[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
CBO OVERSIGHT: ECONOMIC ASSUMPTIONS, BASELINE CONSTRUCTION, COST
ESTIMATING, AND SCORING
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HEARING
BEFORE THE
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
HEARING HELD IN WASHINGTON, D.C., FEBRUARY 6, 2018
__________
Serial No. 115-8
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Printed for the use of the Committee on the Budget
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COMMITTEE ON THE BUDGET
STEVE WOMACK, Arkansas, Chairman
TODD ROKITA, Indiana, Vice Chairman JOHN A. YARMUTH, Kentucky,
DIANE BLACK, Tennessee Ranking Minority Member
MARIO DIAZ-BALART, Florida BARBARA LEE, California
TOM COLE, Oklahoma MICHELLE LUJAN GRISHAM, New Mexico
TOM McCLINTOCK, California SETH MOULTON, Massachusetts
ROB WOODALL, Georgia HAKEEM S. JEFFRIES, New York
MARK SANFORD, South Carolina BRIAN HIGGINS, New York
DAVE BRAT, Virginia SUZAN K. DelBENE, Washington
GLENN GROTHMAN, Wisconsin DEBBIE WASSERMAN SCHULTZ, Florida
GARY J. PALMER, Alabama BRENDAN F. BOYLE, Pennsylvania
BRUCE WESTERMAN, Arkansas RO KHANNA, California
JAMES B. RENACCI, Ohio PRAMILA JAYAPAL, Washington,
BILL JOHNSON, Ohio Vice Ranking Minority Member
JASON SMITH, Missouri SALUD O. CARBAJAL, California
JASON LEWIS, Minnesota SHEILA JACKSON LEE, Texas
JACK BERGMAN, Michigan JANICE D. SCHAKOWSKY, Illinois
JOHN J. FASO, New York
LLOYD SMUCKER, Pennsylvania
MATT GAETZ, Florida
JODEY C. ARRINGTON, Texas
A. DREW FERGUSON IV, Georgia
Professional Staff
Dan Keniry, Staff Director
Ellen Balis, Minority Staff Director
CONTENTS
Page
Hearing held in Washington, D.C., February 6, 2018............... 1
Hon. Steve Womack, Chairman, Committee on the Budget......... 1
Prepared statement of.................................... 4
Hon. John A. Yarmuth, Ranking Member, Committee on the Budget 8
Prepared statement of.................................... 9
Mark Hadley, J.D., Deputy Director, Congressional Budget
Office..................................................... 10
Prepared statement of.................................... 14
Committee on the Budget, questions submitted for the record.. 56
Answers to questions submitted for the record................ 60
CBO OVERSIGHT: ECONOMIC ASSUMPTIONS, BASELINE CONSTRUCTION, COST
ESTIMATING, AND SCORING
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TUESDAY, FEBRUARY 6, 2018
House of Representatives,
Committee on the Budget,
Washington, D.C.
The Committee met, pursuant to call, at 10:00 a.m., in Room
1334, Longworth House Office Building, Hon. Steve Womack
[Chairman of the Committee] presiding.
Present: Representatives Womack, Sanford, Brat, Grothman,
Palmer, Renacci, Lewis, Bergman, Smucker, Arrington, Ferguson,
Yarmuth, Lee, Lujan Grisham, Jeffries, Wasserman Schultz,
Jayapal, Jackson Lee, and Schakowsky.
Chairman Womack. Thank you. The hearing will come to order.
Welcome to the Committee on the Budget's hearing on the
Congressional Budget Office's economic assumptions, baseline
construction, cost estimates, and scoring. This is the second
of five hearings that the Committee plans to hold this spring
on oversight of the Congressional Budget Office.
As we discussed during our first hearing, CBO was created
more than 40 years ago as part of the Congressional Budget and
Impoundment Act of 1974. Since then, CBO has been a vital
congressional support agency that provides nonpartisan
budgetary analysis and directly assists the House and Senate
Budget Committees.
These hearings with CBO are intended to help us learn more
about how the agency carries out its mandate of supporting
Congress in the Federal budgeting process and to consider areas
in which the agency can improve.
CBO has not undergone a comprehensive review since it was
founded. However, the demands on the agency have undoubtedly
changed since 1974. So, we are here to make sure the agency has
everything it needs to effectively and efficiently fulfill its
mission in the 21st century.
Last week, during our hearing with CBO's director, Dr.
Keith Hall, we looked more broadly at CBO's organizational and
operational structure, including its staffing, assumptions,
processes, and work products. In today's hearing and at our
next hearing, we are diving deeper to explore the nuts and
bolts of how CBO actually crafts the impartial work product
Congress relies on to make informed legislative decisions.
Today's discussion will be largely technical in nature, but
it will provide the Committee with great insight into CBO's
work, with the goal of making that work more useful to
Congress.
We will discuss CBO's budget and economic reporting
responsibilities, which include providing information on the
national economic outlook, as well as cost estimates for
proposed legislation.
As our Committee members know well, CBO regularly produces
an economic outlook and details long-term budget projections.
Based on current laws that affect Federal spending and
revenues, CBO's budgetary and economic projections are updated
regularly throughout the year and together form a baseline.
Congress intended this baseline to be a neutral benchmark
in the budget process, and CBO uses the baseline to project the
impact of proposed legislation. CBO's baseline, or ``The Budget
and Economic Outlook,'' as it is called in report form, is
instrumental to building the budget each fiscal year. This
annual report details the expected levels of spending, revenue,
surpluses or deficits, and debt over the forthcoming 10-year
cycle.
Using CBO's baseline, Committees and members of Congress
consider policy options through the lens of whether they
increase or decrease spending and revenues. So, it is essential
we on the Budget Committee have a firm grasp on this process.
As we learn the ``how'' behind these various work products, I
am also interested in exploring CBO's efforts for maintaining
an appropriate level of transparency.
Transparency within CBO is critical to ensuring the agency
can effectively fulfill its nonpartisan mission to support the
work of Congress. At the same time, the Budget Act recognizes
there is a delicate balance between CBO's need for access to
good private sector data and the appropriate transparency of
that data, and in this series of hearings, we look forward to
carefully evaluating and understanding this balance.
So, with that in mind, I am pleased to welcome three
individuals from the agency who are here today to help improve
our understanding of CBO's work. Each one comes with expert
knowledge related to CBO's processes for constructing various
types of analysis and providing support to Members and
congressional staff.
First, we have Mark Hadley, Deputy Director of CBO. Mark is
responsible for assisting the CBO director in managing the
daily operations of the agency and coordinating between the
divisions.
Also joining us is Wendy Edelberg, Associate Director of
Economic Analysis. Wendy is here to provide us with her expert
insight into how CBO handles its economic forecasting and
analysis. And finally, we welcome Teri Gullo, Assistant
Director for Budget Analysis. Teri's division is responsible
for producing baseline projections, formal cost estimates, and
informal support to congressional staff.
Before we hear from our witnesses, I want to stress again
that we are not here to invite attacks on an agency so vital to
Congress' ability to budget independently. But we are here to
see how things are being done and identify potential areas for
improvement.
Today, I look forward to hearing from our witnesses and
engaging in more productive conversation. And with that, I
would like to yield to the ranking member from the great
commonwealth of Kentucky, Mr. Yarmuth, for his opening
comments.
[The prepared statement of Chairman Womack follows:]
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Mr. Yarmuth. Thank you very much, Mr. Chairman. I would
like to join you in welcoming our three CBO witnesses today,
Deputy Director Hadley, Associate Director Edelberg, and
Associate Director Gullo. Thank you all for coming before the
Committee to testify and answer our questions about how the
Congressional Budget Office makes economic assumptions,
constructs the baseline, and estimates the cost of our
legislative proposals.
Last week, Director Hall testified before the Committee,
and that discussion touched on all of these subjects in varying
degrees of detail. The take away from last week's hearing, at
least my takeaway, was pretty clear. CBO has a regimented,
well-documented, and consistent process to produce work that is
accurate, fair, and nonpartisan.
The budget analysts, policy experts, and economists at CBO
have a tremendous amount of experience and are well-respected
in their fields of expertise. They certainly could make more
money working fewer hours in the private sector, but they
choose to serve their country in this very important capacity.
I am not suggesting that there is not room for improvement at
CBO, or that we all have to agree with every CBO conclusion.
Much of the public policy with which we are dealing is
complicated, involving many variables and interactive effects.
CBO, rightfully, has to make assumptions and judgments, and we
have the right to ask questions to better understand the
conclusions they reach. What is not appropriate, as the
Chairman mentioned, is to launch ad hominem attacks to
undermine the credibility of CBO.
Last year, CBO was subjected to a number of vicious attacks
purely for political purposes. These attacks weaken the
institution and add to the dysfunction that the American people
overwhelmingly reject. Mr. Chairman, I was heartened by the
tenor of last week's hearing.
On the whole, and as you encouraged, the questioning was
respectful, and members made genuine attempts to better
understand how CBO operates. Ideas were explored on ways to
make improvement at the agency so that Congress can be better
served. I hope that continues with this hearing.
We are holding a series of five oversight hearings on CBO.
This is a tremendous amount of time that we are dedicating to
one agency. So, Mr. Chairman, I hope that we will be just as
diligent in our other responsibilities and find time to hear
from other agencies as well.
We have not had our customary annual hearing with the
Federal Reserve Board Chairman since 2012. I guess we ought to
let him get his feet on the ground past a week or so. We have
not had the Treasury Secretary testify since 2013. We have not
had the Department of Defense testify since 2013.
We have not heard testimony from the Secretary of Health
and Human Services since 2011. I think it would be valuable to
hear from these agencies and others as we consider priorities
for the 2019 budget. I thank, once again, our witnesses for
coming and I look forward to their testimony. So, thank you,
Mr. Chairman, and I yield back.
[The prepared statement of Mr. Yarmuth follows:]
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Chairman Womack. Thank you, Mr. Yarmuth. In the interest of
time, if any other members have opening statements, I would
like to ask unanimous consent that members submit them for the
record. Without objection, so ordered.
I would like now to recognize the Deputy Director of the
Congressional Budget Office, Mark Hadley. Mr. Hadley, thank you
for your time today. The Committee has received your written
statement. I will be part of the formal hearing record. We are
going to give you 10 minutes, and now the floor is yours. Make
sure that mic is on, and talk directly into it, if you would.
STATEMENT OF MARK HADLEY, DEPUTY DIRECTOR, CONGRESSIONAL BUDGET
OFFICE
Mr. Hadley. Chairman Womack, Ranking Member Yarmuth, and
members of the Committee, thank you for inviting me and my
colleagues here today to talk about CBO's forecast, baseline,
cost estimates, and scorekeeping more generally.
The House and Senate Budget Committees are the scorekeepers
for the Congress, crafting the budget resolution and enforcing
the budgetary rules. CBO prepares its forecast, and baseline,
and cost estimates to help the Budget Committees carry out
those duties.
Some people think that CBO makes the rules that we follow,
but in fact, most of the rules that govern the production of
those products are set in statute. Others come from House and
Senate rules, budget resolutions, and the conference reports
that accompanied major budget legislation. Still others were
generated in conjunction with the Budget Committees directly.
Some of the rules require that CBO develop estimates using
specified assumptions. When that happens, CBO also provides
information from other perspectives and that Budget Committees
have found useful. And we would like to hear from you. What
information could we add or present differently that would be
helpful?
Today, I will describe our projections and cost estimates,
what they are, the function that they serve. I will then turn
to the rules that govern their content. CBO's baseline
projections include estimates of spending, revenues, the
deficit, and the public debt. CBO's economic forecast covers
the major economic variables, gross domestic product, the
unemployment rate, inflation, and interest rates, along with a
broad array of other economic measures.
The baseline and the forecast represent CBO's best estimate
of the way the budget and the economy would evolve if existing
laws generally remained in place. They are developed together
to be consistent with each other and cover the entire 10-year
period used in the congressional budget process. The Budget
Committees typically use CBO's baseline as a starting point for
budget resolutions and as a neutral benchmark to assess the
budgetary effects of some legislation.
The baseline provides consistency and stability to the
budget process. Baselines provide consistency because each
estimate is built on a common set of assumptions that helps the
Congress consider the relative cost of competing proposals in
the same subject and proposals across other subjects, from
agriculture to unemployment insurance.
Consistency also helps the Congress ensure that legislation
complies with the target set in the budget resolution.
Baselines add stability, because they do not change with each
new piece of budget or economic information. Instead, that
information is included in the next baseline.
