    [Senate Hearing 116-454]
    [From the U.S. Government Publishing Office]

                                                           S. Hrg. 116-454

            THE CONGRESSIONAL BUDGET OFFICE'S UPDATED BUDGET OUTLOOK

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

                                    HEARING

                                   BEFORE THE

                            COMMITTEE ON THE BUDGET

                              UNITED STATES SENATE

                         ONE HUNDRED SIXTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                               September 23, 2020

                                   __________

               Printed for the use of the Committee on the Budget

    [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                                   __________

                        U.S. GOVERNMENT PUBLISHING OFFICE
    44-023                     WASHINGTON : 2021

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                            COMMITTEE ON THE BUDGET

                       MICHAEL B. ENZI, Wyoming, Chairman
    CHARLES E. GRASSLEY, Iowa            BERNARD SANDERS, Vermont
    MIKE CRAPO, Idaho                    PATTY MURRAY, Washington
    LINDSEY O. GRAHAM, South Carolina    RON WYDEN, Oregon
    PATRICK TOOMEY, Pennsylvania         DEBBIE STABENOW, Michigan
    RON JOHNSON, Wisconsin               SHELDON WHITEHOUSE, Rhode Island
    DAVID A. PERDUE, Georgia             MARK R. WARNER, Virginia
    MIKE BRAUN, Indiana                  JEFF MERKLEY, Oregon
    RICK SCOTT, Florida                  TIM KAINE, Virginia
    JOHN KENNEDY, Louisiana              CHRIS VAN HOLLEN, Maryland
    KEVIN CRAMER, North Dakota           KAMALA D. HARRIS, California
                     Doug Dziak, Republican Staff Director
                    Warren Gunnels, Minority Staff Director

                                C O N T E N T S

                                  ----------

                         WEDNESDAY, SEPTEMBER 23, 2020

                                                                       Page

                        STATEMENTS BY COMMITTEE MEMBERS

    Chairman Michael B. Enzi.........................................     1

                                   WITNESSES

    Swagel, Hon. Phillip L., Director, Congressional Budget Office
      (CBO)..........................................................     3
        Prepared Statement of Mr. Phillip L. Swagel..................     5
        Questions and Answers (Post-Hearing) from:
            Senator Charles E. Grassley..............................    22
            Senator Ron Johnson......................................    24
            Senator Mark R. Warner...................................    26
            Senator Sheldon Whitehouse...............................    33

            THE CONGRESSIONAL BUDGET OFFICE'S UPDATED BUDGET OUTLOOK

                                  ----------

                         WEDNESDAY, SEPTEMBER 23, 2020

                                           U.S. Senate,
                                       Committee on the Budget,
                                                       Washington, D.C.
        The Committee met, pursuant to notice, at 2:29 p.m., in
    Room SD-608, Dirksen Senate Office Building, and via Webex,
    Hon. Michael B. Enzi, Chairman of the Committee, presiding.
        Present: Senators Enzi, Grassley, Crapo, Toomey, Braun,
    Scott, Kennedy, and Van Hollen.
        Staff Present: Doug Dziak, Republican Staff Director; and
    Mike Jones, Minority Deputy Staff Director.

