[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
THE CONGRESSIONAL BUDGET OFFICE'S
BUDGET AND ECONOMIC OUTLOOK
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
HEARING HELD IN WASHINGTON, DC, FEBRUARY 13, 2013
__________
Serial No. 113-1
__________
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COMMITTEE ON THE BUDGET
PAUL RYAN, Wisconsin, Chairman
TOM PRICE, Georgia CHRIS VAN HOLLEN, Maryland,
SCOTT GARRETT, New Jersey Ranking Minority Member
JOHN CAMPBELL, California ALLYSON Y. SCHWARTZ, Pennsylvania
KEN CALVERT, California JOHN A. YARMUTH, Kentucky
TOM COLE, Oklahoma BILL PASCRELL, Jr., New Jersey
TOM McCLINTOCK, California TIM RYAN, Ohio
JAMES LANKFORD, Oklahoma GWEN MOORE, Wisconsin
DIANE BLACK, Tennessee KATHY CASTOR, Florida
REID J. RIBBLE, Wisconsin JIM McDERMOTT, Washington
BILL FLORES, Texas BARBARA LEE, California
TODD ROKITA, Indiana DAVID N. CICILLINE, Rhode Island
ROB WOODALL, Georgia HAKEEM S. JEFFRIES, New York
MARSHA BLACKBURN, Tennessee MARK POCAN, Wisconsin
ALAN NUNNELEE, Mississippi MICHELLE LUJAN GRISHAM, New Mexico
E. SCOTT RIGELL, Virginia JARED HUFFMAN, California
VICKY HARTZLER, Missouri TONY CARDENAS, California
JACKIE WALORSKI, Indiana EARL BLUMENAUER, Oregon
LUKE MESSER, Indiana KURT SCHRADER, Oregon
TOM RICE, South Carolina
ROGER WILLIAMS, Texas
SEAN P. DUFFY, Wisconsin
Professional Staff
Austin Smythe, Staff Director
Thomas S. Kahn, Minority Staff Director
C O N T E N T S
Page
Hearing held in Washington, DC, February 13, 2013................ 1
Hon. Paul Ryan, Chairman, Committee on the Budget............ 1
Prepared statement of.................................... 3
Questions submitted for the record....................... 57
Hon. Chris Van Hollen, ranking member, Committee on the
Budget..................................................... 3
Prepared statement of.................................... 5
Question submitted for the record........................ 58
Douglas W. Elmendorf, Director, Congressional Budget Office.. 6
Prepared statement of.................................... 9
Response to questions submitted for the record........... 58
Hon. Luke Messer, a Representative in Congress from the State
of Indiana, questions submitted for the record............. 58
THE CONGRESSIONAL BUDGET OFFICE'S
BUDGET AND ECONOMIC OUTLOOK
----------
WEDNESDAY, FEBRUARY 13, 2013
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 10:17 a.m. in room
210, Cannon House Office Building, Hon. Paul Ryan [chairman of
the committee] presiding.
Present: Representatives Ryan of Wisconsin, Price, Garrett,
Campbell, Cole, McClintock, Lankford, Black, Flores, Rokita,
Woodall, Blackburn, Nunnelee, Renacci, Rigell, Hartzler,
Walorski, Messer, Rice, Williams, Van Hollen, Schwartz,
Pascrell, Ryan of Ohio, Moore, Castor, McDermott, Lee,
Cicilline, Jeffries, Pocan, Lujan Grisham, Huffman, Cardenas,
Blumenauer, and Schrader.
Chairman Ryan. If Dr. Elmendorf could take his usual and
customary position. Kind of feels like Groundhog Day sometimes,
doesn't it?
Mr. Elmendorf. Yes.
Chairman Ryan. Let me start this hearing, first off, by
welcoming our new members. We have got a lot of new members who
cover a big cross-section of this country, who represent
different areas, different views, different philosophies, and I
just want to first start off by saying how much of a pleasure
it is to serve on this committee. This is the kind of committee
where you get to bring your ideas to the table and air them
out. We have got enormous fiscal challenges ahead of us. We
have got a debt problem that we all acknowledge must be dealt
with. We have got a deficit that needs to be brought down. We
have got an economy that needs growth, and this is one of those
areas, one of those committees where we need to have this
debate.
We are going to be processing legislation. We are going to
be considering alternatives, and I just want to say on behalf
of those of us here on this side of the aisle, we look forward
to engaging our friends on the other side of the aisle in the
collegial way and comity way we have, and it will be a good,
vigorous debate. And this is what the country deserves.
I mean, with that, welcome everybody to today's hearing.
