Hall. Yes.
Chairman Johnson. I mean, there is no doubt that if you
spend a lot of money, that is going to stimulate the economy.
But, if you spend it on consumption versus, let us say,
infrastructure----
Mr. Hall. Right.
Chairman Johnson. Do you know, out of the $800-whatever
billion stimulus how much of that was actually spent on
something we would consider infrastructure--highways, bridges,
that type of thing--versus just getting pumped into, for
example, city and State Governments?
Mr. Hall. I do not know that.
Chairman Johnson. It is pretty small, though, is it not?
Mr. Hall. I do not----
Chairman Johnson. The best estimate I have been able to get
out of staff is about $50 billion into what I would consider
infrastructure.
Mr. Hall. Right.
Chairman Johnson. I want to go back to debt burden and how
much you can really carry, because you are right. It totally
depends on the circumstance. In a growing organization, you
take on a lot more debt because you are going to be a lot
bigger in, 5, 10, 15 years. Does it not really come down to
debt service, though, in terms of whether you can afford it,
and is that not what we are facing right here, is because we
are at such historically low interest rates, we are not really
feeling the full economic brunt of this enormous increase into
our debt, where we are keeping those interest rates
artificially low and we are able to service for the time being,
but at some point in time, that is going to stop, correct?
Mr. Hall. That is right, and that is in our 25-year
forecast. We do have interest rates moving back to more
historic levels.
Chairman Johnson. To what level?
Mr. Hall. I think we have the Treasury 10-year at something
like 2.3 percent. I would have to look that up to make sure.
Chairman Johnson. OK. I think right now, as Senator Enzi
was saying, I think our total borrowing cost is about under 2
percent. Historically, what we were looking at is about 5.3
percent, overall average interest rate that the Federal
Government is paying on its debt.
Mr. Hall. Right.
Chairman Johnson. So, I think your estimate is about 4.7
percent, so still under that 50-, 60-year average.
Mr. Hall. Oh, right. Yes. The 4.7 percent is the net
interest----
Chairman Johnson. Right.
Mr. Hall [continuing]. Is 4.7 percent of GDP----
Chairman Johnson. But, basically nominal. That includes
inflation, that type of thing.
Mr. Hall. Correct. That is right.
Chairman Johnson. OK. One thing you do not include in your
forecast is another recession, correct?
Mr. Hall. That is right.
Chairman Johnson. I just had staff quickly give me a note
on how frequently we have recessions, and dating back to the
1960s, it is about a 9-year, then 3-year, 5-year, 10-year, 10-
year, 8-year interval. As an economist, that is about right.
Every 10 years or less, we are having another recession,
correct?
Mr. Hall. That is right.
Chairman Johnson. So, again, your long-term projections, I
understand you cannot project out a recession, but we can,
based on the past, you can pretty well assume that there will
be recessions, maybe three or four or more of those over the
next 30 years.
Mr. Hall. Unfortunately, that is probably----
Chairman Johnson. And that will make the numbers, the $103
trillion, even worse.
Mr. Hall. Well, that is right. We try to work in the long-
run averages through a recession. So, you get some idea of a
recession and then recovery, what it averages through that.
But, there certainly is risk if there is a recession.
Chairman Johnson. And, as Senator Enzi was alluding to, as
well, part of the problem we have in terms of getting this
under control is so much of the Federal budget is on automatic
pilot, that we really only appropriate about a trillion dollars
out of what is approaching a $4 trillion budget, is that not
correct?
Mr. Hall. Yes.
Chairman Johnson. And, so, we do not have a whole lot of
room to maneuver on an annual basis in terms of adjusting those
things because these are programs that are termed entitlement
programs, and if you qualify, it gets automatically spent.
Mr. Hall. Yes.
Chairman Johnson. I want to talk a little bit about the
difference between total debt and debt held by the public. What
is excluded from debt held by the public versus total debt,
which right now is over $18 trillion total debt?
Mr. Hall. Right. The idea here is that debt that is held by
other parts of government is not included in debt held by the
public, and the reason, at least, we focus on debt held by the
public is this is the stuff that has economic impact. One part
of the government owing money to another part of the government
does not really impact the economy like owing to----
Chairman Johnson. It is not external debt, but it is a debt
of the--for example, the biggest element of that is really
Social Security Trust Fund, correct?
Mr. Hall. Yes.
Chairman Johnson. And that is about $2.77 trillion worth,
correct?
Mr. Hall. I think that is right, yes.
Chairman Johnson. Now, to the Trust Fund, that Trust Fund
holds about $2.77 trillion of U.S. Government bonds, correct?
Mr. Hall. I think so.