             OPENING STATEMENT OF CHAIRMAN MICHAEL B. ENZI

        Chairman Enzi. Good afternoon. I will call the Committee to
    order.
        Today the Committee will hear testimony from the
    Congressional Budget Office Director, Phillip Swagel, on CBO's
    updated budget and economic projections. These projections
    account for the effects of the COVID-19 pandemic and
    legislation enacted in response to it and provide a window into
    the future of our financial state.
        This is Dr. Swagel's first time testifying before the
    Budget Committee since becoming the tenth Director of the
    Congressional Budget Office. Unfortunately, the pandemic has
    delayed us from having him appear before this Committee. I
    would like to thank Dr. Swagel for being here today. I would
    also like to thank the CBO staff for working to provide
    Congress with informed estimates at a time of unprecedented
    uncertainty and unusual working conditions.
        CBO's updated budget projections confirmed what we all
    knew: that the economic disruption caused by COVID-19 and the
    Federal Government's response have led to a surge in deficits
    and debt. CBO projects that by the end of the month we will
    have spent $3.3 trillion more than we took in during fiscal
    year 2020, more than triple the size of last year's deficit,
    and the largest deficit relative to the size of our economy
    since 1945.
        Our debt-to-Gross Domestic Product (GDP) ratio will close
    out the year at 98 percent, nearly 20 percentage points higher
    than it was at the end of the last year. Next year it is
    expected to climb above 100 percent for the first time since
    the end of World War II.
        These staggering updated figures reflect the magnitude of
    the crisis presented by COVID-19 and the unprecedented actions
    Congress and the President have taken. In response to the
    pandemic and the ensuing lockdowns, we came together on a
    bipartisan basis to enact the largest relief package in United
    States history. We worked to alleviate the financial
    devastation and it helped, but at great cost.
        CBO estimates that the legislation enacted in response to
    the pandemic will cost roughly $2.8 trillion. Sometimes the
    amounts we are discussing are so great that we lose context.
    That $2.8 trillion is the equivalent of $8,400 for each and
    every adult and child in this country. Adult and child in this
    country, $8,400. By all accounts, the U.S. fiscal response to
    COVID-19 was one of the largest, if not the largest among
    advanced economies. It is an extraordinary response to an
    extraordinary challenge.
        But we face another extraordinary challenge. As the CBO
    demonstrates, our national debt continues growing long after
    the current crisis abates. CBO projects that the size of our
    publicly held debt, which already amounts to more than $60,000
    for every adult and child, will soon exceed the size of our
    economy. And by 2023, the debt-to-GDP ratio will be the highest
    it has been in our Nation's history.
        It will only keep growing from there. By 2050, debt will
    reach 195 percent of GDP. Deficit spending and the national
    debt was unsustainable before the pandemic. We must address it
    before it becomes the next historic crisis or prohibits future
    policymakers from dealing with future emergencies.
        COVID-19 and the Government response to it are not the root
    of the cause of our long-term budget problem. Nevertheless,
    that does not mean we should continue to spend with impunity.
    While additional measures to combat the virus and help
    struggling families and businesses may be necessary, we cannot
    use this crisis to justify multi-trillion-dollar wish lists
    that have little or nothing to do with the pandemic.
        Wasting billions bailing out mismanaged pension plans or
    providing tax breaks to wealthy individuals in high-tax States
    will not help us find a vaccine or spur the economic recovery.
    More spending will squander our limited fiscal capacity and
    saddle our children and grandchildren with an even higher debt.
        Make no mistake: Debt and deficits matter. CBO warns that
    our rising debt will leave future generations with higher
    interest rates, lower incomes, and a greater chance of a fiscal
    crisis, which will lead to more painful options while we try to
    address it. We cannot continue running trillion-dollar annual
    deficits forever. The longer we wait, the more severe the
    challenges, and challenges will be, and the fewer options we
    have.
        I look forward to hearing from our witness today. There is
    no person representing the other side, so we can move on to our
    witness.
        Our witness today, as I mentioned, is Dr. Phillip Swagel,
    the Director of the Congressional Budget Office. Dr. Swagel
    became the tenth Director of the CBO on June 3, 2019. Prior to
    his appointment, he was a professor at the University of
    Maryland School of Public Policy and a visiting scholar at the
    American Enterprise Institute and the Milken Institute. Dr.
    Swagel was Assistant Secretary for Economic Policy at the
    Treasury Department from 2006 to 2009, and he has also served
    as Chief of Staff and Senior Economist at the White House
    Council of Economic Advisers and as an economist at the Federal
    Reserve Board and the International Monetary Fund. That covers