Thanks, again, Dr. Elmendorf, Doug, for coming and testifying,
and I want to thank you for your staff for putting together the
latest budget and economic outlook. We understand you had a bit
of a time crunch given the end-of-the-year episodes that
occurred, and I wanted to say that you didn't miss much of a
deadline, and you put out your baseline and outlook in a fairly
quick form, given the circumstances that you had to contend
with.
I am sorry to say, though, that things don't look good. The
CBO says that our economy will grow by only 1.4 percent this
year. Unemployment will hover around 8 percent this year, and
we will add another trillion dollars to our debt. That is the
news we just received from the CBO.
Further down the road, things get worse. The CBO says we
will add $10 trillion to our total debt by the end of the
budget window. That debt will weigh down our economy like an
anchor. Starting in 2019, the economy will grow by a mere 2.2
percent, much, much lower than the historical average. And when
people can't find jobs, many stop looking altogether for work.
In other words, this report is a warning of what is to come if
we don't get spending under control.
Publicly-held debt will hit 76 percent of GDP at the end of
this year. That is the largest share of debt since 1951. In the
1950s, we paid down our debt. And our economy kicked into high
gear. These days, we still haven't gotten a handle on spending.
Total debt already exceeds 100 percent of gross domestic
product. You see, we are in the danger zone.
Economists from the right and left say that if you get your
total debt at that area, you really go into the danger zone.
Investors might begin to doubt our ability to pay our
obligations. They might demand higher interest rates. As we
know on this committee, if they did that, interest rates across
the country would skyrocket, on mortgages, on credit cards, on
car loans. One estimate says that an interest rate increase of
a single percentage point will cost the average family $400
more each and every year.
In short, we could have a debt crisis. And the result of a
debt crisis would be catastrophic, because unlike during the
financial crisis, government would be unable to borrow more
money. Instead, the only way out to be austerity, which we are
witnessing in Europe; big tax hikes and big spending cuts.
Interest goes up. We literally start losing control of our own
fiscal situation. We become slaves to interest on the debt. We
don't have to look far for examples of a debt crisis in action.
We don't even have to look at Europe. In Central Falls,
Rhode Island, retirees' pensions have been slashed by up to 55
percent. In Stockton, California, a quarter of the police force
has been laid off. If a debt crisis hit this country, the
social safety net would unravel. The most vulnerable would
suffer, and we cannot let that happen. This is our obligation
here in this committee. And if this report shows us anything,
it is that, primarily, spending is the problem. Spending on
Medicare and Social Security is set to double. Spending on
interest is set to quadruple. The CBO expects revenue to double
in the next 10 years, so taxes are going up. Revenue is rising.
It is doubling. But even with the President's tax hikes the
budget never, ever, ever balances. In fact, it doesn't even
come close.
By 2023, the deficit will be nearly $1 trillion, just like
it is today. The President says we need a balanced approach to
closing the deficit, by which he seems to mean one tax hike
after another. But the fact is, mathematically, we can't tax
our way out of this problem. We need to get serious on
spending. And unfortunately, the President has yet to produce a
budget. It was due last week. In violation of the law, it has
yet to be received by Congress. And Senate Democrats haven't
passed a budget in nearly 4 years. Hopefully that will change.
We will offer our budget here in the House on time, next
month, in accordance with the law. We will put our plan up
against the President's, and we will have a healthy debate in
the House over the way forward.
[The prepared statement of Chairman Ryan follows:]
Prepared Statement of Hon. Paul Ryan, Chairman, Committee on the Budget
Welcome, everyone, to today's hearing. Thanks to Dr. Elmendorf for
coming to testify. And thanks to your staff for putting together the
latest Budget and Economic Outlook.
I'm sorry to say: Things don't look good. The CBO says our economy
will grow by only 1.4 percent this year. Unemployment will hover around
8 percent. And we will add another trillion dollars to our debt.
Farther down the road, things get worse. The CBO says we will add
$10 trillion to our total debt by the end of the budget window. That
debt will weigh down our economy like an anchor. Starting in 2019, the
economy will grow by a mere 2.2 percent--much lower than the historical
average. And when people can't find jobs, many will stop looking
altogether.
In other words, this report is a warning of what's to come--if we
don't get spending under control.
Publicly held debt will hit 76 percent of GDP at the end of this
year--the largest share since 1951. In the 1950s, we paid down our
debt--and our economy kicked into high gear. But these days, we still
haven't gotten a handle on spending. Total debt already exceeds 100
percent of GDP.
We're in a danger zone. Investors might begin to doubt our ability
to pay our obligations. They might demand higher interest rates. If
they did, interest rates across the country would skyrocket--on
mortgages, on credit cards, on car loans. One estimate says an
interest-rate increase of a single percentage point would cost the
average family $400 more each year.