Cost estimates describe the budgetary effects attributable
to a single piece of legislation. Each cost estimate tells a
concise story about a proposal's likely effects on the budget
outlays or revenues compared with what would happen under
current law; that is, what would happen if the legislation were
not adopted. CBO's cost estimates are advisory.
The Budget Committees enforce the budget rules of the
Congress, and they are not required to use CBO's estimates. The
Congressional Budget Act of 1974 requires that CBO produce cost
estimates for every bill reported out of a full Committee, the
authorizing Committees. We also prepare estimates when
requested at other stages of the legislative process.
The Budget Act directs CBO to give priority to Committees,
particularly the House and Senate Budget Committee. Though we
try, given our staffing, we are generally not able to satisfy
requests for cost estimates that do not come from the Budget
Committees, the Committees of jurisdiction over the
legislation, or the House or Senate leadership.
Now, to the content of our products; I will start with the
rules governing the baseline and then turn to the rules
governing our cost estimates. Section 257 of the Balanced
Budget and Emergency Deficit Control Act of 1985 defines the
baseline and sets out the rules for its construction. For
mandatory spending and revenues, the touchstone is that we
assume that current laws will remain in place and they will
operate as they are set in statute.
So, for example, for individual income taxes, we assume
that changes scheduled in law will occur. There are, however,
three important differences, or exceptions, under 257, and they
come with tradeoffs. Let me take each of them in turn.
First, under section 257, CBO is required to assume that
certain taxes and spending programs will continue beyond their
expiration date. Those include excise taxes dedicated to a
trust fund, such as the Federal gasoline tax. They also include
certain payments with current year outlays greater than $50
million; for example, the Children's Health Insurance Program.
This is sometimes referred to as the $50 million rule.
There are tradeoffs that come with this rule. On the one
hand, because expiring programs often are extended, the rule
improves the accuracy of baseline projections of the deficit.
On the other hand, the rule makes certain extensions of those
policies appear costless because the cost of extension is
already in the baseline. To help, CBO and the staff of the
Joint Committee on Taxation show how baseline projections would
change if the provisions that we must assume are extended were
instead assumed to expire.
The second exception deals with entitlement authority. CBO
is required to assume that entitlement programs, such as Social
Security and Medicare, will be fully funded, and thus, all
scheduled payments will be made.
For example, CBO must assume that scheduled Social Security
benefits would be paid even after the program's trust funds
were exhausted and annual payroll tax revenues were inadequate
to fund those payments. That rule, too, presents tradeoffs.
On the one hand, a baseline that shows the benefits being
paid regardless of the resources in the trust funds, may be
more informative about the budgetary challenges facing the
nation if policymakers want to maintain Social Security in its
present form. On the other hand, it is less informative about
the challenges facing the program. In our products, we present
both the deficit affect from making all of the benefit payments
and the percentage by which benefits would have to be cut if no
additional funding were provided.
And finally, the third exception deals with discretionary
spending. Section 257 specifies how CBO must construct the
baseline for discretionary programs. It requires CBO to use
specified inflators to increase the most recent appropriation
for each program over time. However, to project total defense
and nondefense discretionary spending, we apply the caps that
limit the spending for those categories through 2021.
And again, CBO provides alternate paths with its reports.
For example, one where inflation for discretionary
appropriations is assumed to be zero. That is, it continues at
the level in the most recent appropriation.
Turning now to four rules that broadly apply to cost
estimates, and four of these may sound familiar to you.
First, CBO must consider the effects across the entire
Federal budget. Therefore, cost estimates sometimes include
effects on programs other than those specifically addressed in
the legislation.
Second, CBO's cost estimates generally do not include the
interest costs that would result from increasing the deficit or
the interest savings that would result from decreasing the
deficit.
Third, CBO reports point estimates of the budgetary effects
of legislation because they are necessary for the enforcement
of the budgetary rules. But CBO strives to indicate which
factors underlying an estimate may be particular uncertain.
Fourth, for appropriations and authorizations of
appropriations the benchmark is current law, but it is not the
baseline. As I mentioned, 257 requires that we assume that
spending inflate over time, the benchmark for many programs.
The starting point is actually zero because there is no
appropriation or authorization for future years under current
law.
Let me end with two sometimes controversial principles
related to a limited group of cost estimates, dynamic scoring,
and when a program should be considered Federal for purposes of
the budget. CBO always tries to estimate the effects that
legislation would have on people's behavior; for example,
changes in how many people would enroll in a program. But
effects on the economy as a whole are taken into account only
when CBO produces a dynamic score for major legislation.
Nevertheless, when CBO prepares its economic projections
the agency incorporates the macroeconomic effects of all
enacted legislation.
Finally, when Congress considers legislation that would
establish a new program or mandate a new activity, CBO must
determine whether the associated cashflows would be Federal
transactions. For most legislation, that determination is
straightforward because the activity would be carried out by a
Federal agency. But where the determination is less clear, we
look to the guidance found in the 1967 Report of the
President's Commission on Budget Concepts. We try very hard to
be even-headed, and we look forward to hearing from you what we
could do better.
[The prepared statement of Mark Hadley follows:]
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Chairman Womack. Thank you, Mr. Hadley. Now, let's welcome
to the table two additional witnesses. They are Teri Gullo, the
Assistant Director for Budget Analysis at the CBO office, and
Wendy Edelberg, the Associate Director for economic analysis at
the Congressional Budget Office.
TESTIMONY OF WENDY EDELBERG, ASSOCIATE DIRECTOR FOR ECONOMIC
ANALYSIS, CONGRESSIONAL BUDGET OFFICE; AND TERI GULLO,
ASSISTANT DIRECTOR FOR BUDGET ANALYSIS, CONGRESSIONAL BUDGET
OFFICE
Chairman Womack. All three of our witnesses will be
available to take your questions once they begin.
Let me make an administrative note. It is expected that
there will be votes called in a little over an hour and
assuming, and I think this practically speaking here, assuming
that we are in the middle of this hearing, we will just simply
recess at a moment during that first vote series where we can
all leave, go do our job in voting on the floor. And then,
immediately following the last vote, within a matter of a few
minutes, we will come back and reconvene the hearing.
So, at that moment that we break, and we will find a soft
spot in the Q-and-A to do it, we will recess subject to the
call of the chair, where we will come back and resume the
hearing. The ranking member and I have talked before the
meeting this morning and being respectful of the time of our
fellow members, and I know there are other Committee meetings
going on and markups, and there will be a constant ebb and flow
of members here at the dais, it is my intent to withhold my
questions until my fellow members have had a chance to give
their Q-and-A. And Mr. Ranking Member has agreed to do the
same.
Mr. Yarmuth. I will do the same.
Chairman Womack. So, with that in mind, let's begin our
testimony this morning. And I am going to yield the floor to
the gentleman from Ohio, Mr. Renacci, for his round of
questions. You have 5 minutes, sir.
Mr. Renacci. Thank you, Mr. Chairman, and thank you for
holding this hearing. And I want to thank you, Mr. Hadley and
the other witnesses, for your participation. As someone who has
spent my entire life in the business world making decisions,
and as a certified public accountant, I use to pour through
financial information before I made business deals or business
transactions.
So, it was always great to see the information get greater
transparency and I am glad that we are talking about the CBO
because we make all of our decisions. The CBO always seems to
be the thing. ``Well, let's see what the score is. Let's see
what the score is''; and it comes to: we look at your
conclusions when many decisions are made--or when people want
to complain about the decisions that were made, they use the
CBO score. So, I think it is important that we get a better
understanding of how you come up with your information.
Deputy Director, my colleague and friend Representative
Warren Davidson recently introduced the CBO Show Your Work Act.
This legislation would require the CBO to publish the data,
models, and processes that are used to score proposals. Would
you consider this to be valuable for Members of Congress? And
do you have any concerns with this legislation?
Mr. Hadley. So, in general, we think that the approach to
having more transparency is a great one, and we fully support
the general idea of having more transparency. There are many
ways to be more transparent, and we want to look at the
different options and find the ones that are most effective,
most useful to you all, but are also the most cost effective
that come with the least cost to taxpayers.
So, what we are trying to do right now is a bunch of
different approaches where we look at different things,
different ways we can be transparent. And they include
additional descriptions. They include technical details about
our modeling, and ultimately, also some of the model code
itself.
And we want to see what you all find the most useful. I
suspect in some cases the thing that would be the most useful
is for us to generate some interactive tools that the staff of
the members could go and look at how the results would be
different under a different set of assumptions. But we want to
explore each of those options.
But I also agree with kind of what you alluded to, that
there are some concerns that we have about our access to
information and just putting up every single model. And as you
know, we try to be also careful stewards of the information
that we are given. And some of it has to be protected very
carefully because it involves details about people and
businesses.
Mr. Renacci. So, you do not fear that general
acknowledgment of transparency, how you came up with this
information? I do understand some of the things are
confidential, the information you get, and you want to protect
that. But you do understand that we need to know how you come
up with this information? It sounds like you would like to come
up and help us better understand how you come up with this
information as you do come up with the information.
Mr. Hadley. Yes, we would, and we would also be happy to
come up and talk with you at any time, if that is also helpful.
I mean, there are many ways we want to do more. One of the
things we tried to do recently was to come and do a
presentation to a broad array of congressional staff and that
was very successful. We met with over 150 of them and explained
how we came up with a group of our estimates and answered
questions. Any kind of engagement like that we look forward to.
Mr. Renacci. I want to switch over now to something that
concerns me. It is an issue of national debt and national
deficits. In fact, I have introduced bipartisan legislation
requiring the Comptroller General come before Congress on an
annual basis to provide an overview of our Nation's long-term
financial outlook.
Of particular concern to me is the rising cost of interest
which will be, by 2027, more than $750 billion per year. This
is more than double what it is today. Even more concerning, an
article from the Committee for a Responsible Federal Budget
noted that interest rates were 1 percentage point higher
annually that what is projected through 2027 by the
Congressional Budget Office, the national debt would be $1.7
trillion higher. Can you please discuss the process that CBO
goes under to determine the 10-year interest rate?
Mr. Hadley. I can, but I think Dr. Edelberg would be better
positioned to do that.
Ms. Edelberg. We think about that projection somewhat
differently in both the near-term and the long-term. I think it
is on. Is it on? I have a green light. Can you hear me?
Mr. Renacci. I can hear it.
Ms. Edelberg. So, when we think about how to project the
10-year rate as well as short-term interest rate, like 3-month
interest rates over the near-term, we pay very close attention
to what financial markets seem to be saying. And so, for
example, we will look at the Fed Fund futures markets very
carefully to think about what the Fed Fund's rate might be over
the next several years.
When we think about what interest rates will be over the
long-term, we have less outside information to go on. There are
fewer private sector forecasters that are thinking about long-
term interest rates. And we find that information from
financial markets is less useful for telling us what interest
rates should be over the next 10 years, or even longer.
So, for that we think more about the various factors that
we think should have a strong influence on long-term interest
rates. So, as you mentioned Federal borrowing, we think that is
one of the most important factors driving interest rates over
the next 10 years. So, we think hard about that.
But there are other ones as well. So, deficits, we think,
are pushing up interest rates over the next 10 years. A factor
that we think is pushing down interest rates, at least over the
next 10 years relative to recent decades, is what we think will
happen to labor force growth.
So, the fewer workers we have for each machine, the less
productive each machine is. And so, we think that that pushes
down interest rates over the next 10 years. And so, we have a
variety of factors, like productivity growth, labor force
growth, the level of savings in the economy, and we think about
all of those factors together and that helps us to project what
we think interest rates will be over the next 10 years.
Mr. Renacci. Thank you. I yield back.
Chairman Womack. Ms. Lee of California, the floor is yours.
Ms. Lee. Thank you very much. Thank you, Mr. Chairman, and
our ranking member for this hearing, and thank our witnesses
for being here; very important hearing and presentations from
you.
First, I want to ask you about the recent tax bill law now
which increases the deficit by approximately $1.8 trillion, it
raises taxes on about 86 million middle-income families, and
kicks about 13 million off of their health insurance. It is
clear that there is going to be a devastating impact on the
budget and the economy, and I know the CBO has taken this into
account. So, can you walk us through how these changes are
actually built into your baseline?
Mr. Hadley. I will start and then invite my colleagues to
jump in after I give a brief overview. So, the way we think
about legislation is, of course, we start with what have been
the changes that have occurred in the economy and the budget to
date as we are putting together the next economic forecast and
the new budget baseline. It is critically important then that
we think about how the tax bill, how H.R. 1 affected both of
those, and we look first to the estimates produced by our
colleagues at the Joint Committee on Taxation, because they
studied that bill in detail.