    just about all the financial bases.
        For the information of colleagues, Dr. Swagel will provide
    us with an opening statement followed by questions.
        Dr. Swagel, please begin.

    STATEMENT OF THE HONORABLE PHILLIP L. SWAGEL, PH.D., DIRECTOR,
                      CONGRESSIONAL BUDGET OFFICE

        Mr. Swagel. Thank you. Chairman Enzi, Ranking Member
    Sanders, and members of the Committee, thank you for inviting
    me to testify about CBO's budget update and the long-term
    budget outlook.
        I will focus in my remarks now on that long-term fiscal
    challenge, and the challenge is daunting. At the same time, the
    United States is not facing an immediate fiscal crisis. The
    current low interest rates indicate that the debt is manageable
    for now and that fiscal policy could be used to address
    national priorities if the Congress chose to do so.
        In our projections, interest rates remain low for several
    years and as the economy recovers from the effects of the
    pandemic, in part because the Federal Reserve is working to
    keep interest rates low.
        Let me make two main points about the long-term outlook.
    Federal debt is high and is projected to rise substantially,
    number one. And, number two, over the long term, actions are
    needed to address the Nation's fiscal challenges. So here are
    some of the numbers.
        The Federal debt held by the public is projected to
    increase to 98 percent of GDP at the end of this year. It is up
    from 79 percent last year and up from only 35 percent in 2007
    before the start of the previous recession. And the debt is
    projected to continue to rise, reaching 195 percent of GDP by
    2050, and that far exceeds the previous high of 106 percent
    recorded just after World War II.
        So what has happened this year in 2020? Well, the year
    began with a strong economy and a strong labor market, but also
    with a deficit that was projected at $1 trillion. It was high
    already by historical standards, and then, of course, Mr.
    Chairman, as you said, the pandemic changed the situation
    dramatically. So our projection of the deficit this year has
    increased to $3.3 trillion, mostly reflecting the budgetary
    effects of legislation enacted to address the pandemic and, of
    course, the resulting economic downturn.
        Now, at 16 percent of GDP, the deficit relative to the size
    of the economy is the largest since 1945. Over the next 30
    years, debt will continue to rise, and that is because Federal
    spending is set to grow from 21 percent of GDP last year to 31
    percent of GDP in 2050, and with interest costs contributing
    the most to that growth in spending. And, again, even as we
    project interest rates to remain low for several years as the
    economy recovers from the pandemic, and those low interest
    rates hold down borrowing costs.
        The challenge is that continued deficits drive up the cost
    of servicing the debt, and spending growth also reflects rising
    costs for health care programs and for Social Security spurred
    by both the aging of the population and by projected growth in
    health care costs.
        Federal revenues increased from 16 percent of GDP last
    year--again, before the pandemic--to 19 percent in 2050. The
    challenge with the long-term fiscal policy is that the path
    over the coming decades is unsustainable, and the cost of
    financing these deficits and servicing the debt cannot consume
    an ever-growing proportion of the Nation's income.
        The consequences of this high and rising debt will play out
    for the economy. Borrowing costs will eventually rise, reducing
    business investment, slowing economic growth. The larger
    interest payments will go to foreign holders of U.S. debt, and
    that subtracts from our national income. And then a fiscal
    crisis in which interest rates abruptly escalate or other
    disruptions occur become a greater risk. And higher rates of
    inflation and the chance of a loss of confidence in the dollar
    have a greater chance of occurring.
        Now, there is no set tipping point at which a fiscal crisis
    becomes likely or imminent, nor is there an identifiable point
    at which interest costs as a percentage of GDP become
    unsustainable. The challenge is that as the debt grows, these
    risks become greater.
        Now, the status of the Federal trust funds is one
    indication that action may be needed soon, so in our
    projections, the Highway Trust Fund is exhausted in 2021;
    Medicare's Hospital Insurance Trust Fund is exhausted in 2024;
    Social Security's Disability Trust Fund is exhausted in 2026;
    and the main fund of Social Security, the Old-Age and Survivors
    Fund, is exhausted in 2031. So action is close, not over the
    horizon, but the fiscal challenge is close by.
        Again, the current low interest rates on Treasury
    securities indicate that the Nation is not facing an immediate
    fiscal crisis, but we face fiscal challenges over the long term
    that will require difficult adjustments after we have emerged
    from the challenges of the pandemic.
        Let me conclude and just take a moment, Mr. Chairman, to
    thank you on behalf of everyone at CBO. Thank you and your
    staff for your support for CBO and for our mission to serve the
    Committee and the Congress.
        Thank you very much.
        [The prepared statement of Mr. Swagel follows:]