In short, we would have a debt crisis. And the results would be
catastrophic--because unlike during the financial crisis, government
would be unable to borrow more money. Instead, the only way out would
be austerity: big tax hikes and big spending cuts.
We don't have to look far for examples of a debt crisis in action.
In Central Falls, Rhode Island, retirees' pensions have been slashed by
up to 55 percent. In Stockton, California, a quarter of the police
force has been laid off. If a debt crisis hit the country, the social-
safety net would unravel. And the most vulnerable would suffer. We
can't let that happen.
And if this report shows us anything, it's that spending is the
problem.
Spending on Medicare and Social Security is set to double. Spending
on interest is set to quadruple. The CBO expects revenue to double in
the next ten years. But even with the President's tax hikes, the budget
never balances. In fact, it doesn't come close. By 2023, the deficit
will be nearly $1 trillion.
The President says we need a ``balanced'' approach to closing the
deficit--by which he seems to mean one tax hike after another. But the
fact is, we can't tax our way out of this problem. We need to get
serious about spending.
Unfortunately, the President has yet to produce a budget--in
violation of the law. And Senate Democrats haven't passed a budget in
nearly four years.
House Republicans will offer their budget--on time--next month. We
will put our plan up against the President's. And we will have a
healthy debate in the House over the way forward.
With that, I yield to the ranking member, Mr. Van Hollen.
Chairman Ryan. With that, I would like to yield to the
ranking member for his opening comments.
Mr. Van Hollen. Thank you, Mr. Chairman. I want to join the
chairman in welcoming Dr. Elmendorf, and thank you and your
team at the Congressional Budget Office for the professional
work that you do.
Just at the outset, let me say with respect to the timing
the President's budget submission. I think all of us who were
part of the last Congress know that we struggled until January
2nd to pass legislation to avoid the fiscal cliff. The result
of that legislation was to make sure that we did not see a
sharp increase in taxes on middle-income Americans, but we
asked higher-income individuals to begin to contribute to
reducing the debt over the long term.
As CBO has said, that that action did help strengthen the
economy. If we had actually gone over the fiscal cliff, we
would be in a world of hurt, but it did take us until January
2nd, to do it, and we didn't know how much revenue would be
coming in either this year or in the next 10 years. So it is
understandable that the President needs a little more time on
the budget.
Look, as the Budget Committee, our challenge is to try and
come up with a blueprint for our country's decisions on
spending and taxes. And while we talk a lot about numbers,
ultimately it should be a reflection of where the American
people are in terms of their values and their priorities. And I
believe, and I hope we share this view, that as we approach the
budget, our number one priority has to be expanding economic
growth, making sure we promote job creation, making sure we
strengthen the middle class so that we don't have an economy
that just works for some folks at the very top, but we have an
economy that works for everybody in terms of rising wages and
rising incomes, and a plan that meets the commitments we have
made to people throughout the country, including our seniors.
That is the overriding goal. And reducing deficits,
especially over the long term, has to be important part of that
but it has to be seen in the context of the overriding goal:
Job creation, strengthening the middle class. And so I hope as
we have these discussions over how we reduce our deficits, what
is the timing, and pace, and target of doing that, we look at
it through the lens of job creation, strengthening of the
middle class. And that should hold true whether we are talking
about the short term, the medium term, or the long term.
Over the long term, there is no doubt, we see rising
deficits, and the challenges we have said before is not whether
we reduce those deficits, but again, the magnitude of the
reduction, the timing of the reduction, and how we do it. And
as the President said last night, we support taking a balanced
approach to that, meaning cuts, and I would just remind my
colleagues that over the last 2 years, including the Budget
Control Act and previous actions, we will reduce spending by
$1.5 trillion by capping discretionary spending.
As a result of the agreement to avoid the fiscal cliff, we
will raise $600 billion in revenue from higher income earners.
If you add up the interest savings on that, that is $2.5
trillion in deficit reduction.
Yes, we have to do more in outyears, but we believe in
order to do it the right way and meet our commitments to our
citizens and preserve economic growth and strength in the
middle class, we have got to make sure we deal with that in a
balanced way.
Now, let me just say in the short term, that means dealing
with the sequester, Mr. Chairman. You cited the fact that CBO
projects 1.4 percent growth. None of us want to see growth that
slow. A full .6 percent of that growth is attributed--of that
lack of growth, is attributed to the sequester. In other words,
if we were to replace the sequester in a balanced way, you
would add .6 percent to growth. And translating that number
into actual jobs, and we will get testimony from Dr. Elmendorf,
but we are talking about hundreds of thousands of jobs lost
this year if we don't replace the sequester.
