[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 [GRAPHIC NOT AVAILABLE IN TIFF FORMAT] Available on the Internet: www.govinfo.gov __________ U.S. GOVERNMENT PUBLISHING OFFICE 30-530 WASHINGTON : 2018 ----------------------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Publishing Office, http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free). E-mail, [email protected]. 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.] [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] [all]