                  Prepared Statement of Mr. Phillip L. Swagel
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Chairman Enzi. Thank you. I appreciate your comments and
    even more so your full report that I hope people will take a
    look at.
        I did note that you mentioned interest rates and confidence
    in the dollar, and I think they are both tied together, and I
    have looked at what a difference that will make.
        Now we will turn to questions, and to explain the process,
    each member will have 5 minutes for questions. Normally we
    would start with myself and then the Ranking Member, but
    Senator Grassley has been on this Committee longer than I have
    and could have been the Chair of it several times and has long
    experience with it. Of course, he is chairing the Finance
    Committee right now, and this is all related to that. So I will
    yield my time to Senator Grassley.
        Senator Grassley. Thank you for your courtesy. And,
    Director, I am glad to see you in your new position and have
    you here.
        During Presidential elections, Democrats here in the Senate
    decide to manufacture some sort of crisis in Social Security.
    Then they use that crisis to try to scare or mislead seniors,
    and make the disabled end up believing that some people want to
    destroy the program. And they feed those scare tactics to
    whoever is the Democrat nominee for President.
        In light of the recent Executive order (EO) to allow an
    optional deferral of payroll taxes for employees, some
    Democrats wrote to the Social Security Chief Actuary about some
    sort of hypothetical legislation that they do not support. The
    hypothetical legislation would entirely eliminate payroll taxes
    that fund Social Security. So three questions.
        First, are you aware of any plan by anyone to entirely
    eliminate payroll taxes and destroy Social Security?
        Mr. Swagel. No, I am not. And I read the SSA Actuary's
    analysis and saw that he also said that there was no plan that
    he was aware of either, and it was entirely hypothetical.
        Senator Grassley. Okay. Second, can you tell me what effect
    the President's Executive Order to allow deferral of some
    payroll taxes for a few months has on the CBO's long-term
    outlook for Social Security Trust Funds?
        Mr. Swagel. That EO is not in our figures, just as we
    closed out our books before--just before the President issued
    it. But that would have essentially no impact on the long-term
    budget outlook. It is deferral, not a change in the long-term--
    --
        Senator Grassley. Okay. Third, does CBO know that the
    Treasury Department will continue throughout the year to make
    deposits in the Social Security Trust Fund associated with
    payrolls, even with the optional deferral?
        Mr. Swagel. Yes, that is correct. The Treasury will
    continue to pay into the trust funds even with the deferral.
        Senator Grassley. Then the last one on this subject:
    According to the Social Security Chief Actuary, the employer
    payroll tax deferral in the Coronavirus Aid, Relief, and
    Economic Security (CARES) Act legislation, which enjoyed
    support of all Democrats and Republicans who voted, does not
    affect revenue in the trust funds. Do you agree with that
    assessment?
        Mr. Swagel. Yes, I do.
        Senator Grassley. Okay. Hitting Social Security from a
    little different angle, CBO's projections for when Social
    Security Trust Funds are exhausted are different from
    projection in the Social Security Trustees Report. CBO has also
    provided estimates for effects of reform bills that differ from
    estimates that the Social Security Chief Actuary provides as
    technical assistance. As an example, Representative John Larson
    has a reform bill called the ``Social Security 2100 Act.'' That
    bill increases taxes substantially, including taxes for low-
    wage earners and the middle class, and it also increases Social
    Security benefits with most of the extra dollars going to
    upper-wage earners.
        The Social Security Actuary estimated that the bill would
    go a long ways to generate financial sustainability of Social
    Security. CBO had a different assessment and estimated that the
    bill would only postpone exhaustion of Social Security Trust
    Funds by around 9 years. CBO and Social Security Actuaries and
    Trustees also seem to have different outlooks for when Social
    Security Trust Funds will be exhausted under current law.
        Can you discuss the sources of some of the differences
    between estimates concerning Social Security programs at CBO
    and Social Security Actuaries who provide technical assistance?
        Mr. Swagel. Yes, sir, I can. We have different modeling
    approaches, but the main difference between our estimates and
    the Actuaries' estimates are in the parameter choices. So the
    underlying numbers for fertility, for longevity, mortality,
    income inequality that have all the economic variables that
    affect the financial condition of the Social Security system.
    So we have a bit more pessimistic view. We have the trust fund
    exhausted in 2031, and before the pandemic, they had it in 2034
    or 2035.
        Just as an example, after the financial crisis, fertility--
    so the number of babies for each woman of child-bearing age--
    did not rebound as much as it had in the past after past
    recessions. So we have marked down fertility, and that means
    over 75 years that it is a negative or the Social Security
    financing system. So that is the sort of difference that we
    have taken into account. This year the Trustees started to take
    that into account. We have some other differences on inequality
    and things like that as well.
        Senator Grassley. Thank you, Dr. Swagel.
        Thank you, Mr. Chairman.
        Chairman Enzi. Thank you, Senator Grassley.
        Senator Scott had another Committee meeting that he had to
    duck into. He will be back. But I will go ahead and ask some
    questions, and then Senator Kennedy, followed by Senator
    Toomey, Senator Crapo, and now Senator Braun, in that order,
    depending on who is online or here.
        So to begin my questions, right now the interest on the
    Federal debt are at historic lows, even negative on an
    inflation-adjusted basis. I read some claim that means that
    debt and deficits do not matter. Is that true?
        Mr. Swagel. No, sir. We would say that they still matter,
    that the low interest rates, of course, are reducing the cost
    of servicing the debt, but over time, as the economy recovers,
    as we get past the pandemic, and as the debt rises, we expect
    interest rates to rise, and the cost of servicing the debt will
    become more challenging.
        Chairman Enzi. Well, CBO, you projected that interest rates
    will stay well below what we have seen in the past. The average
    rate on the 10-year Treasury note over the last 30 years was
