[Senate Hearing 116-454]
[From the U.S. Government Publishing Office]
S. Hrg. 116-454
THE CONGRESSIONAL BUDGET OFFICE'S UPDATED BUDGET OUTLOOK
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HEARING
BEFORE THE
COMMITTEE ON THE BUDGET
UNITED STATES SENATE
ONE HUNDRED SIXTEENTH CONGRESS
SECOND SESSION
__________
September 23, 2020
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Printed for the use of the Committee on the Budget
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
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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
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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
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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
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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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