Now, we, on the Democratic side have in this Congress
proposed a plan to replace the sequester. That $85 billion in
meat-ax cuts, with a mix of cuts, which is in your budget as
well, dealing with ag subsidies, getting rid of the direct
payments, but also saying that we shouldn't be providing tax
breaks to big oil companies, and that we believe we should
apply the Buffett Rule to people making over $2 million a year.
We heard a lot of talk during the last election from both
candidates and all candidates about all of the tax breaks in
the Tax Code. Well, we should get rid of some of those, and we
should get rid of some of those for the purpose of deficit
reduction in a balanced way. And that is what our sequester
replacement plan does in the short term, and frankly, that is
what it would do in the long term. So we hope we can have an
opportunity to have an up-or-down vote, Mr. Chairman, on the
plan that we have put forward. We put it forward for a vote, at
least two or three times now. We have going to be in the Rules
Committee later today asking for a vote on that proposal that
will save hundreds of thousands of jobs and prevent this
disruption. And I hope we can have an opportunity, as you say,
just to have a free flow of debate, and ultimately a vote and
let the chips fall where they may. Thank you, Mr. Chairman.
[The prepared statement of Mr. Van Hollen follows:]
Prepared Statement of Hon. Chis Van Hollen, Ranking Member,
Committee on the Budget
Thank you, Mr. Chairman. I want to join the Chairman in welcoming
Dr. Elmendorf, and thank you and your team at the Congressional Budget
Office for the professional work that you do.
Just at the outset, let me say, with respect to the timing of the
President's budget submission, I think all of us who were part of the
last Congress know that we struggled until January 2nd to pass
legislation to avoid the fiscal cliff. The result of that legislation
was to make sure that we did not see a sharp increase in taxes on
middle income Americans, but we asked higher income individuals to
begin to contribute to reducing the debt over the long term.
As CBO has said, that action did help strengthen the economy. If we
had actually gone over the fiscal cliff, we'd be in a world of hurt.
But it did take us until January 2nd to do it, and we didn't know how
much revenue would be coming in, either this year or in the next ten
years. So, it's understandable that the President needs a little more
time on the budget.
Look, as the Budget Committee, our challenge is to try and come up
with a blueprint for our country's decisions on spending and taxes.
And, while we talk a lot about numbers, ultimately it should be a
reflection of where the American people are in terms of their values
and their priorities.
And I believe, and I hope we share this view, that as we approach
the budget, our number one priority has to be expanding economic
growth; making sure we promote job creation; making sure we strengthen
the middle class, so that we don't have an economy that just works for
some folks at the very top, but we have an economy that works for
everybody in terms of rising wages and rising incomes; and a plan that
meets the commitments we've made to people throughout the country,
including our seniors.
That's the overriding goal. And reducing deficits, especially over
the long term, has to be an important part of that, but it has to be
seen in the context of the overriding goal--job creation, strengthening
the middle class. So I hope as we have these discussions over how we
reduce our deficits, what's the timing and pace and target of doing
that, we look at it through the lens of job creation, strengthening the
middle class. And that should hold true whether we're talking about the
short term, the medium term, or the long term.
Over the long term, there's no doubt we see rising deficits. And
the challenge, as we've said before, is not whether we reduce those
deficits, but, again, the magnitude of the reduction, the timing of the
reduction, and how we do it. And as the President said last night, we
support taking a balanced approach to that, meaning cuts--and I would
just remind my colleagues that over the last two years, including the
Budget Control Act and previous actions, we will reduce spending by
$1.5 trillion by capping discretionary spending.
As a result of the agreement to avoid the fiscal cliff, we will
raise $600 billion in revenue from higher-income earners. If you add up
the interest savings on that, that's $2.5 trillion dollars in deficit
reduction.
Yes, we have to do more in the out years, but we believe that in
order to do it the right way and meet our commitments to our citizens,
and preserve economic growth, and strengthen the middle class, we've
got to make sure to deal with that in a balanced way.
Now, let me just say that in the short term, that means dealing
with the sequester, Mr. Chairman. You cited the fact that CBO projects
1.4 percent growth. None of us want to see growth that slow.
A full 0.6 percent of that lack of growth is attributed to the
sequester. In other words, if we were to replace the sequester in a
balanced way, you would add 0.6 percent to growth, and translating that
number into actual jobs--and we'll get testimony from Dr. Elmendorf--
but we're talking about hundreds of thousands of jobs lost this year if
we don't replace the sequester.