    4.5 percent, but CBO projections are that it will average about
    2 percent between 2020 and 2030. Even still, CBO projects
    interest spending will skyrocket in the long-term budget
    outlook.
        How would your projection budget change if interest rates
    were 1 percent higher? What if the rates matched their
    historical average over the last 30 years? I am asking for some
    numbers.
        Mr. Swagel. I know. I understand, I understand. So I will
    just start by saying we have interest rates staying low as the
    economy recovers. By 2028, we see the economy back at our
    potential, past the lingering effects on the economy of the
    pandemic. Obviously, there are lots of lingering effects. And
    as that happens, that is when we start to see interest rates
    rising.
        So it could happen sooner, it could happen later. If it
    happens sooner and more, that would have a very substantial
    effect on debt-to-GDP, and so just to give the example that you
    cited, if interest rates were 1 percentage point higher than we
    forecast, the debt-to-GDP ratio, you know, 30 years out would
    be something like 254 percent of GDP instead of 195 percent of
    GDP. So it is a really sizable difference, just 1 percentage
    point difference in the interest rate.
        Chairman Enzi. And what has the historical average for
    interest rates been in the last whatever number of years?
        Mr. Swagel. So we looked at the 30-year average, and that
    is about 4.6 percent for the 10-year, which--you know, of
    course, it is hard to predict interest rates way out into the
    future, but we do have historical low interest rates right now.
        Chairman Enzi. And they are related to how much people have
    faith in what we are doing, I think. If they have less faith,
    they will need more interest in order to leave their money with
    us. But your updated projections show that the economic
    downturn has strained the financials of several trust fund
    programs that were already in trouble. Can you discuss how the
    CBO's projections of Social Security, Medicare, and Highway
    Trust Funds have changed and how they are already running
    deficits?
        Mr. Swagel. So the trust fund report that we released at
    the same time with the budget update showed that the Federal
    trust funds that you mentioned--Highway, Medicare, Social
    Security disability, and the main Social Security--all have
    exhaustion dates sooner than we previously expected, and this
    reflects in large part the effect of the pandemic in reducing
    the contributions that go into those trust funds. So, each year
    forward, means that we have less time to address it. The
    cumulative trust fund deficit that we see over the next 10
    years--so, of course, all the trust funds, it is over $2
    trillion, $2.3 trillion for 10 years. That is the whole of the
    trust funds, the net deficit in them over the next 10 years,
    just as an indication of the challenge that is really in the
    next decade.
        Chairman Enzi. I appreciate your precise answers. I have a
    few more questions, but I will turn to Senator Braun,
        Senator Braun. Thank you, Mr. Chairman.
        Dr. Swagel, if you remember the last time we were together,
    I was wanting you to maybe revise what the impact was from the
    Tax Cut Act of 2017. I think the original amount from your
    office was that it would have a $150 billion per year impact,
    $1.5 trillion over 10 years. Is that roughly correct?
        Mr. Swagel. That is right.
        Senator Braun. And then I noticed pre-COVID that it looked
    like we were generating record revenues--is that correct?--in
    terms of what it was compared to the year before and I think
    maybe up somewhere in the range of 4 to 4.5 percent.
        Mr. Swagel. The revenue dollars----
        Senator Braun. Yes.
        Mr. Swagel. --was certainly extremely strong. The revenue
    as a share of GDP was slightly below the long-term average but
    set to rise up above that long-term average.
        Senator Braun. But the increase from the last measurable
    year to the year before has been over 4 percent, hasn't it?
        Mr. Swagel. Yes.
        Senator Braun. Okay.
        Mr. Swagel. We had a strong economy, and it is reflected,
    as you said, in the revenue figures.
        Senator Braun. So do you still stick with that projection
    that over a 10-year period? Now that you have had the benefit
    of at least a couple years in the trend that we were on pre-
    COVID, I will give you the opportunity to revise that
    projection if you want to.
        Mr. Swagel. We have not gone back and revised that. For
    sure, the economy before the pandemic was strong, the labor
    market was strong, and that translated into revenues. The
    challenge is distilling, you know, that strength of the
    economy, distilling out the specific effects of the 2017 Tax
    Act. We have not gone back and done that. You know, we will
    continue to go back and look at that.
        Senator Braun. Well, one thing you might do is look at
    whatever the parameters were when you made it in the first
    place, and you had to use some method that was going to make
    that differentiation. I still would like to see that. I know
    COVID has put a glitch in that.
        But let us look at it this way: We have a structural
    deficit of roughly $1 trillion, COVID aside, correct?
        Mr. Swagel. That is right.
        Senator Braun. Okay. So $150 billion divided by $1 trillion
    is 15 percent, correct?
        Mr. Swagel. Yes.
        Senator Braun. So 85 percent of the structural deficit
    would have nothing to do with the original projection if, in
    fact, that is still true. So it gets down to whatever we do,
    and looking at whoever put the chart together on easy pay-fors
    for Social Security and Medicare--was that you or was that--did
    you do this, Chairman?
        Staff. That is from the Manhattan Institute.
        Senator Braun. Okay. So have you looked at these? Do you
    believe them to be accurate?
        Mr. Swagel. I am sorry. The chart----
        Senator Braun. Well, we will get you one of these. It is a
    different----
        Mr. Swagel. Ah, I know that. I can tell just by looking at
    it from here. It is Brian Riedl, I think. It is his chart.
        Senator Braun. Yes.
        Mr. Swagel. I looked at it very quickly just in the last
    day or two.
        Senator Braun. And if you look at what they do over 10
    years, some of them being very, very drastic, it still leaves a
    gap, unless you may be combine a couple of them.
        So I think it clearly gets down to the fact that we have a
    spending issue more so than a revenue one, and I am going to
    end up with this question, which is two-part: Do you think we
    have hit the sweet spot of taxation? That is something if you
    cannot give me an answer today, I would love for you to get
    back to it. And I think that at some point we have got to
    realize that whatever we do on the tax side of the equation, it