And then, we are currently in the process of trying to
parse out how much of kind of the data that we have seen to
date was in anticipation of the tax bill and how much we should
consider the tax bill to be layering on top of it. So, we are
currently in the process of updating both our economic forecast
and our estimates of the budget baseline.
Ms. Edelberg. That hit a lot of the high points. But I
guess I will talk about our work basically in three different
large buckets. So, one important thing that we do in using the
work that the Joint Committee on Taxation has done is we think
about how the tax bill will change incentives to work and
invest over the next 10 years.
And there are some short-term effects. There are some
medium-term effects. There are some long-term effects. So, we
are going carefully through the tax bill to think about how
incentives are affected. We also think about how changes to
Federal borrowing because of the tax bill will change the
amount of net foreign inflows coming into the U.S. So, either
foreign investors buying up U.S. debt, changing the amount of
U.S. debt that they are going to hold, or U.S. investors
holding U.S. debt, instead of foreign assets.
So, we think about how changes to debt and deficits will
affect private investment through its effect on how many funds
are available for private investment. And then, finally, we
think about how the tax bill might change the aggregate demand
in the near-term. So, there are, for example, some important
changes to disposable income that different households will
have because of the tax bill. And so, we think about how those
can affect, in particular, near-term growth over the next
couple of years.
Ms. Lee. Thank you very much for that. So, you are still in
the process of just doing this.
Ms. Edelberg. We are.
Ms. Lee. The Overseas Contingency Operations, the OCO
account--some of us call it a slush fund, which I believe it
is--it is a fund that the Pentagon uses for off-budget war
funds. How is that treated in the baseline? And OCO funding
increases, I think it is $75 billion for fiscal year 2018. How
does that affect the deficit, and do you know if there is a
better way and method for reflecting OCO and other emergency
spending in the baseline?
Mr. Hadley. So, again, I will start and one of my
colleagues will jump in. In this case, it will be Teri Gullo.
So, the way we show OCO spending, it is a form of discretionary
spending.
So, when we are producing an estimate of Overseas
Contingency Operations spending, it is essentially scored from
zero. That is, we estimate the total amount that is affected,
or that is provided in a year, as new budget authority. And
then, for the baseline, we project that using the specified
inflators. Now, unlike the other defense and nondefense
discretionary spending, OCO spending is not constrained by the
caps on those categories.
Ms. Gullo. But OCO spending is used in calculating the
total deficit. So that money is in the baseline and it is used.
It is just that when Congress is judging whether or not you
have exceeded the caps, any spending under OCO is not included
for those cap calculations. But that money is included when we
are doing the overall deficit estimates.
Chairman Womack. Thank you, Ms. Lee. Mr. Palmer, from
Alabama.
Mr. Palmer. Thank you, Mr. Chairman. Ms. Edelberg, can you
discuss in general terms if this will impact an economy growing
at three percent versus an economy growing at less than two
percent? In other words, how would stronger GDP impact your
budget baseline?
Ms. Edelberg. In general, stronger GDP growth will improve
the deficit projections. So stronger GDP is generally
associated with greater taxable income, and that will lead to
greater revenues, and that will lead to less Federal borrowing.
One thing that can be important, though, is thinking about what
it is that we believe is going to drive faster GDP growth
relative to our baseline.
So, to the degree that it is something that we think has
other effects, that can either also reduce Federal borrowing or
it can work in the opposite direction. One thing I have in
mind, for example, is productivity growth. So, we think that if
factors are expected to push GDP growth above our baseline; so,
for example, as you say, 3 percent.
If those factors are productivity growth, we would expect
interest rates to also be higher than our baseline, and that
will increase net interest cost. And because of the high level
of debt, even small increases in interest rates relative to our
baseline can have notable effects on our projection of net
interest cost.
Mr. Palmer. I ask that in context to the Atlanta Federal
Reserve projecting that this quarter will have 5.4 percent
growth and the prospects that that gives for being three
percent or better for the year.
Mr. Hadley, thank you for being here. In our last hearing,
Director Hall said that the single biggest problem we have when
it comes to the capability of the economy to increase
production, and thus improve economic growth and the prospects
for it, is the labor supply. Do you agree with that statement,
and what types of things can we do to be able to get more
people into the workforce?
Mr. Hadley. I agree with the Director's assessment. I am,
unfortunately, unable to make recommendations about different
strategies you might pursue to change things.
Mr. Palmer. Well, the CBO put out a report in March of 2015
and reported on the effects of repealing the Affordable Care
Act, and I am reading, ``The ACA directly imposes higher taxes
on labor income, thus, discouraging work.'' And that,
``Repealing the ACA would increase the supply of labor.'' Does
the CBO stand by that?
Mr. Hadley. Yes, we do.
Mr. Palmer. I think the same report also indicated that
repealing the ACA would increase capital stock because, as
businesses have fewer workers, there is less incentive to
expand, to invest in the capital equipment, things like that
for production. But as the labor supply increases in a growing
economy, you will have more capital investment. Can you talk a
little bit about how that might impact CBO's projections?
Mr. Hadley. I will turn this over to Wendy, who will do a
much better job with the economics than I would.
Mr. Palmer. I would be happy to hear Ms. Edelberg's answer.
Ms. Edelberg. I think you have it right, that we think that
investment in capital, in large part, is driven by what is
happening to the labor force. So, firms feel like they need to
outfit their workers with a certain amount of capital. And when
those workers earn wages, they save part of those wages and
that saving becomes funds available for investment. So, for all
of those reasons, we project that in the cases when a
particular policy would boost labor force growth, what would go
hand-in-hand with that is typically an increase in investment.
Mr. Palmer. One of the things I know the CBO is not in a
position to estimate, and I do not think really anybody in this
room or in this town is able to estimate, is the benefit of
unleashing the talent, and intellect, and imagination of people
who have been caught in the welfare trap.
We know that there are millions of people, able-bodied
adults, who are out of the workforce that are not even counted
when we make calculations about employment. And I think the
bigger picture here is not only how an increased labor supply
impacts capital investment and how it impacts the economy, but
also how it unleashes this talent, and intellect, and
imagination of people that, if you look at some of the
advances, and inventions, and things, it is coming from people
who were basically blue-collar that got into the workforce and
saw a problem and solved it.
And I really, again, appreciate the work that you guys do,
but I really think that this is the key to growing a healthy
economy that will really benefit the entire country. Mr.
Chairman, I yield back.
Chairman Womack. Thank you, Mr. Palmer. Once again, I
remind everyone we will have votes. They have moved it up now.
They say it will be sometime between 11:05 a.m. and 11:10 a.m.
We will find a soft spot in our Q-and-A at that time and recess
and come back subject to the call of the chair. Ms. Wasserman
Schultz from Florida.
Ms. Wasserman Schultz. Thank you, Mr. Chairman. I will note
that CBO has endeavored to increase your outreach in hiring of
women economists, so, it is good to see two women at the table.
In follow-up to Mr. Palmer's question, could you, for example,
give us a sense of what effect a sharp decrease in the levels
of legal immigration would do to employment levels?
Ms. Edelberg. Well, as you can imagine, one of the most
important factors underlying our labor force projections is
population growth. So, if a policy would have a significant
impact on population growth, then that would feed in many
direct ways to our projections of labor force growth.
Ms. Wasserman Schultz. And my understanding is that CBO, in
the past, has done analyses of comprehensive immigration reform
legislation. Is it accurate to say that comprehensive
immigration reform, if it became law, would significantly
contribute to employment levels?
Mr. Hadley. So, the version of comprehensive immigration
reform that we considered earlier did increase employment
levels and, therefore, resulted in additional revenues. And
that was one of the things that we discussed in that cost
estimate.
Ms. Wasserman Schultz. Sorry. And thereby, increasing
revenues, and thereby, reducing the deficit.
Mr. Hadley. That is correct, but I should note that it
depends in part on the specifics of the policy that you are
considering.
Ms. Wasserman Schultz. Of course. And I want to stress
again, as I did, Mr. Chairman, in the last meeting, that I do
not agree with the dynamic scoring approach that CBO currently
uses under the leadership of CBO at the moment. But in spite of
that, I have tremendous respect for the people who work at CBO,
for your expertise, and for your commitment to giving us
accurate analysis.
With that said, last year, the House considered an
amendment that attempted to cut 89 people from CBO's staff.
They justified the cut on the claim that CBO's estimates are
inaccurate. Ironically, proponents even used CBO's score of the
amendment itself as part of that justification. The criticism
was that CBO offered no savings in their score of the amendment
itself, even though it seemingly eliminated the salaries of 89
staff.
My understanding, and correct me if I am wrong, is that the
actual member author of that amendment incorrectly drafted it,
and the text of the amendment did not actually cut CBO's
budget. Did the author of that amendment contact CBO for
technical assistance in drafting that amendment? Is that
assistance that you would offer if a member did reach out to
you to ask for technical assistance in drafting? And was there
any attempt to contact you to find out why the amendment scored
with no savings?
Mr. Hadley. So, I think it would be helpful to take this
question in two parts. So, I will talk first about that
amendment, and then, Terri will talk more about the policy and
the procedures we typically follow.
Ms. Wasserman Schultz. Great.
Mr. Hadley. So, with respect to that amendment, I cannot
speak to the intent of the member other than what was written
in the text of the amendment. And the way the amendment was
written, it would eliminate positions and transfer the
responsibilities for carrying out those actions to the
Director's office. And it did not change the topline
appropriation for the Congressional Budget Office.
So, we would have had to use other resources. We would have
had to use those kinds of topline resources in a different way,
which is why our score or estimate of that proposal did not
result in savings. But I cannot talk about the specific
interactions we had with the member, because requests for
technical assistance are confidential.
Ms. Gullo. But I think it is fair to say that that was an
amendment to an appropriations bill. And we worked very closely
back and forth with various staff on the Appropriations
Committee to help them understand how we were looking at the
legislation.
We also consulted the parliamentarian's office and ledge
counsel on the drafting of the language. So, there was a fair
amount of back and forth among congressional staff and CBO to
make sure we understood everyone is thinking on what the
potential effect of the amendment would be.
Ms. Wasserman Schultz. And Mr. Chairman, as a member of the
Appropriations Committee representative on the Budget
Committee, I appreciate that. Thank you. I yield back the
balance of my time.
Chairman Womack. Thank you. Let's go to the gentleman from
Pennsylvania who is still coming down from soaring with his
Super Bowl champion Eagles, Mr. Smucker.
Mr. Smucker. Thank you. Thank you, Mr. Chairman. I
appreciate you pointing that out. Mr. Hadley, good to see you
again.
You have already been asked about the Tax Cuts and Jobs Act
and its impact. And I would like to just drill down a little
more on how that has impacted your forecast because, from my
perspective, my view, and what I have seen in the district that
I represent, it has had a tremendous impact already; at least
in the short-term, and I believe, a long-term impact.
We have seen, of course, companies like Home Depot, FedEx,
Comcast, Starbucks, Fulton Financial in my area who are
providing pay raises, bonuses to their employees, specifically
because of tax reform. And starting this month, millions of
Americans will be going home, or are already starting to go
home, with a bigger paycheck because of the Tax Cuts and Jobs
Act. So, specifically, what I would like to hear from you is
whether the act, the tax reform, has forced any last-minute
changes to your upcoming economic forecast?
Mr. Hadley. So, we typically would finish our forecast
generally in early December. And obviously, that was before the
tax legislation was enacted; and, so, we did not finish at that
time. Instead, we are still working on it. We are trying to
trace through all of the ways in which it is going to affect
the economy, both in the near-term and over the longer period.
Mr. Smucker. How about the Department of Labor report that
200,000 new jobs were created, and wages grew at the fastest
pace that we have seen in the past 8 years? Do you foresee that
your economic growth rate will be increasing because of that
forecast?
Mr. Hadley. Well we expect to take that information on
board as well. Yes, sir. I do not know yet. I cannot speak to
exactly where we are going to come out yet because we have not
finished.
Mr. Smucker. But it will impact it?
Mr. Hadley. It will be considered as part of that process.
Yes, sir.
Mr. Smucker. The other thing that I am hearing from
businesses in my area, and as a small business owner myself--in
fact, it was one of the things I was hoping to accomplish
coming to Congress--was to provide regulatory relief to
businesses and to American taxpayers. And we have already, in
this Congress, made some great strides to save taxpayers as
much as $36 billion by getting rid of at least 860 erroneous
regulations.
And to that end, there has been an increasing interest
among Members of Congress to ask CBO to begin to estimate
regulatory costs in addition to its current duties. Is that
something that is possible for CBO to begin to do?