Now we on the Democratic side have, in this Congress, proposed a
plan to replace the sequester--that $85 billion in meat ax cuts--with a
mix of cuts, which is in your budget as well, dealing with ag
subsidies, getting rid of direct payments--but also saying that we
shouldn't be providing tax breaks to big oil companies. And we believe
that we should apply the Buffett Rule to people making over $2 million
a year.
We heard a lot of talk during the last election from both
candidates--and all candidates--about all the tax breaks in the tax
code. Well, we should get rid of some of those, and we should get rid
of some of those for the purpose of deficit reduction in a balanced
way. And that's what our sequester replacement plan does in the short
term, and frankly, that's what it would do in the long term.
So, we hope we can have an opportunity to have an up or down vote,
Mr. Chairman, on the plan that we've put forward. We put it forward for
a vote at least two or three times now--we're going to be in the Rules
Committee later today asking for a vote on that proposal that will save
hundreds of thousands of jobs and prevent this destruction. And I hope
we can have an opportunity, as you say, just to have a free flow of
debate and ultimately a vote, and let the chips fall where they may.
Thank you, Mr. Chairman.
Chairman Ryan. Thank you. I would love to begin the debate
right now, but we have a hearing to get into. So, Dr.
Elmendorf, the floor is yours.
STATEMENT OF DOUGLAS W. ELMENDORF, DIRECTOR, CONGRESSIONAL
BUDGET OFFICE
Mr. Elmendorf. Thank you, Mr. Chairman, Congressman Van
Hollen, and to all members of the committee. I appreciate the
opportunity to be here today, and to discuss with you CBO's
outlook for the budget and the economy over the next 10 years.
Our analysis shows that the country continues to face very
large economic and budget challenges. Let me discuss the
economy first and then I will turn to the budget.
We anticipate that economic growth will remain slow this
year because the gradual improvement we see in underlying
economic factors will be offset by a tightening of Federal
fiscal policy scheduled under current law. The good news is
that the effects of the financial and housing crisis appear to
be gradually fading. We expect an upswing in housing
construction, rising real estate and stock prices, and
increasing availability of credit will help to spur a virtuous
cycle of faster growth in employment, income, consumer
spending, and business investment over the next few years.
However, several policies that will help to bring down the
budget deficit will also represent a drag on economic activity
this year. The expiration of the 2 percentage point cut in the
Social Security payroll tax, the increase in tax rates on
income above certain thresholds, and the cuts in Federal
spending scheduled to take effect next month, will mean reduced
spending by both households and the government. We project an
inflation-adjusted GDP will increase by about 1.5 percent in
2013, but it would increase roughly 1.5 percentage points
faster were it not for that fiscal tightening.
Under current law then, we expect the unemployment rate
will stay above 7.5 percent through next year. That would make
2014 the sixth consecutive year with unemployment so high, the
longest such period since the 1930s. We expect that growth in
real GDP will pick up after this year to about 3.5 percent per
year in 2014, and the following few years. But the gap between
the Nation's GDP and what it is capable of producing on a
sustained basis, the economists refer to as potential GDP, will
still not close quickly. Under current law, we expect output to
remain below its potential level until 2017, nearly a decade
after the recession started in December 2007.
The Nation has paid and will continue to pay a big price
for the recession and slow recovery. We estimate that the total
loss in output relative to the economy's potential between 2007
and 2017 will be nearly equivalent to half of the total output
produced in the country last year.
Let me turn then to the budget. Under current laws, the
Federal budget deficit will shrink in 2013 for the fourth year
in a row, and an estimated $845 billion, the deficit would be
the first in 5 years below $1 trillion, and at 5.25 percent of
GDP, only about half as large relative to the size of the
economy as the deficit was in 2009. Our projections, based on
current law, show deficits continuing to fall over the next few
years before turning up again in the second half of the decade,
and totaling nearly $7 trillion over the decade as a whole.
Federal revenues are projected to reach 19 percent of GDP
in 2015 and beyond, because of both the expanding economy and
schedule changes in tax rules. That 19 percent figure compares
on average of about 18 percent over the past 40 years. At the
same time, Federal spending will fall relative to the size of
the economy over the next several years, and then rise again.
The decline can be traced to the caps on discretionary funding
and a drop-off in spending attempts to go up when the economy
is weak, like unemployment benefits. But later in the decade,
the return of interest rates to more normal levels will push up
interest payments to nearly their highest share of GDP in 50
years. And throughout the decade, the aging of the population,
a significant expansion of Federal health care programs, and
rising health care costs per person, will push up spending on
the largest Federal programs.