Chairman Johnson. So, again, that is an asset to the Trust
Fund, right? But, what is a U.S. Government bond--what is it
called to the Treasury? A liability, correct?
Mr. Hall. Right.
Chairman Johnson. Now, coming from the business world, if
you are talking about one overall organization like the Federal
Government, you would consolidate the books. So, when you
consolidate the books of the Federal Government and you look at
a $2.77 trillion asset in the Trust Fund versus a $2.77
trillion liability in Treasury, what does that net out to? Can
you say it?
Mr. Hall. Can you run it by me once more----
Chairman Johnson. OK. A $2.77 trillion asset in the Trust
Fund of U.S. Government bonds is a $2.77 trillion liability to
Treasury----
Mr. Hall. It zeroes out, yes.
Chairman Johnson. It nets to----
Mr. Hall. Zero.
Chairman Johnson. Zero. So, the Trust Fund, the Social
Security Trust Fund, in terms of a financial value to the
Federal Government, is equal to zero, correct?
Mr. Hall. Right. Yes.
Chairman Johnson. It is just an accounting convention. It
is a bookkeeping----
Mr. Hall. Right.
Chairman Johnson. OK. So, I want to just go through what
happens now that we are actually paying out more in benefits
that we are taking in the payroll tax. What is currently
happening is the interest on those bonds are still being paid
into the Trust Fund and the interest is covering the deficits
currently. But, in a few years, the interest payments will no
longer cover the expanding deficit in Social Security. So, the
Social Security Trust Fund is going to have to start cashing
those bonds in to the Treasury, correct?
Mr. Hall. Yes.
Chairman Johnson. So, they will take a bond, maybe $100
billion if that is the shortfall, give it to the Treasury, the
Treasury will give them $100 billion to pay out benefits. But,
how does the Treasury get that $100 billion?
Mr. Hall. They borrow it from somebody else.
Chairman Johnson. They borrow it. So, I guess, from my
standpoint, the debt held within these agencies is an
obligation. I realize we do not recognize it as such because, I
think by Federal law, we really do not have to--we are really
not obligated to make Social Security payments. Social Security
is really not a pre-funded retirement fund.
Mr. Hall. Right.
Chairman Johnson. We did not really take those funds in and
put those into an account for an individual taxpayer, correct?
We brought that money in. We spent it. And in its place, we
issued a U.S. Government bond. In a previous hearing, we
actually had the Trust Fund. We have a picture of it. We did
not bring it today. It is a four-drawer file in Parkersburg,
West Virginia. That is what politicians from both parties are
telling the American people, looking them straight in the eye
and lying to them, saying that that is going to fund Social
Security deficits for the next 20 or so years. It does not do
that, does it?
Mr. Hall. No.
Chairman Johnson. No. So, the Trust Fund is a fiction. By
and large, the Trust Fund is a fiction. It has no financial
value to the Federal Government.
Now, had we--just real quick--had the Federal Government
actually taken those surpluses and invested those in assets
outside the Federal Government, for example, maybe a Dow Jones
stock index fund, those would be a real hard asset that then
the Trust Fund could actually cash those in and a different
entity could have paid that and that actually would be funding
benefits. But, that is not what happened, right?
Mr. Hall. Right.
Chairman Johnson. We took the money and we spent it. It is
gone. And all we have in place of it is a piece of paper that
basically says, $2.77 trillion. OK. We will be exploring this
in far greater detail in a future hearing. Senator Carper.
Senator Carper. Thank you.
I want to go back to the analogy of the family trying to
figure out how to spend their money. Say you have a family that
is renting. They were trying to decide whether to buy or just
to continue to pay rent payments, and mortgage payments are
maybe attractive--or mortgage rates are attractive, so they are
tempted to actually buy a house, and they finally decide maybe
that is in their best long-term interest.
We rent a lot of space, as you know, in the Federal
Government--a lot of space--and we sometimes wonder, well,
maybe should we just go ahead and buy something or build
something? Would we be better off? Would the taxpayers
ultimately be better off? And, I think there is a lot of reason
to say, yes, we would, and it is just not my conjecture, but
folks a whole lot smarter than me.
I think it was the Government Accountability Office (GAO)
who--or maybe it was the General Services Administration
(GSA)--but on the issue of Homeland Security, Department of
Homeland Security continuing to rent space all over kingdom
come. They rent a lot of space, and, it is a big agency, huge,
dozens of agencies that are part of it. They are far-flung
across this area and, really, across the world. But, they are
trying to consolidate in one area, not all the Department, but
big pieces of the Department. Former Secretaries Tom Ridge,
Judge Chertoff, Janet Napolitano, all said in terms of actually
managing the Department, it makes a whole lot of sense.