Mr. Hadley. So, we started to by looking at the experiences
that states and other nations have had with trying to estimate
the impact of regulatory change. And so, we have done a fair
bit of research looking into that. And we would be happy to
write a report. I will give you kind of some outline of kind of
what we have found so far.
How feasible it is will depend on what you are asking for.
So, if it is more information about legislation that would turn
back a regulation that the Administration has proposed? Then at
that point there is a fair bit of detail about what that
regulation would entail, and more can be done.
If it is looking at the point when legislation is first
enacted, then there was obviously less information available at
that time. And it is somewhat different in other countries
because a lot of the legislation originates, particularly in
countries with parliaments, the difference between the
legislature that creates the program and the executive that
carries it out is a little bit different.
Mr. Smucker. I am sorry because I am running out of time.
So, would that be a function that is different than what you
currently do? That would be an added function?
Mr. Hadley. So, we would be broader. We have done some
analysis, like we looked a little more than a year ago at the
overtime rule and the effects of repealing it. And in that
case, the stars aligned, and we were able to provide an
economic analysis of what those effects would be.
But doing burden analysis can be tricky on a case-by-case
basis. And so, particularly for environmental regulations, we
are not yet well-positioned to address those. I mean, we do not
have the chemists and those types of scientists on staff.
Mr. Smucker. It would take additional resources, you are
saying, in order to provide those kinds of estimates?
Mr. Hadley. It would take additional resources. Yes, sir.
Mr. Smucker. Thank you.
Chairman Womack. To the great State of Washington, Ms.
Jayapal.
Ms. Jayapal. Thank you so much, Mr. Chairman. And I do
appreciate very much, going back to my days in investment
banking and as a master's in business and running a nonprofit,
the ability for us to really understand exactly how you come up
with these projections. So, thank you all so much for the work
that you do.
One of you said earlier that in looking at the estimates of
the tax plan on the baseline that you would at things like
incentives to invest, and I think it might have been you, Dr.
Edelberg. Can you tell me how you think about that
specifically? Do you look at history?
If you look at history, I am struck by the comments from
Sarah Sanders at the White House about how she contextualized
the Reagan tax cuts. There is a lot of disagreement around
those tax cuts. The country was recovering from an economic
recession at that time. Reagan also increased taxes three
times.
And so, I am just wondering how do you look at and evaluate
what is going to happen to the economy and investments in the
economy? Do you look at a State like Kansas, that did similar
things to what the GOP tax plan included, and in fact, had a
hugely detrimental impact on Kansas' economy? And eventually
those tax cuts ended up being rolled back by a Republican
legislature. What kinds of things do you look at to come up
with those projections?
Ms. Edelberg. So, there is an extensive economic literature
that thinks about how investment responds to changes in rates
of return. And it is a complicated literature, because there
are lots of different types of investment. There are lots of
different ways of measuring what the rate of return is.
So, it is not a literature that comes to a very strong
consensus as to what that relationship is. But there is
something to go on, and that literature can look at particular
episodes, like the ones you have mentioned, but it can also
look at broader time series and look at how investment
generally speaking in the U.S. economy has fared over decades
in response to changes in rates of return.
So, we are taking all of that onboard, and we have put out
some of our own papers walking through how we think about how
investments respond to incentive. I should say more broadly, we
are using much the same machinery that we use when we put
together the baseline projection. The pre-policy baseline
projection, before the tax bill was passed, has all of these
same channels in it, as we had to think about what investment
would be before the tax bill passed.
Ms. Jayapal. But the impact of the tax bill is going to be
enormously substantial, given how much it increases the
deficit. And so, the impact of this particular bill, it seems
to me, would have sort of a very unusual effect on your
baseline, unlike some of the other things that have happened
over time; maybe not the ACA because I think that was also
substantial.
Ms. Edelberg. It certainly has a complicated effect. The
changes relative to the entire economy are perhaps not as
outsized as you have in mind. But we are deep in this analysis
and so, I do not want to predispose what the conclusions will
be. But I am worried about characterizing it as being so
outsized.
Ms. Jayapal. Thank you. Just moving to the Affordable Care
Act now. Our colleagues on the other side of the aisle have
made repeated attempts to, in our view, undermine the
Affordable Care Act. And as a result, we are now seeing an
uptick in the uninsured rate among U.S. adults since 2016. Can
you tell us how the CBO will account for those in the upcoming
baseline projections?
Ms. Gullo. So, not dissimilar from Wendy's comments, we are
constantly reviewing the data that is currently available. We
have information on what the enrollment numbers for 2018
through the marketplaces, and all of that data and State-level
reactions to some of the regulatory changes are all things that
we are taking into account as we update our baseline this time
around. So, all of that will be taken into account to come up
with the most recent estimates that we can.
Ms. Jayapal. Thank you very much, and I yield back, Mr.
Chairman.
Chairman Womack. Mr. Lewis of Minnesota.
Mr. Lewis. Thank you, Mr. Chairman. And thank you, panel,
for coming today. Very, very important topic as we get to the
best model for economic growth and a rising tide. I have a
couple of questions; one on process, and one on theory. Theory
dealing with the penchant of some of my friends on the other
side of the aisle of all you have to do is raise taxes, and
raise spending, and voila, you get economic growth; sort of a
demand-side model. I will get to that in a second.
But first, tell me or describe the difference between the
baseline and the cost estimate as a matter of process. So, the
baseline assumes current policy going forward, and the cost
estimates assume pending legislation or legislation that has
been reported. What are the differences we need to know on this
Committee between those two? I am a little confused there.
Mr. Hadley. Sure, I would be happy to discuss that. So, the
key difference between the two of them is really how we think
about discretionary spending. So, for discretionary spending in
the baseline, it is inflated, as if future discretionary
appropriations will be provided. And the reason for that is we
need some estimate of discretionary spending to have a
realistic 10-year view of the debt in order to do debt
calculations.
But for cost estimates, whether it is for an appropriations
bill or an authorizing bill that authorizes future
appropriations, the estimates are done relative to current law.
So, for most cases, that means starting from zero and then
looking at the amount added by the provision.
Mr. Lewis. But if you are in the middle of pending
legislation to the Tax Cuts and Jobs Act, and we are doing a
baseline and we are doing a cost estimate, what is the
difference there?
Mr. Hadley. Well, so we do our cost estimates relative to
the baseline, and it is usually the baseline that was adopted
as part of the budget resolution that Congress then determines
when we switch to a new baseline.
Mr. Lewis. Okay. So, we do a baseline with a resolution.
Then you take pending legislation or reported legislation and
apply that to the baseline. Correct?
Mr. Hadley. Correct. And not all baselines get picked up by
budget resolutions.
Mr. Lewis. Okay. Got you. Thank you. I noticed when you are
doing your forecasting models and your macroeconomic model, it
is purely an aggregate demand exercise; consumer spending,
business investment, residential investment, government
spending, net exports.
We all had that in economics. You could have used wages,
plus interest, plus rent, plus profits. Either one, it is a
totally demand side. So, naturally, if we are going down that
road, the best way to increase GDP and growth would be to raise
consumer spending, which is vastly overstated when you consider
business-to-business purchases.
But raise government spending. Well, you just put in the
multiplier, and boom, you got an increase in GDP. And the
problem, of course, with this demand-side emphasis is the first
rule of economics and that is opportunity cost.
If you increase government spending, where does it come
from? There is no such thing as a free lunch. Milton Friedman
was right. And so how much are you relying on this old Gaussian
aggregate demand model, and how much are you relying on the
changes in behavior from a supply-side model that encourages
work, savings, and investment, which of course will create
demand without having to prime the pump?
Ms. Edelberg. Okay. So, you are absolutely right that we
think about the components of GDP and how the Bureau of
Economic Analysis thinks about the different sectors that
aggregate up to GDP. And we have to keep track of those over
the full 10 years.
And you are absolutely right that one can think of both GDP
and GDI. But setting those aside, I think what anchors our
projection over the full 10 years is our estimate of potential
output. So, we try to measure something that cannot be
observed, which is the maximum output that our economy can
produce without creating undesirable inflationary pressures.
And so, we have an estimate of potential output----
Mr. Lewis. Okay, let me interrupt.
Ms. Edelberg.----in any year over the projection period.
Mr. Lewis. Thank you for that. But I come from the school
that growth is actually anti-inflationary; and I know there is
a bias on the bond market. I know there is a bias in some
economic circles that if you have got increases in growth, oh
my goodness, you are going to get bottlenecks. It has got to be
inflationary. Then interest rates have got to go up, and the
Fed dutifully starts to raise rates.
The fact is, we have had experiments in the 1920s, in the
1960s, in the 1980s where growth actually decreased inflation.
Inflation went down in the 1980s after those tax cuts. Because
the same amount of dollars chasing more goods and services is
anti-inflationary. I do not hear you talking about that.
Ms. Edelberg. So, I cannot speak to those episodes in
particular, but any policy, for example, or any other factor
that improves the economy's potential output will have those
sorts of deflationary pressures that you are talking about.
That is embedded in our models for sure.
Mr. Lewis. Not necessarily inflationary.
Ms. Edelberg. No, it will have deflationary pressures.
Mr. Lewis. Exactly, okay.
Ms. Edelberg. If you boost the economy's potential, you
will--and that is all you have done--you will produce
deflationary pressures.
Mr. Lewis. My time is up, thank you very much.
Chairman Womack. Thank you, Mr. Lewis. The first vote has
been called, but I am going to yield now to the gentleman from
New York, Mr. Jeffries, for his round of questions. And then we
will take a break and a recess subject to the call of the
chair. Mr. Jeffries.
Mr. Jeffries. Thank you, distinguished Chairman for
yielding, and the witnesses for your presence and service to
the country. Let me simply point out that when Ronald Reagan
cut taxes for millionaires and billionaires in the 1980s, it
did not lead to significant economic growth. It exploded the
deficit.
And when George Bush cut taxes for millionaires and
billionaires in 2001 and 2003, it did not lead to explosive
economic growth. We got the worst economic crisis since the
Great Depression.
And when the Republican Governor and Republican Legislature
in Kansas decreased taxes for millionaires and billionaires in
that State, it did not lead to massive economic growth. It led
to overcrowded classrooms, crumbling infrastructure, and prison
riots--so much so that Republicans rolled back their so-called
tax cut.
This notion of trickle-down economics has been widely
discredited over, and over, and over again. Now Ms. Edelberg,
the notion of consumer spending as a result of increased
consumer demand leading to an increase in GDP is a relatively
sound economic theory and policy, is that right?
Ms. Edelberg. Yes, sir.
Mr. Jeffries. And is it fair to say that if you have a
context where 83 percent of the benefits of a tax bill go to
the wealthiest 1 percent in the country, that would not
necessarily lead to the same type of consumer spending increase
as if the benefits were more equitably distributed?
Ms. Edelberg. So, we generally think that what we call the
marginal propensity to consume is generally lower for higher
income households.
Mr. Jeffries. So, is it fair to say that an increase of
$1.50 in a weekly paycheck would not necessarily lead to some
dramatic increase in consumer spending?
Ms. Edelberg. I think what you have in mind is thinking
about what the marginal propensity to consume is for perhaps a
lower income household. And in that circumstance, we generally
think that those marginal propensities to consume are higher
because those households have a greater probability of being
constrained, of being liquidity constrained.
Mr. Jeffries. Right. So, the greater the increase in the
weekly paycheck the greater the increase in consumer spending
and therefore, perhaps, the greater the increase in GDP. Is
that right?
Ms. Edelberg. Generally speaking yes, in the short-term.
Mr. Jeffries. Okay. Yeah, and I am making reference to the
fact that the Speaker--who I do respect, who used to be the
chairperson of this Committee--touted an increase of a $1.50 in
a paycheck as if that was some significant accomplishment to be
celebrated. I found that to be astonishing.
Now the CBO, Mr. Hadley, was created in 1974 to give
Congress direct access to expertise, is that right?
Mr. Hadley. Yes, Congressman, that is correct.
Mr. Jeffries. And prior to that period of time when
Congress needed information on economic estimates, it would get
it from the executive branch, is that right?
Mr. Hadley. That is correct.
Mr. Jeffries. And I think the theory in creating the CBO
was that if you got information from the executive branch, it
did not carry the objectivity that a separate and coequal
branch of government as embedded in Article I of the United
States Constitution should receive, is that right?
Mr. Hadley. That is correct.
Mr. Jeffries. And, you know, over that 40-year period, I
think there has been nine different directors. Fair to say that
CBO has consistently provided high-quality information to
Congress that is objective and free of partisan political
taint?