    is not going to address the fact that we do not have the
    political will to do something on the spending side. In
    general, do you think that is a fair statement?
        Mr. Swagel. I will cover a couple of these, if that is
    okay.
        Senator Braun. Okay.
        Mr. Swagel. I will start by--at the end of this year, we
    are going to put out an option--a volume of budget options, so
    we will--we will not tell you--you will never hear from me what
    the Congress should do, but we will give you our analysis and
    sort of our version of that menu, you know, entirely up to you
    to choose.
        At CBO, we think of it as a deficit problem and a debt
    problem, and not as much of a revenue problem or a spending
    problem, just because, you know, we shy away from saying what
    the Congress should adjust. But for sure, as you say, there is
    a deficit problem, there is a debt problem, and that action is
    needed. And whether the Congress does it on the spending side
    or the revenue side, we will provide the analysis, but action
    is absolutely needed.
        Senator Braun. Thank you.
        Mr. Swagel. Okay.
        Chairman Enzi. You are doing an excellent job of answering
    questions concisely, and I appreciate it. I have a few more
    questions I will do, and if Senator Braun has some more, we do
    that, too.
        Dr. Swagel, you are hardly the first CBO Director to warn
    this Committee about a dire fiscal outlook. The pandemic has
    not created the issue. How long has CBO been warning us that
    the Federal budget is unsustainable?
        Mr. Swagel. So the first long-term budget outlook came out
    in 2000, October 2000, and that warned about rising costs for
    retirement and health care. And that was, of course, even as
    the budget was in surplus at the time. So at least for 20 years
    we have been flagging this issue. I suspect Alice Rivlin, the
    founder of the agency, had it in her mind as well.
        Chairman Enzi. I appreciate that, because our soaring debt
    raises the possibility of a fiscal crisis similar to what we
    saw in several European countries. I got to visit Greece after
    that where they impounded personal savings accounts. I have
    read that it is foolish to worry about a U.S. debt crisis
    because we are not seeing any warning signals. CBO and most
    other forecasters do not anticipate particularly high interest
    rates or inflation anytime soon. Does that mean that we cannot
    face a debt crisis?
        Mr. Swagel. No, sir, and that is the challenge, that the
    financial markets are not flashing those warning signs now. But
    the reasoning is understandable given the effects of the
    pandemic and the actions of the Federal Reserve and the
    situation around the world, where our economy still looks like
    the most trustworthy in many dimensions.
        As the economy recovers, as the Fed normalizes its policy
    and does not suppress long-term interest rates, and as the
    debt-to-GDP ratio continues to rise, we worry that all the
    things holding down rates now will unravel and reverse, and we
    will have the problem upon us.
        Chairman Enzi. Thanks. My last comment and question:
    Congress used to be governed by an overall principle that you
    could pass legislation as long as it did not add to the
    deficit. That was the pay-as-you-go (PAYGO) principle. I think
    you would agree that when it comes to nonemergency spending,
    the PAYGO principle is useful. Still, given the current
    forecast, is PAYGO enough? Or do we need to actively take steps
    toward deficit reduction?
        Mr. Swagel. PAYGO is a step, that is for sure, so I do not
    have negative things to say about PAYGO. The challenge is that
    PAYGO does not address the existing balance--does not address
    the existing problem, which is already steep, and there is a
    sense in which PAYGO actually makes it harder because, of
    course, any offset, whether on the spending side or the revenue
    side that is used to pay for the new activities, is no longer
    available to address the existing imbalance. So as an example,
    reversing the 2017 Tax Act and then spending it all--right?--
    that is PAYGO. But that is in some sense the same as if the
    2017 Tax Act had never happened and just spending had been
    raised. So that is the challenge with PAYGO. In a sense it
    makes things harder.
        Chairman Enzi. Well, we have another tactic that we use,
    which is to borrow future revenue and spend it immediately, and
    that is not PAYGO either. We did a National Parks bill to cover
    deferred maintenance here earlier in the year, and people
    lauded it, and it is a good idea to try and cover that. But I
    had some suggestions in there for ways that we could actually
    raise the money. It would have been additional revenue, and
    most of it would have come from foreign visitors. But I could
    not even get the amendment up.
        Kind of in closing, I will mention that I talked to an
    inventor, a United States inventor. His name is Dean Kamen. He
    did the Segways that you see policemen riding around on, and he
    even invented a wheelchair that would go up and down stairs,
    but that was after 200 medical patents that he did. Then he got
    to play with these other things. So he does a lot of thinking,
    and he got a hold of me about the pandemic things that we were
    doing and said, ``You know, you are actually spending some of
    that Social Security money, and you are giving out money in the
    pandemic checks. Why don't you get the people that are
    receiving that money to sign that they will take a deferral on
    receiving their Social Security and allow for means testing?''
    He said, ``Particularly young people would probably sign that,
    and that would help to overcome the deficit.''
        And I am out of my time here, but I see that Senator Van
    Hollen is here, and I would give him an opportunity for
    questions before we close if he wishes. Senator Van Hollen.
        Senator Van Hollen. Director, good to have you with us. I
    had not planned to address this, but since Senator Grassley
    raised the issue of a letter a number of us sent to the Social
    Security Actuary, I thought I would address it. And while we
    indicate in our letter that we were discussing a hypothetical
    proposal, the reality is that Donald Trump did say--and I am
    quoting here--``And the payroll tax, we will be terminating the
    payroll tax after I hopefully get elected.'' He went on to
    elaborate on that. So it was appropriate that we asked the
    Actuary what the impact of that would be on Social Security,
    and I am sure if you ask folks at the White House whether that
    is what President Trump meant to say, they will say it is not.
    But we have also learned that the only person who counts in
    this White House is the President himself, which is
    appropriate, and that is what he did say.
        With respect to PAYGO, I would just point out that when the
