[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

                               __________

           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

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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

                              ----------                              

                     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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