Mr. Hadley. We have done our best.
Mr. Jeffries. Okay. And the CBO appoints staff based on
their qualifications to do their jobs without deference to
political party ideology, is that right?
Mr. Hadley. That is correct.
Mr. Jeffries. And so, I find, you know, the attacks on the
CBO somewhat astonishing. But I guess if you put it in the
context of what is happening in this country, maybe or not. We
have folks in this town who attack the free press, attack the
FBI, attack the Department of Justice, attack the article III
Federal judiciary, labeling folks so-called judges, attack the
national security apparatus.
I am hopeful that these constant attacks on institutions
important to our democracy will cease. And certainly, that we
here in the United States Congress should not attack the work
that the CBO has consistently done, as I would point out now,
under the leadership of a Republican-appointed Director in
terms of both the Speaker and the Senate majority leader. I
yield back.
Chairman Womack. I thank the gentleman from New York.
Ladies and gentlemen, the votes have been called. We are in the
first few minutes of that vote series. I would remind our
members this hearing will continue within just a few minutes
following the call of the final vote of the series. This
hearing is recessed and is subject to the call of the chair.
[Recess.]
Chairman Womack. The hearing will come to order. And once
again, thank you for your patience to our witnesses as we did
our duty and voted. Before we took the recess, Mr. Jeffries of
New York was the last questioner. So, in that case we are going
to move back to the other side of the table and the gentleman
from Georgia. Mr. Ferguson, the witnesses are yours.
Mr. Ferguson. Thank you, Mr. Chairman, and thank each of
you for being here. Last week with Dr. Hall, I asked him some
questions about the accuracy of the scoring. And he said that
within 6 years, it got to 3 percent of what CBO does. It goes
back and looks the numbers and says, ``Okay, 6 years out we are
at 3 percent.''
The challenge that I had with that is that we are being
asked to make decisions on a 10-year window, and yet we only
score a 6-year window, okay. So, the first question is why is
that? Why do not we look at the 10-year window--and just, you
know, whoever wants to answer this one. And if you could, be
brief because I have got a bucket of questions to ask on that.
Ms. Gullo. So, Congressman, I think you are referring to
our recent outlay accuracy report where we looked at the budget
year, which was basically a year and a half after the estimate.
And then we looked at the 6th year. The reason we did not go
out 10 years was because we were looking at data that went all
the way back to the early 1990s. And when we were only doing 5-
year estimates, in order for us to do a complete look over a
10-year period we did not have enough observations.
Mr. Ferguson. And yet we are asked to make decisions on a
10-year with absolutely no certainty of what years 6, 7, 8, 9,
and 10 are going to look at.
Ms. Gullo. Well, but what I can tell you is we did take a
look at those observations we had from year 6 through 10. And
our conclusion was that the error rates were roughly in line
with what that 6th year error was.
Mr. Ferguson. So, I think it is important if I am going to
be asked to vote on a policy that is going to have a 10-year
window on it, I want to know what those accuracy numbers are in
years 7, 8, 9, and 10. Otherwise, I might as well cut the
lights out and throw darts at the window.
So, I think it is really, really important because the
question has been asked, or the discussion has been had, for
you all to look at 15- and 20-year windows. And that is not a
realistic ask if we cannot even determine if year 10 is
accurate as it should be.
So that is going to be something I am going to focus on is
accuracy in that 10-year window so that we know--and I think we
just need to be honest about that and say in year 2 we are at
98 percent accuracy. By year 6 it goes to 97. And at year 10,
you are going to be making a decision on something that has an
accuracy of 80 percent. Whatever that number comes out to be,
okay. I think that is important to do that.
So, Ms. Gullo, I am going to ask this question too. When
you are looking at this, the budgeting process, does the CBO
take into account Congress's inability to pass appropriations
bills on time and the constant environment of C.R.s that we
have been in? What does our inability to do the work here have
on the scoring?
Ms. Gullo. So, when we score continuing resolutions, our
normal practice is to what we call ``annualize'' them. So, even
if there is a 1-month C.R., we provide the score to the
Congress on an annualized basis. So, that provides you with
information on what it would look like for the whole year if
you appropriate it at that level.
Mr. Ferguson. Let me ask it a different way then.
Ms. Gullo. Okay.
Mr. Ferguson. When you are doing your 10-year projections,
okay, when we ask you to score something when we bring forward
the 2019 budget, and you are going to give a 10-year estimate
on that to see if it comes into balance, will you take into
account in that the fact that we may or may not get an
appropriations bill done? Not how you score the C.R. that we
are inevitably apparently going to do. But how does that play
into it, or is it just something that you cannot account for?
Mr. Hadley. Well so, when we put together our estimates and
the baseline, we start first with what were the actuals in
prior years. And in many prior years, most prior years, we have
continuing resolutions. And so, some of the agency behavior
that you would expect to occur under a C.R., like delaying when
they make major procurements, that is already baked into the
data.
And so, in our projections going forward that include using
those spend out rates of budget authority, it already captures
those historical experiences.
Mr. Ferguson. Would it be more helpful if we refined our
budget process to ensure that we had authorizations and
appropriations done in the allotted time in a given year? Would
it give you more certainty in your scoring?
Mr. Hadley. It would give agencies more certainty in how
they plan their behavior. And then as we gained experience with
that----
Mr. Ferguson. That's a long way of saying ``yes.''
Mr. Hadley. Yes.
Mr. Ferguson. Okay. Thank you. That is just all I needed
from you. Mr. Chairman, with that I will yield back.
Chairman Womack. I thank the gentleman from Georgia. Let's
go next to the gentlelady from Illinois. Ms. Schakowsky, the
floor is yours.
Ms. Schakowsky. Thank you, Mr. Chairman. Ms. Gullo--am I
saying that right?
Ms. Gullo. Yes.
Ms. Schakowsky. Okay. Do the CBO and Joint Committee on
Taxation base their cost estimates on how a bill is written, or
do they try to assume the future legislation that might follow
if a bill is passed?
Ms. Gullo. So, Congresswoman, if I understand your
question, CBO in scoring a piece of legislation looks at the
legislative language and how we think that legislative language
will be implemented.
Ms. Schakowsky. So, a bill's score would not include the
future cost, for example, of extending provisions that expire
after a few years. Is that correct?
Ms. Gullo. Well I think it depends on the program. We do
have this $50 million rule that requires us to assume for
certain programs, and for certain excise taxes that are part of
trust funds, that those do extend in the baseline even after
their expiration date. So, it depends on the program.
Ms. Schakowsky. Well let me ask you about the tax bill. Are
you the one that worked on the tax bill?
Ms. Gullo. Among the three of us we will get you the
answer.
Ms. Schakowsky. Okay, good. So, the Republican tax bill
that passed in December had an estimated cost of $1.5 trillion.
Which I understand does not include interest on----
Ms. Gullo. That is right. That is right.
Ms. Schakowsky. But it includes several sunsetting
provisions that Republicans actually have suggested would be
extended. So, is the cost of extending those expiring tax cuts
in the $1.5 trillion CBO JCT cost estimate for the bill?
Mr. Hadley. No, as a general matter they are not because
the legislation had the tax rates returning to a higher level.
And we reflect that in both the cost estimates, and we consider
that as we are putting together our forecast and baseline based
on current law now that the bill has been enacted.
Ms. Schakowsky. So, you are making the assumption that the
individual tax rates will go back to what they were, that they
are not permanent.
Mr. Hadley. That is correct.
Ms. Schakowsky. Okay. It seems to me though, since it has
been suggested that they may be continued, that one explanation
is that the Republicans gamed the scoring roles to make it look
like their tax bill is actually cheaper in terms of debt than
it was intended to be. Another is that they are willing to let
the taxes go up on over half of middle class families in a few
years, while making sure that the big corporations and super
wealthy get the permanent tax cuts.
I have another question. The Republicans have argued that
the tax bill will pay for itself once we take into account the
economic effects of the legislation. Last week, the CBO moved
up its projection for when the Federal Government will hit the
debt limit by several weeks at, ``After incorporating the
anticipated effects of recent tax legislation.'' So, whomever
of you, how did passage of the tax bill effect the CBO
projection for the debt limit?
Ms. Edelberg. The main reason why we moved up our
anticipated date, our best guess of when we think we would
reach the debt limit, is because the IRS published new
withholding tables that we think will lead to a lower estimate
of tax revenues coming in between now and then.
Ms. Schakowsky. Thank you. As far as the debt limit is
concerned, is it fair to say that the economic effects of the
tax bill are not currently projected to offset the decrease in
revenue the bill caused? And is that what you are saying, that
there will be less revenue that will come in?
Ms. Edelberg. I think it is important to think separately
about some of the near-term effects of the tax bill--like the
withholding tables that the IRS might be putting out and how
those will affect tax revenues as they come in over the next
several weeks--relative to what we think the overall effect
that the tax bill will have on revenues, you know, including
its macroeconomics effects.
One estimate of that broader estimate is the Joint
Committee on Taxation's estimate of the macroeconomic effects
of the tax bill as it was passed out of Conference, and that
suggested that revenues would be higher after incorporating the
macroeconomic effects relative to just a conventional estimate,
but not by enough to fully offset the deficit effects.
Ms. Schakowsky. Thank you. I yield back.
Chairman Womack. Gentleman from South Carolina, Mr.
Sanford.
Mr. Sanford. I thank the chair. I guess my question to each
one of you all would be, are we walking our way toward the most
predictable financial crisis in the history of man, and are you
abetting in that process? And here is what I mean by that and
let me throw out a caveat.
Trying to guess anything 10 years out is amazingly complex
deliberation, you know. It becomes at best a well-reasoned
educated guess and nothing more than that. I mean, it is
awfully, awfully tough to go 10 years out and project. So, you
have my empathy on that front.
But I looked at some of the numbers that are built into the
baseline, and in some ways, they could be argued to be
optimistic. So, what we see in terms of budget forecast in
terms of projected deficits and accompanying debt in many ways
may be the optimistic case because Murphy's Law always exists,
bad things happen. Wars come about, a lot of things might come
about that we cannot build into a model.
But I do look to the things that are built into the models.
So, on mandatory spending, as I read it, it funds entitlement
authority basically regards to the trust fund amount. And I
think that that is a somewhat optimistic projection because we
can end up with a real squeeze based on some of the fund
balances. It presumes that caps still exist, at least in my
reading of the baseline, though I think a political reality is
they are about to disappear.
I do not see a recession built into the front end of the
10-year model. It assumes an averaging, but if that recession
were to come near-term--and we are now in the third longest
economic recovery in American history--that would again dampen
down the numbers.
The interest rate numbers to me seemed a little bit
optimistic. When I look at the average between 1990 and 2007 at
5.8; we are at 4.4. I think that one could argue that that
might be a little bit optimistic. I look at the labor
productivity, which is just really complex given the aging of
America.
And the numbers I see in terms of projected downdraft on
both fertility rate and on overall growth of the population. In
other words, people that live longer, but we are having fewer
people come in. That puts a real squeeze in terms of our
entitlement programs. But nonetheless, labor productivity as I
see it stays about the same as it did for the 30 years
previous. Which I think could be argued to be a little bit
optimistic.
I look at some of the--what were these numbers, my eyesight
is getting so bad--well interest rates, I was going to go back
to those. If we were to go back to the numbers that we saw over
the last 30 years on interest rates, there would be a $4
trillion delta as I read it in terms of future debt amount.
So, I will not belabor the point. But as I look at this, I
see some numbers that could be argued to be a little bit
optimistic. Give me your thoughts on that, and a little bit of
maybe foreboding or forewarning with regard to some of the
economic realities we might have to contend with as a Congress
if these numbers do not pan out.
Mr. Hadley. Sure, we would be happy to. So, the first thing
I would note is that, you know, we produce the baseline and
forecast under the rules that we are required to use. But we
also supply information, if you would use alternative
assumptions. And the deficit and debt paths would be higher if
those alternative assumptions were used. But I want to note
that even under the baseline assumptions, we are on an
unsustainable path for deficits and debt.
Mr. Sanford. So, which one of the alternative assumptions
scares you the most?
Mr. Hadley. Well so, one of the things that concerns me is
mostly about productivity. And if productivity does not return
to historical levels, depending on which window you look at,
then that is pretty troubling. And that is----
Mr. Sanford. Well can we go to more than troubling? Maybe,
like, completely, wildly optimistic? I mean, we had
globalization occur over the last 30 years. We had the internet
which has just, I mean, radically changed sourcing and a whole
host of things in terms of the way that people are able to
interface with machinery, and equipment, and technology. I mean
we have had some rather amazing developments, and we now have a
substantially aging population.