    big tax cuts were passed in 2017 that disproportionately went
    to the wealthiest Americans, as part of that, our Republican
    colleagues waived the PAYGO rule as well as the law, the
    statutory PAYGO, because, otherwise, the statutory PAYGO rule
    as well as the law would have constrained that tax cut and
    would not have allowed another $2 trillion to be added to the
    deficit.
        We are now in the middle of this pandemic right now, and
    the CARES Act, of course, put forward a number of ways to
    address it, and I think that bipartisan effort did help rescue
    many families and small businesses. Interestingly, in your
    report, at Table 3, you assess the relative benefits of those
    different approaches. And as I see this, you say that aid to
    State and local governments is among the most efficient forms
    of economic stimulus that was passed by Congress. Is that
    correct?
        Mr. Swagel. Yes, sir, that is correct.
        Senator Van Hollen. I mention that because the Health and
    Economic Recovery Omnibus Emergency Solutions (HEROES) Act that
    passed the House I think almost 5 months ago now contains
    substantial support for State and local governments who are
    struggling and will otherwise have to lay off workers; whereas,
    the proposal put forward here in the Senate by Senator
    McConnell had zero additional funds for State and local
    governments. So it is interesting to me that that has been
    determined to be one of the most effective things that we can
    do going forward.
        Similarly, I see under your revenue provisions--and I know
    it is a mix of them, but collectively you find that some of the
    tax cut provisions are among the least effective in terms of
    dollars spent per economic growth gain. Is that correct?
        Mr. Swagel. Yes, that is correct. And as you said, the
    State and local money is especially effective in terms of the
    change in the deficit, how much GDP does it add. It means that
    States and local governments do not have to raise taxes or cut
    other spending by as much as they might have to, and that is
    why we get that result.
        The taxpayer provisions do have a positive impact on GDP,
    but as you said, not as large as the State and local money.
        Senator Van Hollen. Right. We are talking per dollar spent,
    and we have had conversations in this Committee about how we
    can most efficiently spend, for example, our housing dollars.
    But what your report shows is that a State and local government
    expenditure, the spending on health for them, is a lot more
    efficient per Federal dollar spent than the tax expenditures
    taken together. Is that right?
        Mr. Swagel. That is right. That is what our report finds
    for the money that has been enacted so far.
        Senator Van Hollen. Yeah, and just in terms of the public
    health issue, you have a paragraph here talking about how one
    of the fastest ways to speed up economic growth and regain
    ground is to deal with the public health issues, which makes
    common sense. The more comfortable people are going out about a
    business and can normalize their activities, the sooner we will
    get back to that. And you point out that we could reduce the
    scale of social distancing needed to slow the spread of the
    virus with more widespread use of masks, greater testing, and
    increased contact tracing. Is that right?
        Mr. Swagel. Yes, that is right, and that social distancing
    would have an effect on the economy and also on the
    effectiveness of policy; that if Congress puts more money into
    fiscal policy with less social distancing, the sorts of
    interventions you mentioned, that money would be more
    effective, and people would be able to spend more and more
    rapidly.
        Senator Van Hollen. Sure. The more comfortable people feel
    by applying those measures that have been advocated by the
    public health experts, the sooner we will get our economy
    going.
        Senator Van Hollen. Thank you, Mr. Chairman, and thank you,
    Mr. Director.
        Mr. Swagel. Thank you.
        Chairman Enzi. Thank you. If you want to ask some more, you
    may. I will call on Senator Braun for a second round.
        Senator Braun. Thank you, Mr. Chairman.
        In the modeling that you use to come up with predictions on
    what raising or lowering taxes would do, I am assuming it is a
    dynamic system that does reflect that when you raise taxes, it
    generally as a rule is going to depress economic growth. Do
    your models incorporate that?
        Mr. Swagel. Yes, they do, and we look at the details of the
    tax. So a higher tax on capital, for example, would mean a
    lower return to investment. We would have less investment. We
    would have less saving. That would affect the capital stock.
        Similarly, a higher tax on wage income would affect
    people's willingness to work, and that would affect the economy
    as well.
        Senator Braun. Well, that is good. I figured the case, and
    it is leading to a second question, and I will be interested to
    see if you differentiate between the two kinds of personal
    income. Before the Tax Act of 2017, I think the highest
    marginal rate was 39.6 percent, and I think that was applied to
    W-2 and 1099 income as well as K-1 income. Is that correct?
        Mr. Swagel. That is correct.
        Senator Braun. And to me, those are two different kinds of
    income taxed at the same rate. One is liquid as you can get, W-
    2 and 1099. K-1, on the other hand, which is called ``business
    income,'' ``flow-through income,'' is inherently illiquid.
        Do you differentiate between the two kinds of personal
    income? Because the rates got separated in the Tax Act of 2017.
    Is that reflected in your models in terms of what it would do
    lowering the 1099/W-2 rate versus the K-1 rate?
        Mr. Swagel. Yes, we would take that into account in our
    modeling, and we would also take into account the difference
    between the pass-through rate and the corporate rate, you know,
    shifting the incentives for a business to decide whether to
    incorporate or remain a pass-through, all of those.
        Senator Braun. So has your modeling since then reflected
    the benefit of basically keeping the 1099/W-2 rate--I think it
    is at 37 now versus 39.6. Have you been able to measure the
    benefits into the strong economy that you cited earlier which,
    anecdotally and theoretically, I would say has been the driver
    of the recent prosperity pre-COVID? And whenever you are
    talking about taxing the wealthy, to me that is a liquid
    income. Most small businesses, whether you are a
    proprietorship, a partnership, a Sub S, an LLC, you are going
    to have the K-1 type income.
        So it sounds like your modeling reflects that, and that is
    good to know, and I personally think that has been the driver
    behind how well the economy has done. And I cite the corporate
    rate to where I think nominally it was, what, 35 percent prior,