By 2023, spending reaches about 23 percent of GDP in our
projection compared with the 40-year average of about 21
percent. What does this mean for Federal debt? We project the
debt held by the public will reach 76 percent of GDP this year,
the largest percentage since 1950. And under current laws, we
project the debt in 2023 will be 77 percent of GDP, far higher
than the 39 percent average of the past 40 years, and it will
be on an upward path. Such high and rising debt relative to the
size of the economy is a significant concern for several
reasons: First, high debt means that the crowding out of
capital investment will be greater, that you will have less
flexibility to use tax and spending policies to respond to
unexpected challenges like a recession, or a war, and that
there will be a heightened risk of a fiscal crisis in which the
government would be unable to borrow at affordable interest
rates.
Second, debt would be even larger if current laws were
modified to delay or undo scheduled changes in policies. For
example, if lawmakers eliminated the automatic spending cuts
scheduled to take in effect in March, but left in place the
original caps from the Budget Control Act, if they prevented
the sharp reduction in Medicare's payment rates for physicians
scheduled to occur next January, and extended the tax
provisions that are scheduled to expire, and if no offsetting
changes were made, then budget deficits would be substantially
larger than our baseline projections, and debt held by the
public would rise to 87 percent of GDP by 2023, rather than 77
percent under current law.
Third, debt might also be larger than in our projections,
because even the original caps on discretionary funding in the
Budget Control Act would reduce such spending to just 5.8
percent of GDP in 2023, a smaller share than for any year in at
least the past 50. Because the allocation of discretionary
funding is determined, as you know, through annual
appropriation acts, you and your colleagues have not yet
decided which specific government services and benefits will be
constrained or cut to meet those caps, and doing so might be
quite difficult.
Fourth, projections for the 10-year period covered in this
report do not fully reflect long-term budget pressures. Because
of the retirement of the baby-boom generation and rising health
care costs, a wide gap exists between the future costs of the
benefits and services that people are accustom to receiving
from the Federal Government, especially in the form of benefits
for older Americans, and the tax revenue that people have been
sending to the government.
It is possible to keep tax revenues at their historical
average percentage of GDP, but only by making substantial cuts
relative to current policies in the large benefit programs that
aid a broad group of people at some point in their lives.
Alternatively, it is possible to keep the policies for those
large benefit programs unchanged, but only by raising taxes
substantially for a broad segment of the population. Deciding
now what combination of policy changes to make to resolve the
budget imbalance would allow for gradual implementation of
those changes which would give households and businesses time
to adjust their behavior. Thank you.
Chairman Ryan. Thank you, Dr. Elmendorf.
[The prepared statement of Douglas Elmendorf follows:]
Chairman Ryan. Let me get into the debt itself. We had the
State of the Union address last night, and you know, as we all
do, we go to the microphones and give our play-by-play analysis
of what we thought of the speech and what we liked and what we
didn't like. One thing stood out that gave me a real cause for
concern. I heard it just with Mr. Van Hollen's opening
statement, which gives me very big cause for concern, which it
seems as if they think the heavy lifting on debt reduction,
deficit reduction is behind us, as we have just got a little
bit left and then we are done. The notion that we have already
got $2.5 trillion of deficit reduction taking care of, it is in
the bank, we are not much farther to go to finish the job. This
calculation, this $2.5 trillion of debt reduction does not
count the spending that took place during that time. It doesn't
count the stimulus spending, $831 billion. It doesn't account
for the first payroll tax holiday, $111 billion. It doesn't
account for the second payroll tax holiday $89 billion. It
doesn't account for the multiple unemployment extensions. It
doesn't account for the 24 percent increase in non-defense
discretionary spending that occurred in the first 2 years of
the administration. It doesn't account for the disaster
spending that has taken place annually, or the Sandy
supplemental. It doesn't account for the debt servicing of all
of that additional spending.
You wash it out, you net it out, it is about $500 billion
roughly of deficit reduction; not $2.5 trillion. But when you
hear such projections which ignore the spending that occurred
at the same time, I really worry that part of our government
here, two-thirds of it, you know, the Senate and the White
House, and our friends over on the other side of the aisle, are
deluding themselves into thinking this is taken care of.
Look, you say in your own report here, publicly held debt
has doubled from 36 percent of GDP at the close of 2007, to 73
percent on 2012, on page 3, 77 percent by 2023. I guess this is
your new alternate fiscal scenario meaning doc fix, all of the
other things you think Congress will do based on, you know,
reasonable assumptions. We could go as high as 87 percent of
GDP of publicly-held debt. Total debt is already above 100
percent of GDP. If you could bring up chart one.