So, I mean, I look at some of these productivity numbers
and, yeah, we could hit them if we get everybody in Sun City in
my district in South Carolina to go back to work. I do not
think they are going to do it, but I think that there are some
optimistic forecasts that I would love to dig in deeper but I
am out of time. Thank you, Mr. Chairman.
Chairman Womack. Always enjoy listening to the gentleman
from South Carolina. Gentlelady from Texas, Ms. Jackson Lee.
Ms. Jackson Lee. Let me thank the Chairman and the Ranking
Member for these hearings. And let me say to Mr. Hadley, I am
going to ask a potpourri of questions, some I hope that will
just get a ``yes'' or ``no.'' But you are aware of the tax
cut--some of us have called it a tax scam--of the last year.
You are aware of the projected $1.4 trillion in deficit that
will occur?
Mr. Hadley. Yes.
Ms. Jackson Lee. And it has come to my attention that we
might be in a posture next year to borrow close to $1 trillion.
Would you combine those two elements as to the impact on your
economic forecast and how you would counsel Congress as asked?
Mr. Hadley. So, we are going to certainly take on board the
effects of the tax bill, that is what the thing that is, but--
--
Ms. Jackson Lee. Say it again, I am sorry.
Mr. Hadley. We are working hard to take on board all of the
effects of the tax bill as we produce the new economic baseline
and forecast. And I would note that also includes taking on the
debt effects of those provisions. And so, we will show higher
levels of debt and also the interest rate effects that would
occur. And so, interest rate changes on a higher debt will also
be different, and usually larger.
Ms. Jackson Lee. And a higher debt, you do not view that as
a positive impact on working Americans overall having to bear a
high amount of debt?
Ms. Edelberg. All else equal, no. It is a negative effect,
particularly over long periods of time.
Ms. Jackson Lee. And as we well know, let me quickly do
this, we have had some movement in the market Friday, et
cetera. And the concept may be what is good for Wall Street is
not good for Main Street. How do you view that movement in the
market being speculated to be a response to higher wages, of
which the tax cut was to advocate for that? How do you see that
market impact when people are getting higher wages and then
they get hit from the back end? Because if they have any kind
of savings or 401K, it impacts them when the market responds to
them getting higher wages.
Ms. Edelberg. So, we are certainly paying very close
attention to what is happening to the markets in the past week
or so. I should say it is never a good idea to pay too close
attention to particular movements on particular days. The
market can be pretty volatile. That said, these have been big
movements and we will think hard about them as we put together
the economic projection. It would not be good professional
practice, though, for me to try to guess why the exactly the
markets have moved.
Ms. Jackson Lee. And I appreciate it. Let me go to my other
line of questioning. I would say that a trillion-dollar tax cut
has not been the Christmas tree full of gifts that everybody
has speculated. In fact, I think it will be very detrimental,
and we will see that as you go forward on your forecast.
But let me give you the story of a teacher in Texas who was
38-years old--and I say was--married with children, and died of
flu just a few days ago. And one of the reasons why she died of
flu is because she thought the Tamiflu purchase, or the
purchase of Tamiflu--or maybe let me just say that she did not
purchase Tamiflu because it was too expensive.
Let me go back to the Affordable Care Act and the present
Administration's destruction and tempting to destroy and
undermine the Affordable Care Act. And we see there is evidence
of an uptick in the amount of uninsured rate among U.S. adults.
And of course, they are bragging about ending the mandate.
In what ways is the legislation not being implemented as
intended? Because you had a construct of what you perceive the
Affordable Care Act would do. And we saw over the last couple
of years a huge surge, really, of those enrolling in the
Affordable Care Act. If you would give that, and then what are
some of the intervening events at the Federal or State level,
like the Supreme Court decision--2012 decision--which put us
going forward, that the CBO could not have anticipated?
Ms. Gullo. You are absolutely right that the Supreme Court,
the intervening Supreme Court decision, really did change how
we looked at the costs of the Affordable Care Act relative to
what we had originally estimated. There also were delays in
imposing some of the penalties on large employers that we had
anticipated that did not end up coming to pass.
And there also were extensions of hardship exemptions for
people to not have to pay the penalties. So, there were a host
of things in the implementation of the law that we had not
anticipated when we originally did the estimate. And that
certainly changes what we now think the effects of the ACA are.
Ms. Jackson Lee. So, people wound up losing their lives
because you were not able to implement it as it was
constructed. We had a good bill, and it was destroyed. But we
are still fighting to insure people. Were you going to answer,
Mr. Hadley? No.
Mr. Hadley. Not necessarily.
Ms. Jackson Lee. With that, Mr. Chairman, I thank you and I
yield back.
Chairman Womack. Thank you. Gentleman from Virginia, Mr.
Brat.
Mr. Brat. Thank you, Mr. Chairman. Lot of discussion about
labor force contributing to wage inflation, labor force issues
related to immigration, et cetera. I just googled right now it
is true that, you know, large GDP I guess is good. But most
people care about GDP per capita in terms of their welfare, et
cetera.
And so, while bringing labor into the country certainly
does increase the size of the total pie GDP, in the growth
models going back to Solow who won the Nobel Prize for growth,
and then Mankiw at Harvard who followed it up. In your view,
GDP growth I do not think depends on labor force size. To my
recollection in the Solow model, and in Mankiw, and the growth
literature coming out of Harvard and Nobel Prize, GDP growth
rates depend on productivity and human capital accumulation. Is
that true to the best of your knowledge?
Ms. Edelberg. I think what you are getting at is that
growth in GDP per capita is a function of labor productivity,
which includes human capital. That is right.
Mr. Brat. Right. Right. Right. So, growth rates depend on
labor productivity and human capital, et cetera. And so, that
is the key. People say well, if you have more folks coming into
the country that is good for GDP. That is true, but it is not
necessarily true that it is good for GDP per capita.
And if you look at the highest GDP per capita countries--I
just googled it--Luxemburg is largest in the world, $101,000
GDP per capita. It does not have a huge population. So, how did
they do that? Probably through good productivity growth and
good human capital. Would you make that assumption?
Ms. Edelberg. I suspect that that is true.
Mr. Brat. Suspect it, right. Good. Thank you. I hate to get
too much out on speculating but is it true that the stock
market plunge was basically, right, debt has been with us,
right. We have $21 trillion in debt; interest rates are going
to go up at some time. Is it probably likely the major cause of
the market unrest was wage rate inflation? Was that, do you
think, the primary inflation worry that came about that will
increase interest rates?
Ms. Edelberg. I certainly saw news articles attributing the
decline to that. But I know nothing more than what those news
articles are saying.
Mr. Brat. Right. And so, I mean, that would be my
assumption. That was the new piece, right. If you anticipate
GDP growth in the next quarter of 5 percent plus, like the Fed
is now forecasting, that is a wakeup call to something, right.
So, we need to all sort that out.
So those same news articles and the financial markets all
refer to tight labor markets. I am not so sure about that,
right. Labor markets are tight if you look at just the
technical definition where the unemployment rate is low.
But Paul Ryan, Speaker of the House, wants to bring 25
million people who have left the labor force altogether, right.
Frustrated workers could not find jobs after the financial
crisis. What is your commentary on how tight the labor markets
can be if we have 25 million able-bodied folks on the welfare
rolls or discouraged workers that we can bring back in the
labor force? Might that help wage rate pressure somewhat?
Ms. Edelberg. I think the channel that you are talking
about would have an effect on wage pressure. I think there are
two main measures that are useful for looking at and thinking
about slack in the labor market. One is the unemployment rate.
And as you talked about it is quite low, and we think lower
than its natural rate.
Another useful measure is looking at labor force
participation. And there we actually do see a little bit of
slack. We think that participation is slightly lower than where
we might think it should be, given you know, when labor markets
settle down. But that said, our estimate of labor force
participation rates and our so-called potential labor force
participation rates reflect long downward trends in the
participation of prime-age men. So, these are not really new
forces at work.
Mr. Brat. Right.
Ms. Edelberg. And we do have to grapple with what will
happen to those trends over the projection period, and to be
sure if policies or something else reverse those trends that
would matter.
Mr. Brat. Right. Yeah, and I did not mean to suggest that
there is anything new there, right. The workforce participation
rate is terrible, wage rates have been roughly flat for 30
years. A lot of that has to do with our human capital
development in K to 12, et cetera.
And I will just close, finally, that is 25 million people I
am talking to. If productivity growth is the number one driver
of GDP growth, what is the productivity growth currently of
those 25 million people out of the labor force, right? That is
Y over L, right? So, output per worker or output per hour. If
they are not working and not in the labor force, what is their
productivity?
Ms. Edelberg. I see where you are going. And yes, I mean,
the measured productivity would be zero.
Mr. Brat. Right. The measured productivity would be zero.
And so, it seems to me if you put those 25 million people back
in the labor force using their God-given gifts and talents, et
cetera, that would be a good thing for our economy. I got 12
seconds, thank you all very much for coming today. Thank you,
Chairman.
Chairman Womack. You did not have 12; you used an extra 12.
Just want to make sure that we got the numbers correct.
Mr. Brat. Fair, judge. That is fair.
Chairman Womack. Mr. Grothman of Wisconsin.
Mr. Grothman. Okay. We will see if I can get three quick
questions in. Yesterday in The Wall Street Journal, there was
an article commenting that soon may be very costly programs in
which the government gives credit and, particularly, they
mentioned the student loan program.
Right now, you use estimates based on the Federal Credit
Reform Act, but you have talked about using other ways to
estimate the cost of these programs. Can you comment on what
would happen if you made changes or suggested changes?
Mr. Hadley. Right. So, we are required to use the estimates
under the Federal Credit Reform Act. And what we are capturing
there is an accrual measure of the cost of loans and loan
guarantees that the government makes. And we also provide
estimates on a fair value basis where we take into account
another factor.
So, I think it helps to talk about the ways that those
estimates are the same and the ways that they are different.
So, in the context of the way we do credit reform estimates is
we are looking at a set of cash flows and those expectations
about what is going to happen in terms of defaults, and
recoveries, and fees that are paid.
We use exactly that same set of cash flows and those same
expectations and probabilities when we put together a fair
value estimate, but we include one other element. And so, this
is a reason why we talk about fair value estimates as being
more comprehensive than credit reform.
That other element is that the likelihood of default is
correlated with bad states of the economy. And if you are in
the private sector, you demand compensation for the cost of
that risk. And so, that fair value estimate takes on board the
government's cost of bearing that risk.
Mr. Grothman. Okay. I will give you a couple of other
questions kind of coming back to what Congressman Brat said. We
plan on doing some sort of--or, I would hope we would do some
sort of welfare reform. There are many programs out there,
virtually all of them--low-income housing, SNAP--that kind of
discourage you from working.
If we did something to cut the amount that is going out on
these programs, in your estimates would you take into account
that now people are going to be more likely to work? So not
only would you have less going out for these programs, you
would have higher income tax coming in. Do you think that is
something that you would do? And if not, why not?
Ms. Edelberg. I think we would incorporate two effects from
the kinds of policies that you are describing. One would be an
income effect. Generally speaking, we estimate that if you take
income away from people they are, at least in the medium-term,
up into the medium-term they are more inclined to work. So, if
you lower their income they will work harder. That is one
effect.
And if you change their marginal tax rates, if you change
how much for each additional, let's say, hour of work what
their wage will be and if you change the tax code in a way that
changes their marginal tax rates, we would also incorporate
that effect. But those changes on marginal tax rates can be
quite complicated by taking programs in and out of the whole
suite of programs that people have access to.
Mr. Grothman. Okay. There was a question that one of my
colleagues on the other side of the aisle asked. And there was
a premise in it that I just questioned. In these tax cuts,
obviously some people will have more immediate money. I always
think the long-term benefit is the Laffer benefit and that
people work harder, invest differently.
But in her question, she wanted you to estimate if you cut
taxes how much people would save and how much they would spend.
I had always felt in the long-term, it was good for an economy
if people saved money. But I am going to ask you. Is it good or
bad if people save money? Is the economy stronger if we save
nothing and spend every dime I get in my paycheck, or is it
better for the economy if I save 20 percent of my paycheck?
Ms. Edelberg. Well now, it matters what you want to
measure. So, if you are measuring GDP, then the more saving we
have available for private investment and the greater your
productivity growth and the greater your GDP is, that is
definitely one effect, but that is not necessarily what
households care about. What households really care about is
consumption and other things that give them, you know, give
them satisfaction.