    21 now? And my understanding, the effective rate was as low as
    18 percent when the nominal rate was 35. Is that your
    understanding or do you have a different figure on that?
        Mr. Swagel. I do not have the figure off the top of my
    head.
        Senator Braun. I think it is somewhere in that
    neighborhood, and even though the nominal rate has fallen to
    21, the effective rate has only fallen to 16. That shows you
    how much our Tax Code is littered with write-offs that benefit
    just some.
        A final question would be when it comes to--and you
    mentioned it earlier, that we are paying almost a zero interest
    rate when you take into account inflation, is that due to the
    fact that we are basically the only reserve currency, that
    others are willing to lend us money of a different currency
    knowing that it generally will stay put and not depreciate? Is
    that part of why we are borrowing money so cheaply currently?
        Mr. Swagel. It is. And it is an extraordinary privilege, is
    the way economists look at that, that the U.S. has this special
    position in the global economy.
        Senator Braun. And is there a risk that if there would
    become another reserve currency, you could see interest rates
    spike pretty quickly? I think the euro might have been headed
    there before they cropped up with Greece and Spain and Portugal
    and Italy, to name a few. Is that a risk?
        Mr. Swagel. That would be the risk, that if the U.S. loses
    its special place, sure, we could co-exist with another
    currency; but if people lose trust in our economy and our
    fiscal system, financial system, the effects could be quite
    rapid.
        Senator Braun. Thank you.
        Mr. Swagel. Mr. Chairman, could I mention one more thing
    just on this line? On the data that we have--the 2018 tax data
    has only recently become available, and so we are starting to
    work with that, and, of course, that will show the effect of
    the 2017 tax cut, the initial effect. So we are working on
    that. We work on that for distribution, but we will also work
    on that for the tax policy work that I know you are very
    focused on. So we will have more to say on this, and we will be
    happy to talk more.
        Chairman Enzi. Senator Van Hollen?
        Senator Van Hollen. Thank you, Mr. Chairman. And, Mr.
    Director, I just wanted to ask you about something that
    Secretary Mnuchin said on national television earlier this
    month: ``I think before we got into COVID, I thought the debt
    was very manageable. We were having extraordinary growth. We
    were creating growth that would pay down the debt over time.''
        So this question relates to the factual accuracy of that
    statement and the issue of economic growth and debt. I would
    first point out that in the first 3 years of the Trump
    administration, before the pandemic hit, average economic
    growth was 2.5 percent, 2.5 percent over those 3 years;
    whereas, in the last term of the Obama administration it was
    2.4 percent, one-tenth of a percent. I often hear my Republican
    colleagues describe the Obama administration years as ``no
    growth,'' ``negative growth,'' and the Trump years as
    ``supercharged growth.'' Well, that just is not the case. The
    facts do not show that.
        My question to you relates to the statement where he said
    we were creating growth that would pay down the debt over time.
    So a couple factual questions.
        First, in 2018 and 2019, before the coronavirus pandemic,
    was our national debt increasing or decreasing?
        Mr. Swagel. The national debt before the pandemic was still
    increasing, absolutely.
        Senator Van Hollen. That is right. In fact, as I look at
    your report and the numbers, it appears that the debt held by
    the public as a share of GDP was 70 percent in 2017, 77.4
    percent in 2018, and 79.2 percent in 2019. Is that what your
    report shows?
        Mr. Swagel. Yes, sir, that is right.
        Senator Van Hollen. Right. So, clearly, despite what the
    Secretary said, the debt was going up. The growth was not
    sufficient to be reducing the debt.
        Second, in CBO's January 2020 budget projections, which you
    published before the coronavirus pandemic hit in the United
    States, did CBO project that our national debt would increase
    or decrease over time?
        Mr. Swagel. So we had the debt trajectory continuing to
    increase. Instead of, you know, the $1 trillion deficit, we
    projected--before the pandemic it was extremely high by
    historical standards, even as the economy was growing and the
    labor market was strong before the pandemic.
        Senator Van Hollen. Right, so I appreciate that. So it is
    just not factually correct that we were creating growth that
    would pay down the debt over time, is it?
        Mr. Swagel. That is right. We did not expect the pre-
    pandemic economic situation to lead to paying down the debt.
        Senator Van Hollen. And now, of course, we have an even
    bigger hole to dig out of. Is that right?
        Mr. Swagel. That is right.
        Senator Van Hollen. Although if we were not taking action
    to compensate for all the people who are out of work in the
    small businesses, the hole might get even bigger. Isn't that
    right?
        Mr. Swagel. Certainly the economic situation would be much
    more difficult without the actions taken by the Congress
    helping families, businesses, schools, children, a wide
    variety. Absolutely, the situation would be--the economic
    situation and the social situation would be much more
    difficult.
        Senator Van Hollen. Yeah. Thank you, Mr. Director.
        Thank you, Mr. Chairman.
        Chairman Enzi. Thank you. Thanks for participating in the
    hearing. And, of course, we had the housing hearing last week,
    and there appeared to be a lot of agreement on what could be
    done. Of course, the devil is always in the details, but that
    was one of the first positive hearings that I have been to in a
    long time.
        I want to thank Dr. Swagel for his appearance before the
    Budget Committee today, for the work that he and all of his
    people have done to provide us with this information, which is
    quickly changing information.
        As for the information for all the Senators, questions for
    the record are due by 12:00 p.m. tomorrow. Emailed copies of
    the questions are acceptable due to the current conditions.
    Under our rules, Dr. Swagel will have 7 days from the receipt
    of our questions to respond with answers.
        With no further business to come before the Committee, the
    hearing is adjourned.
        [Whereupon, at 3:20 p.m., the Committee was adjourned.]

                     ADDITIONAL COMMITTEE QUESTIONS

        [The following submitted questions were not asked at the
    hearing but were answered by the witness subsequent to the
    hearing:]
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