Here is the question I have. The green is what you said
revenues are historically, about 18.3 percent. The blue line
are all of the tax increases the President has supported,
endorsed, the loophole closers Mr. Van Hollen talks about, much
of this has already been enacted, but the fiscal cliff deal
enacted a good portion of the blue, the revenues the President
is calling for. The red are your projections on where spending
is going.
So even if we got every tax increase that the President has
called for, we are not even scratching the surface. We are not
even getting close to fixing this problem. And so the concern I
have is a couple of things: What happens if we don't get this
under control? What does a debt crisis look like? What happens
to families? What happens to a Nation if our debt continues on
this burden, if we go to where your alternative fiscal scenario
goes, or where your baseline projection goes, if we don't
actually turn this around, what happens? That is question
number one.
Question number two is, and I am going to ask you this in
writing, give me some different interest rates scenarios. What
happens if interest rates rise faster than you are projecting?
What happens to our ability to control our fiscal situation?
What happens to our economy?
Mr. Elmendorf. So Mr. Chairman, let me just quickly clarify
two points on what you said so we can understand. We have not
yet updated our long-term budget projection. I presume this
slide is our new projections for the coming decade and your
extrapolation beyond that, but it certainly is the case in our
long-term outlook last year, and I presume will be true in our
long-term outlook this year, that spending, particularly on the
large health care programs and on Social Security, will
continue to rise as a share of the economy over time driven
most importantly by the aging of our population, and the rising
number of eligible beneficiaries, and also due to other factors
as well.
The second point to clarify is that alternative fiscal
scenario is not meant to be a projection of what actually you
and your colleagues will do. As you know, it is a projection of
what current policies would cost; in fact, we all presume that
you will make some changes in policies over the decade, but it
is an additional benchmark that many of you have found helpful
in the past in addition to our standard presentation of what
would happen under current law.
Chairman Ryan. Because you have a new AFS baseline, what is
the basic assumption, because we had some new things that
happen that deal with the fiscal cliff.
Mr. Elmendorf. So people understand, our basic projections
follow current law. That assumes, for example, now, that the
tax provision scheduled to expire at the end of this year, many
of which are routinely extended, our current law projection
assumes they will expire. In our alternative scenario, we
extend all of those expiring tax provisions. Current law
includes a cut in Medicare's payments to doctors at the end of
this year. Congress has routinely pushed off that cut and made
other changes in health care policy along the way.
Our alternative scenario, continues, extrapolates the
current payment rates to physicians. And current law includes
the sequester, and many Members of Congress have argued that
they would like to do something different instead of that. So
our alternative scenario takes away the sequester, but leaves
in place the original caps that Congress agreed to in August of
2011. So under the alternative scenario, our total debt rises
by about $2.5 trillion more over the coming decade than under
the current law baseline projections.
Mr. Chairman, you asked what happens if debt rises, stays
high and rises, and there are some costs that I think are quite
predictable, and other risks that are created. Over time, not
under the current economic conditions, but under the conditions
that we expect for later in the decade of nearly full
employment in the economy, at that point in time, that large
amount of debt will crowd out some private investment that
would then raise wages and incomes. And the more of that, the
higher the debt is, the more of that investment is likely to be
crowded out, and the greater the depressing effect on wages and
incomes.
Economists have models to capture that and we report those
sorts of estimates to you. But there are also risks that are
involved. Some countries that have had very high levels of
debt, and have not communicated or not persuaded their
potential lenders that they have a plan for getting that under
control, have faced a fiscal crisis, which we defined as a
point at which the government is unable to borrow at affordable
rates.
Currently, our government is not at all in that position.
Currently interest rates, Treasury interest rates are
extraordinarily low. Our projection calls for a normalization
of interest rates as the economy strengthens, as the Federal
Reserve stops pushing so hard to keep interest rates low. We
have a normalization of interest rates in our basic
projections, but with debt high and rising, there is a greater
risk that potential buyers of government debt will get spooked
and will be unwilling to do so at the regular level of interest
rates.
If interest rates were a percentage point higher than we
project over the entire decade, then the Federal Government's
interest costs would be about $1.1 trillion higher. If interest
rates were a percentage point lower than we project, then the
Federal Government's interest payments would be about $1.1
trillion lower. The point is, that given the large amount of
debt the Federal Government has and will have under current law
for the coming decade, fairly small movements in interest rates
can have fairly large effects on government interest payments.
Chairman Ryan. What is your normalized rate assumption? I
don't recall off the top of my head.
Mr. Elmendorf. So we are projecting that short-term
interest rates rise to about 4 percent and that longer-term,
10-year Treasury note rates rise to 5.25 percent. Those rates,
after adjusting for inflation, are a little above inflation-
adjusted interest rates over the past several decades,
reflecting, in our view, the effects of a higher level of debt
relative to what we have experienced in past decades.