Mr. Grothman. I completely disagree with you. I feel better
when I got more money in my bank account, I do not care if I
spend money. But you would know what the average person thinks.
I will give you one more final quick question, just so we
clarify this. As far as determining GDP, if we hire more people
in this building, I do not know that it would necessarily make
us wealthier as a society. But does that cause the GDP to go
up?
Ms. Edelberg. So, one of the components of GDP is
government spending and investment. So, by that accounting,
yes.
Mr. Grothman. Okay, thank you much. And thank you for
letting me go over by 15 seconds.
Chairman Womack. Mr. Bergman.
Mr. Bergman. Thank you, Mr. Chairman. Thanks to all of you
for being here today. Did I hear you right, Ms. Edelberg, when
you said if you lower someone's wages they will work harder?
Ms. Edelberg. If you lower someone's income, they will work
harder. So, if you take income away from someone having nothing
to do with the wage that they earn for a particular hour of
work--if you take $1,000 out of somebody's pocket--the economic
literature suggests that because they feel poorer, the ultimate
effect will be that they will want to work more. In a sense to
replace that lost income. That is a separate effect from the
wage.
Mr. Bergman. Okay. That is all right, I do not want to
waste my time. That is just I think my mother is rolling over
in her grave right now with that. She was Depression-era farm
girl from Minnesota, and my dad was from the Upper Peninsula
Michigan. I respectfully disagree from the human factor side,
which leads me to my next question.
When you develop your models, tell me about the human
factors. You have got to remember I am a career pilot, both in
the military and commercial. And every time there is an
accident or an incident, we go into the human factor's side.
So, tell me about the human factors that CBO uses when you come
up with your model.
Mr. Hadley. Human factor that we start with is our own
track record, right. We look at how we did compared to what
actually happened, and that is the starting point.
Mr. Bergman. When you look at what you did exactly as what
happens, that is kind of reviewing your game films. Do you not
only look at, but do you assess the why or what potentially
changed in the game, if you will, that caused a different
outcome than you had anticipated?
Mr. Hadley. Yes. We try to break out, to the extent we can,
how much of that was caused by something that was kind of
anticipated to happen. So----
Mr. Bergman. Like for the public consumption. Is the
average American who is listening to, ``The CBO scores this and
the CBO scores that,'' is it information in the public domain
that they can see how well you scored, you know, the last time?
Is that set up in such a way that all of our citizens can see
how you did on the last game?
Mr. Hadley. So, we have three reports that each go over how
we did for outlays, how we did for revenues, and how we did for
the forecast. Those are up on our website. And we are looking
for ways to show more of this kind of play-by-play for----
Mr. Bergman. Would you say the average, to get back with
Mr. Grothman, talks about as far as saving as we try to help
folks understand the importance of having money in their bank
account for a rainy day, or wherever that savings are. Do you
think those are pretty simple decisions for a lot of folks who
pretty much add up two and two and get four?
Is your report laid out in such a way that that person who
maybe, you know, needs to understand more that, you know, how
the CBO did in their scoring? They can look at the football
score, baseball score, and they could see, you know, the
points--pretty simple math.
Mr. Hadley. We have tried to make it so, but we also
welcome suggestions for make it better.
Mr. Bergman. Okay. I am going to change because I have only
got--I almost said an hour and 45 minutes. No, I know it is a
minute 40. Do you think that Congress would benefit from
focusing on smaller, more incremental policy items at a time?
Or is, you know, is CBO's modeling better suited for a big
picture, large-scale legislative packages?
In other words, can we play, you know, three yards in a
cloud of dust continually as we advance our policies and our
laws forward? How is CBO's modeling set up to evaluate the
differences in game plans for us legislatively?
Mr. Hadley. So, I cannot make recommendations. But I can
observe that it is easier for us to estimate small incremental
changes than it is if there is a substantial portion of the
economy that is being affected all at the same time.
Mr. Bergman. Thank you. And in the interest of saving, I
yield back.
Chairman Womack. Thank you, Mr. Bergman. Mr. Arrington from
Texas.
Mr. Arrington. Thank you, Mr. Chairman. And panelists,
appreciate your time. Going back to the line of questioning and
discussion, Ms. Edelberg, on when you take income away from
somebody that they work harder. That is a dynamic that is sort
of economic theory, or something, maybe you have experienced it
in your own life. What happens when the government replaces
that income, what happens to that dynamic?
Ms. Edelberg. Well so, we estimate that that effect is
basically symmetric so that if you boost somebody's income--
having nothing to do again with the wage that they earn on a
particular hour of work--but if you boost somebody's income, we
estimate that that depresses their labor supply.
Mr. Arrington. Okay. So, in other words if you supplement,
assist with outside income, in this case my question has to do
with Federal income, people do not work harder they actually
work less. Or, they do not work more, they work less. Is that
what you are trying to say?
Ms. Edelberg. That is correct. Let me make two caveats. I
do not want to overstate this effect, it is rather small in the
economic literature. But nonetheless, it is there. And the
other thing is that it is probably something like a medium-term
effect. And I say that because obviously incomes have
dramatically changed, for example, in the U.S. over time. And
we have not seen anything like the kinds of effects that then
you would expect on labor supply----
Mr. Arrington. Let me just cut----
Ms. Edelberg.----in keeping with those changes.
Mr. Arrington. Thank you. And I appreciate the elaboration,
and it is an interesting point. But the debt, incalculable debt
in most Americans' minds, unsustainable deficit spending. We
are getting to the point where we are going to have a trillion-
dollar deficit some predict soon.
Interest payments in the next 10 years or less will be
greater than what we spend on national defense. That is scary
to me, and to most Americans. What are the long-term economic
effects of that level of debt and deficit spending, as an
economist?
Ms. Edelberg. In general, we think that an increase in a
dollar of borrowing by the Federal Government crowds out
approximately 33 cents of private investment for various
reasons. So, that is an effect that is in our models and is
important.
One thing that I want to say, though, is that it is not
really just about the level, it is also about the trajectory.
So, it does not just matter what the level of debt is today or
in year 10, it is what financial markets and households think
that trajectory is going to look like over time.
Mr. Arrington. So, in Greece for example, before the
sovereign debt crisis, were the CBOs or the CBO-like government
agencies predicting a crisis?
Ms. Edelberg. Oh, I have no idea.
Mr. Arrington. Has anybody followed that? I mean, it is a
recent sovereign debt crisis, and----
Ms. Edelberg. Those were dramatic changes that were
happening quite quickly. So, I----
Mr. Arrington. What would happen----
Ms. Edelberg.----think those are as likely to have been
predicted as the financial crisis, for example.
Mr. Arrington. So, what would happen if we went into a
Greece-like debt crisis on the economy?
Ms. Edelberg. I think this gets back to that it is not just
the level of the debt that matters, but it is also the
trajectory insofar as once financial markets think that the
level of debt is going to rise without bound credibly, the day
those expectations change is the day you have a problem. I
think.
Mr. Arrington. Is it measurable the profound adverse
effects on the economy if the United States were to enter into
a sovereign debt crisis?
Ms. Edelberg. Not particularly, no. I can for sure tell you
the sign.
Mr. Arrington. You do not think it is profoundly adverse in
its effects.
Ms. Edelberg. No, I am sorry. It is whether or not I can
measure it.
Mr. Arrington. Can you predict it?
Ms. Edelberg. I know it is bad, and I know it is negative.
Mr. Arrington. Okay. Why do not you all consider
Administration policy and sort of the high-probability
legislation in your baselining? I understand it may be
statutory. And if it is, then would you consider expanding from
that? Would that help your reliability and prediction if we
were to expand that?
Ms. Gullo. So, we do take account of administrative actions
that we know are final. And we incorporate those in our
baseline. As a matter of fact, any Federal regulation that is a
proposed regulation we fold into the baseline at a 50/50
probability that it will get enacted, and 50 percent chance
that it will not.
So, we are continuously watching what is happening in the
administration. And whenever there is a final rule, we do fold
the effects of that into the baseline. If we are not close to
updating a baseline for the purposes of doing cost estimates,
we also take account when doing that cost estimate of the
regulations that have been finalized since the last time we
updated the baseline.
Mr. Arrington. Mr. Chairman, my time has expired.
Chairman Womack. Thank you, Mr. Arrington. And appreciate
my ranking member's patience. But I also appreciate the fact
that he is willing to defer his questions to the end so that
members who have to come and go because of other commitments
are given an opportunity quickly to make their concerns known
and ask their questions. So, with that I am going to yield to
the ranking member, Mr. Yarmuth.
Mr. Yarmuth. Thank you very much, Mr. Chairman. Once again,
thanks to all the witnesses for spending your morning with us.
We have enjoyed it very much. I want to follow up on the notion
that if you take income away from someone they tend to work
harder, and if you give them more they tend to work less.
Would the same theory apply to taxes? That if you lower
someone's taxes and thereby give them more income, would they
tend to work less? And if you tax them more and took income
away from them, would they tend to work harder?
Ms. Edelberg. I think it is useful to think about
differences in effects on average tax rates versus marginal tax
rates. So, if I increase someone's marginal tax rate--or let me
do the flipside. If I decrease someone's marginal tax rate that
means for each additional, let's say, hour that they work, they
keep more of their wage because the marginal tax rate is lower.
We think that boosts labor supply.
But if we do not change that marginal effect and instead we
just change their average tax rate, that is in a sense like
just taking, you know, taking money in or out of their bank
account. That we do think if you take money out of somebody's
bank account they will work more. If you put money in their
bank account, they will work less.
Mr. Yarmuth. Makes sense to me. So, I want to go more to
get in the modeling on taxation. And it seems to me that when
you are looking at a comprehensive bill like the one Congress
just enacted, there is some incredibly complex
interrelationships there. And I look at the corporate side, and
we theoretically reduced taxes by $1.3 trillion or so over 10
years, corporate taxes. But there is a wide range of things
corporations can do with the money they theoretically save.
So, they could hire new people, or pay people more, or give
them bonuses. They could automate and eliminate jobs, as
apparently Kimberly-Clark is doing. They are going to eliminate
5,000 jobs, and they said that they are using the tax break to
facilitate that reduction in staffing. They could pay
dividends; they could buy back their stock, or they could do
combinations of those.
So, Walmart is giving, as reports say, roughly $300 million
worth of bonuses to employees and buying back $4 billion worth
of stock. So, I am curious as to what kind of model could
possibly anticipate all the different permutations of things
that they might do. And then when you translate that to the
individual's side, we know if you get more money you can pay
off debt, you can spend it, or you can save it basically.
And all of those things have different impacts in terms of
the cost to the Treasury. And so, I guess my question is when
the cost projections are done for something like the tax bill,
are the impacts broken out by let's say--just theoretically
throwing up a number--that 20 percent of all the corporate tax
savings are going to be used to buy back stock. Do the models
break out those kinds of impacts by decisions that are made?
Ms. Edelberg. Those are the sorts of estimates that we have
to keep in mind. As you say, it is a very complicated bill and
there is a lot going on. And those are just the sorts of issues
that we have to think through. The amount of money being
repatriated, that is a big slug of money. And it is important
for us to keep track of where it goes, and that can affect
things for sure in the near-term.
But generally speaking, we can simplify our lives by
putting things into two different buckets. There is one bucket
where we think about what is happening, for example, to
retained earnings, what is happening to corporate profits. And
once we get a handle on that, and I should say the Joint
Committee on Taxation has done a lot of work and, you know, we
are using the very, very good work that they have done. Once we
see what is happening to corporate profits, then we can trace
that money through the economy and think of how that affects
things, particularly over the next few years.
The other bucket is what is happening to corporations'
after-tax rates of return. And so, a lot of the complicated
affects you are talking about that come out of the tax bill can
actually be narrowed down to that one affect. And we can see at
the end of the day, given all of these changes that the tax
bill is going to cause, what is the effect on the after-tax
rate of return? And then, once we know that, we can turn to a
relatively deep literature on what do corporations do when
their after-tax rate of return changes.
Mr. Yarmuth. Okay. Because it seems to me that one of the
things that we would be responsible for is following the impact
of these different tax policies and see whether they actually
turned out the way it was anticipated.
Ms. Edelberg. As will not surprise you, that is
extraordinarily difficult because--well I mean even now looking
at changes in, you know, as corporations announce that they are
going to make some particular change, they may ascribe that to
the tax bill. But, of course it is impossible to know for sure
whether or not that really is a change being made in response
to the tax bill, or they would have done that anyway.
Mr. Yarmuth. Right.
Ms. Edelberg. Magnify that times, you know, exponentially
as we look over the next 10 years and try to tease out what the
effects were from the changes from the tax bill versus other
policies. And that is, of course, why there is an economics
profession.
