[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]


   CBO OVERSIGHT: ECONOMIC ASSUMPTIONS, BASELINE CONSTRUCTION, COST 
                        ESTIMATING, AND SCORING

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

                                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

                               __________

           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

                              ----------                              


                       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:]
   [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    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:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    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:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    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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                             [all]