But, we are also told by GSA that if they do that
consolidation and we build, that over the next 30 years, we
will save taxpayers over a billion dollars. But, yet, we
continue to rent space, lease space as opposed to buying or
building.
What can we do in order to better ensure we make smarter
decisions when it comes to acquiring space, paying for space?
What do we need to do on our legislative side? My sense is that
your hands are tied because when we try to buy or build, it
does not score well because we have to account for everything
up front as opposed to paying for renting something for 30, 40
years. What can we do to help make sure we just use some common
sense here?
Mr. Hall. Well, I suppose it is making the decision about
it, obviously. It is understanding what the cost and what the
extra cost, or not extra cost will be of buying versus renting,
that sort of thing.
Obviously, in terms of scoring something like that, that is
something that we do routinely. We do not constrain anybody in
that. We just are trying to be clear what is going to be the
impact of spending on something like that.
Senator Carper. Well, the way that the scoring occurs now,
when the agency can clearly demonstrate--GSA said an agency can
clearly demonstrate that a lot of money is going to be saved
for taxpayers if we buy or build as opposed to continue
renting, but yet we continue to rent or lease. Is there
something that we need to do at the legislative branch in order
to make sure we use some common sense, or enable you and your
folks to use some common sense here?
Mr. Hall. I do not think I have any advice on that, to be
honest. It is something, I suppose, if you are interested in us
following up on something like that, on likely the scoring
impact of that sort of thing, we can talk about that in a Q and
A afterwards, if you would like.
Senator Carper. Good. All right. Well, this is one I have
been interested in for a while, so I will look forward to that
conversation.
Senator McCaskill was over here talking about prevention
and that sort of thing. Major health care cost drivers, there
are a lot of them, but among those major drivers are obesity.
Among the drivers are dementia. I think we have about five
million people that are suffering from Alzheimer's disease,
dementia today. That number is expected to grow. I used to
think the drivers in Medicaid were, like, women and children.
As it turns out, I am told maybe three-quarters of what we
spend in Medicaid these days are for folks, older people in
nursing homes, a lot of whom have dementia.
Another health care cost driver is end-of-life care. We
spend a huge amount, as you know, in the last 6 months of our
lives. In some cases, people maybe do one of these advanced
care directives or, stipulating what kind of care they would
like to have in the last months or years of their life and they
find that if they are in, like, a hospital, then they are fine,
but if they get transferred to a different facility, there is
no portability of that directive.
I work out. I love to work out every day of my life,
almost, and one of the places I work out is the YMCA back in
Delaware, and there is a woman who works out there from time to
time and I was talking to her. She is in great shape. I think
she is in her 50s. She is in terrific shape. I asked her if her
parents were also, like, really in good physical shape, and she
said that they are deceased. I said, really? What happened? And
she said her mom died of colorectal cancer, and I said, how
old, and she said, like, in her 50s. And, I said, why? She
said, she just did not want to get those screenings. They just
did not like to do them. They were just uncomfortable,
unpleasant, and she would rather than do that just take her
chances. She died, a miserable death, too, I might add.
One of the things we did in the Affordable Care Act is we
basically tried to make sure people get their screenings,
whether it is colorectal, whether it is prostate, whether it is
breast, but I do not know that we always score those, and in
the end, we know we save a lot of money. But, the score is not
encouraging for us to do what in the end saves money.
Could you just comment on what we need to do to change
that?
Mr. Hall. Well, actually, if you like, I think I mentioned
this to Senator McCaskill, that if you like, we can followup
with some description of how we score things like that and what
sort of process we go through in looking at how to score
something like that.
Senator Carper. OK. The last one I would ask, just briefly,
GAO has finally put on their High-Risk List the issue of
climate change. They pointed out that enhancing resilience in
communities may carry some up-front costs but could reduce the
damages in the future by a lot. How should CBO factor into its
analysis the growing costs of climate change to the economy and
the Federal budget?
Mr. Hall. We actually have done a little work on that.
Senator Carper. Have you?
Mr. Hall. Yes, we have. We have looked at estimates of
increased hurricanes and drawn that sort of a trend and it does
have an impact on GDP. It is not a big impact on GDP. In fact,
I think we have a little discussion, actually, in this report
on that. And, the reason it does not have a big budgetary
impact, of course, is because the shared economy that is spread
along the coast is not that big and the ag effects can be kind
of mixed, because you can actually have an agricultural boost
somewhere else where you have it on a negative.
But, we do have that--we do have some discussion on that,
and we are, in fact, doing some more detailed work on the
impact of increased hurricanes and maybe rising sea level. So,
we will actually have some work on that pretty soon.