Mr. Yarmuth. Right. Well on occasion, as with this tax
bill, Congress passes major legislation that greatly impacts
the economy. I think obviously the Affordable Care Act was an
example of that. And I also think of the GI Bill passed after
World War II that was largely accredited with building the
middle class. And I think the statistics are that there was
eventually a 7-to-1 positive return to the Treasury based on
the investment in that program.
So, if similar spending plans were passed today, are CBO's
current models able to predict or account for that kind of
economic impact?
Ms. Edelberg. Well so, I think the short answer is yes. One
of the main effects of the GI Bill, for example, was improving
access or decreasing the cost to higher education for veterans.
Changes to Federal investment in education is one of the
effects that we are explicitly set up to model.
So, there are three kinds of Federal investment that we
think ultimately boost the productivity growth of the economy.
It is Federal spending on infrastructure, Federal spending on
education, and R&D. So, we are well equipped to do that kind of
analysis.
Mr. Yarmuth. Okay, even though a large percentage it seems
to me--and I know it was true in the GI Bill--a large
percentage of the positive economic impact is realized outside
the budget window.
Ms. Edelberg. That is quite true. And so, that would be a
case where we would want to report longer term estimates in a
broad sense.
Mr. Yarmuth. Got you. Real quickly, one of the proposals
that we are going to be dealing with in the next day or so is
apparently to raise the defense budget by $80 billion a year.
Obviously, there is a simulative effect by building weapons and
so forth, but how do you model basically--since we probably do
not know exactly how that $80 billion is going to be spent--how
do you model defense spending? What are kind of the
considerations there, in this minute or so you have left?
Ms. Edelberg. Want to talk about discretionary defense?
Ms. Gullo. Well so, from a spending point of view, most
defense spending is discretionary. So, we take the current
year's appropriation and inflate that into the out-years. It
then gets adjusted an aggregate down to the cap levels, so that
gives us a total amount of spending presumably. And then that
would feed into the economic effects.
Ms. Edelberg. To the economic projections
Mr. Yarmuth. So, in that you are not doing dynamic scoring
on defense spending, I guess.
Ms. Edelberg. So, the entire economic baseline is in a
sense dynamically scored because it is incorporating all of the
economic effects of fiscal policies under current law. We rely
heavily on history to tell us how defense spending seems to
support overall economic growth. We have no particular insight
on that other than what history tells us.
Mr. Yarmuth. All right, thank you Mr. Chairman. I yield
back.
Chairman Womack. I thank the ranking member. Mr. Arrington,
it is impressive that besides the chair and the ranking member,
you are the only member remaining and I give you, I would be
more than happy to yield the gentleman a couple of extra
minutes if he would like to have any other follow up questions
for the panel.
Mr. Arrington. Thank you, Mr. Chairman.
Chairman Womack. And the same goes for any other member
that might walk in here in the next few minutes.
Mr. Arrington. I hope my constituents back in West Texas
know that we are staying late and doing the work of the people.
But this is important, obviously. We got to get this right. I
want to be clear with you all. I do not need to be an economist
and the American people do not need to have the economic
analysis ability and education and expertise to know that this
national debt is awful, horrible and that our spending spree is
out of control. And we do need transparency, reliability,
validity, accuracy, all the things that you guys do so that we
can do our job. But unless you can give us a little pill that
we can all take that will give us a boost in our political
courage, I do not know that you can help us with this.
I think this has to be the United States Congress saying,
enough is enough. It stops now and we are going to safeguard
our children's future. So, I am usually pretty irritated with
the panel, but I am actually irritated with now an institution
that I belong. And I just pray I can have a positive influence
towards that end because I think the national debt is, I think,
the greatest threat to the future of this country.
Regulatory costs are--if you all already covered that, my
apologies. But can you calculate those? Should you calculate
those? What do you need from us to have that--those sort of
costs implications and estimations when legislation is being
considered?
Ms. Gullo. So, if you are talking--if you are speaking of
the cost to the Federal Government of imposing new regulations
or backing off on regulations, that is something we attempt to
incorporate in both cost estimates that might have an effect
and in the baseline.
There then also is the larger component of the effect of
deregulation or additional regulation on the economy. Which
would not be picked up in a cost estimate, but would be picked
up in our forecast.
Ms. Edelberg. So, we are for sure thinking about, for
example, how changes in the regulatory environment that we have
seen, let's say over the past year, what effect those have
already had on the economy and how we want to think about those
effecting the economic projection, for example.
Mr. Arrington. Yeah, I think it is very important and the
Chairman has been very generous. So, I do not want to take
advantage of that. So, Mr. Chairman, thank you again for the
extra time and I yield back.
Chairman Womack. I thank the gentleman from Texas. And I
have got a few questions before we conclude today. Teri, it has
been brought up a couple of times in our hearing today about
member involvement, consultation with CBO between members.
Whether they are budget Committee members or members from the
Congress at large. Is this something that the CBO people
encourage to happen and how so? How is the best way to engage
in a member to CBO dialogue?
Ms. Gullo. Yes, Congressman, we welcome interactions with
congressional staff and members. It always makes me sad when I
have somebody say, I could not make heads or tails of your cost
estimate. We work really hard to be clear. Granted we are
talking about some pretty difficult arching concepts. But, to
the extent that we are not being clear, and a member has
questions, or staff have questions, we urge you to contact us.
We are here to work with you and for you. And if our work
is not clear to you then we have more work to do. And it is
always our intention to provide you with the information you
need to do your jobs. And that, you know, goes across--I mean,
our resources are limited. So, we focus our resources on
working with the budget Committees, the appropriations
Committees, and the authorizing Committees. Our ability to help
individual members is much more limited just because of our
resource constraints.
But we urge you to call us, ask us for briefings, ask us to
walk you through cost estimates. There was a staffer on the
Senate Budget Committee who used to send back to me line item
edits to cost estimates where he thought they were not clear
enough. But we met with him. We had him come over to CBO. Walk
us through why he was not--why he felt that cost estimate was
not giving him the information he needed. And as a result of
that meeting, we changed how we showed the costs of
transportation estimates.
So those sorts of interactions do yield differences. We are
listening. We do want to be as clear as we can. And if we are
not being, you know, we encourage you to call us.
Chairman Womack. Thank you, Ms. Edelberg. It has been said
many times in this hearing, and in recent hearings that CBO, by
its very nature, has to make decisions based on primarily two
criteria, facts, which statute would be a fact and then
assumptions. Things that CBO would suggest have--are going to
happen. Just assume they are going to happen. Maybe because
they always have or maybe there is a political reason why you
make an assumption that something is going to continue.
One that was brought up earlier in this hearing was OCO,
the Overseas Contingency Account and the question was about how
you forecast OCO, the overseas piece, that is off the base
defense bill.
I can think of another, and that would be how we forecast
disaster funding. And there--I am sure there are many others
that I am not thinking about right now. But, how do you go
about putting actual dollar amounts against these assumptions
so that you can accurately predict the budgetary impact?
Ms. Edelberg. So, the one thing I will say before turning
it over to my colleagues, who may have more to say on this is
that when the particular rules that you are alluding to,
whether it is with OCO or disaster funding, we think are
telling one possible story that might affect the budget
baseline and the economy. But there are actually, there would
be alternative assumptions that one could make that would lead
you down a different path. We try very hard to present both of
those alternatives or a handful of alternatives when we present
the data. And we present our projections knowing that those
assumptions can actually matter how someone sees the budget.
Ms. Gullo. For in the same way with OCO, there are rules,
there are score keeping guidelines about what we can count and
not count for the purposes of counting against the caps or what
can be used as an offset to some other program. But the fact is
for things like OCO, program integrity, any of the effects
legislation has on those things, we fully account for in the
baseline.
But then there are then scorekeeping rules that might limit
how those savings or costs might get accounted for. But that is
not to say that for the purposes of developing our bottom line
deficit estimates those kinds of things are accounted for in
the baseline.
Chairman Womack. My colleague from Texas talked a lot about
the debt, as well he should. It is a major concern. One of my
big concerns has always been interest rate risk. The fact that
as you heat up an economy there is an expectation there is
going to be a situation involved where the net effect will be
impacted by the amount of interest we are paying on our debt.
There, I suppose, there is another impact on interest rates.
Another interest rate risk and that would be the potential
for the credit agencies to take a look at the credit of the
United States of America and to down grade it which we all know
would immediately make the borrowing a bit higher for our
country.
In your analytical jobs, is there a way to be able to
predict, at some point in time--the last time there was a down
grade it was about the Congress's inability to resolve itself
to fixing it. Is there a more quantitative measure that can
predict the potential for a down grade and its corresponding
impact?
Ms. Edelberg. So, we have no quantitative measures of the
risk of a measure of a downgrade. That is a--we have written
about the risks of a fiscal kind----
Chairman Womack. But you agree with me that that would
impact the borrowing of this country? The cost?
Ms. Edelberg. I do. I think that there is a way to think
about this as an incremental problem that can affect interest
rates and, you know, the cost of Federal borrowing and a far
less incremental problem where you would see more of a seismic
change. I think on the incremental side, we think about
inflation risks and right now we think that inflation
expectations are pretty well anchored at 2 percent. It looks
like financial market participants are pretty satisfied that
monetary policy and other factors in the economy will be able
to keep inflation at around 2 percent.
You might think that if the budgetary pressures got big
enough that inflation expectations, for example, might become
unanchored and that would lead to, you know, higher inflation
expectations, higher inflation, and thus higher interest rates.
That is something we are keeping close tabs on, but we do not
see those risks right now. That would be an incremental effect
on interest rates.
A far more seismic effect on interest rates is, as I said,
the day that financial market participants credibly expect that
debt to GDP will rise without bound to, you know,
unprecedented, you know, levels. The day that happens, I
suspect that you will--that history will not be a very good
guide and you will see, you know, something like what we wrote
about on the fiscal crisis.
Chairman Womack. Are we on that trajectory?
Ms. Edelberg. I do not think that there is any suggestion
in financial markets that there is a lot of concern about that.
We think about it, we write about it. But I do not see those
pressures in financial markets right now.
Mr. Hadley. But that is in the near term. So, in the long
term--so we are already at historically high levels of debt.
And deficits are very large and so they are going to keep
adding to the debt and at some point, there will be a problem.
There will be a reckoning if we do not change our ways.
Chairman Womack. In my last minute, Mr. Deputy Director, I
will direct this to you. It is not unprecedented that Federal
bureaucracy sometimes allow personal bias to enter into their
decisions. I will not go into those; my time will not permit me
to. Convince me and our panel that the - we are all human
beings. We all have certain ideas and ideology. What steps do
you take to ensure that the information you give back to the
Congress is free of anyone's personal bias?
Mr. Hadley. We work very hard at that, Mr. Chairman. The
first thing is, we start with our hiring procedures. We work
very hard to hire people who are able to do objective work and
able to be perceived as doing objective work. And then they go
through vigorous training where we train them to present just
the facts and to consider all sides of an issue.
One of the things that we have cost analysts do is talk to
the Committees who are offered legislation and say, okay, who
do you think we should have talked to? And then you talk to
people on the other side. It is not that we necessarily take on
board all that we are told. We evaluate it. We do it
independently. But we want to consider the full range of
viewpoints.
We then construct the estimate and we have then a rigorous
review process. And that process in different ways, depending
on the products involved, not only the people within CBO,
managers, like ourselves, but also reaching out to people on
the outside for their perspectives on our work. Because what we
are trying to represent to the Congress is not just what CBO
says about a topic, but in general the middle of where the
economics profession is.
So, in some sense we are trying to represent the entire
range of viewpoints and it gets difficult, because we are asked
to produce a single point estimate. But even where we do that,
we try to provide the sources of uncertainty around that and
the differing viewpoints on a particular issue.
And I think one example of how we try to show just how, you
know, not biased we are, we follow the rules that we are laid
out, that are laid out for us in statute. But, we also provide
information to the Congress from other perspectives so they can
get a full view of what is going on with a particular estimate
or with a particular piece of legislation.
Chairman Womack. I appreciate that and I apologize for
going over just a bit. Mr. Hadley, Ms. Gullo, Ms. Edelberg,
thank you for appearing before us today.
I want to advise the membership of our Committee to submit
written questions to be answered later in writing. Those
questions and your answers will be made part of the formal
hearing record. Any members who wish to submit questions or any
extraneous material may do so within 7 days. Again, our thanks
and with that. This Committee stands adjourned.
[Whereupon, at 12:59 p.m., the Committee was adjourned.]
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