Senator Carper. Good. Well, we look forward to that. Thank
you.
Thanks very much, Mr. Chairman.
Chairman Johnson. Thank you, Senator Carper.
By the way, to both you and Senator McCaskill, if you are
looking for an ally, there is a concept out there, the cure
strategy, which I think is exactly the direction we should be
going on.
As a fiscal conservative, I think it is money really well
spent to try and cure diseases, and what I would love to do is
get a commitment of CBO to really take a look at some of the
projections, for example, on how much we are going to be
spending on Alzheimer's if we do not come up with a cure. What
is the current cost of just diabetes, those types of things.
I think it is kind of hard to--in my guess, it would be
very difficult to project prevention, and say, if you do this--
but we can certainly have a pretty good hard number on what we
are spending treating diabetes, what we are spending treating
Alzheimer's, and then do the demographic projection in terms of
how many, with the aging population, what that is going to
cost. I know the Alzheimer's Association has done those types
of things. So, I think those are extremely good numbers and the
types of information you would need to help direct action,
which kind of gets us back to the point we were making in this
Committee.
It is really about how do we simplify how we project, how
we communicate those projections. It is about providing
information, not relying on demagoguery anymore, because the
only way we are going to solve these problems is, again, lay
out the information, lay out the facts, have a very unbiased,
nonpartisan intermediary, arbitrator of the information so that
we are not sitting and battling over, well, this is my figure,
that is your figure, but we can kind of come together and go,
OK, let us at least first agree on the figures as best we can,
understand what underlies them.
So, again, I am hoping that, we have reported a lot of
pieces of legislation. We have come to CBO in the past looking
for scores. I know you are busy. I am hoping you are valuing
this, and I hope you understand the direction I am trying to go
here. Let us simplify things. Let us get information to the
American public. Let us get information to policymakers so that
we are on the same page.
So, I certainly am looking for a commitment out of CBO to,
with what limited resources you have, and on a prioritized
basis--and we are not going to overburden you. I am very
sympathetic from that standpoint. But, I really would like a
little bit more help in terms of getting scores on some of
these things and work with you to, again, prioritize what our
requests are. Is that fair enough?
Mr. Hall. Sure. Yes.
Chairman Johnson. Just two quick final questions. I want to
go back a little bit on debt and serviceability of it. Do you
have any sense--if you do not, let me know and we will submit
it as a question to the record--what our current maturity level
is of our current Federal debt versus prior years and what the
recommendation would be going forward of trying to extend that,
take advantage of these low interest rates? Can you comment on
that?
Mr. Hall. I cannot, but I am happy to followup.
Chairman Johnson. OK. I think that is pretty important. I
would like to see where we used to be, where we are today,
because my sense is we have really shortened that maturity time
period pretty dramatically to take advantage of these very low
short-term interest rates when what we maybe ought to be doing
is really trying to go as long as possible without driving up
the interest rates themselves by having a great deal of demand.
The other thing, again, this might be picked up in our
follow-on hearing on Social Security, but do you know what
current law is when we no longer have those bonds and that
accounting convention runs out with Social Security benefits?
Do you know what actually happens according to current law if
we do not do something?
Mr. Hall. Uh----
Chairman Johnson. We are facing that with the Social
Security Disability Trust Fund----
Mr. Hall. Right.
Chairman Johnson [continuing]. In the next year or two,
correct?
Mr. Hall. That is right. Yes, that is right. The Disability
one is pretty quick. It is fiscal year (FY) 2017. No, I do not
know what the current law is on that. I think we sort of assume
that money is put in there----
Chairman Johnson. Something is going to happen. I have
heard, and again, it is very difficult for us--I have heard
that, basically, what ends up happening by current law is
benefits would be reduced to equal the revenue generation, but
I cannot get a real handle on that, so I cannot say that
definitively at all, but if you could check on that, we are
going to certainly bring in some experts on Social Security to
find out what is the law if we just put our heads in the sand
on this, which is something I do not recommend we do.
But, again, Dr. Hall, I really do appreciate your
testimony, the time you have taken today, and I really, in all
sincerity, I want to work with you, because your agency is so
critically important to get that information out there for the
American public to understand the depth of these issues,
because, as Senator Enzi was saying, the sooner you address
these problems, the less painful the solutions will be.
So, with that in mind, this hearing record will remain open
for 15 days, until July 24, at 5 p.m., for the submission of
statements and questions for the record.
This hearing is adjourned.
[Whereupon, at 11:26 a.m., the Committee was adjourned.]
A P P E N D I X
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