Chairman Ryan. So for the comity of the committee, Mr. Van
Hollen and I are limiting ourselves to 10 minutes. We don't
always do that. We have a lot of people here, so I will be
brief only to say that it seems we have this window that is
beginning to narrow on us. As you mentioned, America is right
now, with respect to the bond markets, the port in the storm,
the safe haven. We are the world's reserve currency. That gives
us a privilege. That gives us time. But if we fritter this time
away, if we don't deal with the core problem, which is spending
no matter what you try to do on revenues, then we will have
lost this opportunity we have to get our fiscal house in order
while we have low interest rates.
The other problem, as we see it, is growth. If we keep
chasing higher spending with higher taxes, we will sacrifice
growth. The best way is to get people back to work, in good
jobs, with good wages, paying taxes, and getting spending under
control. And so when we talk about taxes and tax reform, this
is something for the Ways and Means Committee, or something we
will discuss here, loopholes are part of tax reform. Closing
loopholes, which is what we proposed for years, is a necessary
pay-for to get tax rates down, to have a globally competitive
Tax Code, to help businesses, to create jobs, to get people
back to work. And if we used loopholes to chase higher
spending, then we are foregoing tax reform and missing our
opportunity for economic growth. That I just want to make very
clear for the record because I think we will hear a lot of
political rhetoric to the contrary, and with that, I want to
yield to Mr. Van Hollen for his 10 minutes.
Mr. Van Hollen. Thank you, Mr. Chairman, and again,
welcome, Dr. Elmendorf. First, just a little bit on the math.
The chairman pointed out that while we will have $1.5 trillion
in cuts over the next 10 years as a result of the spending
caps. There were some other one-time spending measures.
Included in those spending measures, actually, the payroll tax
cut, which was probably the biggest single item in that issue,
and there was actually agreement that given tough economic
times, it was important to provide a payroll tax relief. I
actually think we should have phased that out rather than
having gone cold turkey, but the point is, a big chunk of that
number had to do with lost revenue from a payroll tax cut that
was supported by a great majority in this body.
As I said in my opening remarks, I think that our overall
objective here in the short, medium, and long term needs to be
expanding the economy, growing jobs, and having a strong middle
class. So it is absolutely true that especially as the economy
recovers, if you continue to have high deficits, it will
squeeze out that private investment and put upward pressure on
interest rates. So in order to make sure we have good long-term
economic growth, we have to grapple with the deficit, that just
brings us back to the question of how we deal with the deficit,
and as Dr. Elmendorf pointed out, you can have sort of two
categorical ways. One, you could say, well, we are not going to
do any revenue. We are going to do it all in cuts, and as you
pointed out, you can do it all on, you know, revenue and no
cuts.
Both of those lead and argue to bad results. You can't
raise revenue enough realistically to cover all of those costs,
but cutting, as Dr. Elmendorf said, means undermining important
commitments that we have made when it comes to retirement,
health, and security for our seniors.
So again, the question is how we deal with those deficits.
Now, let me get back to the sequester issue because that is
looming right now. Could you tell me, Dr. Elmendorf, in terms
of the negative economic impact of the sequester, the .6
percent, what does that translate into in terms of lost jobs?
Mr. Elmendorf. So our estimate is, as the Congressman says,
that the sequester alone will reduce GDP growth this year by
0.6 percentage points, lowering the level of GDP at the end of
the year by that 0.6 percent. We think that would reduce the
level of employment at the end of the year by about 750,000
jobs.
Mr. Van Hollen. Seven hundred and fifty thousand jobs
between now at the end of this fiscal calendar year 2013,
right?
Mr. Elmendorf. Yes, Congressman.
Mr. Van Hollen. That is a whole lot of jobs, obviously, and
we should be working overtime to prevent that kind of job loss.
Now, if you were to replace the deficit reduction through that
austerity program, the meat-ax cuts to the sequester, with a
plan that accomplished the same amount of deficit reduction,
spread over the 10-year period, you would not have that big hit
on jobs, isn't that right?
Mr. Elmendorf. That is right, Congressman.
Mr. Van Hollen. Now, we have also heard a lot about the
impact as a result of the defense cuts, and I should point out,
this is not--it is the Congressional Budget Office's analysis,
our analysis. The Republican leader, Mr. Cantor, had it exactly
right last September on the floor of the House when he said
that if we allowed that sequester to take place, ``unemployment
would soar.'' It would set back progress on the economy. And he
cited an estimate that the sequester would cost 200,000 jobs in
the State of Virginia alone. That was if the sequester for the
full year went over. We were able to prevent the sequester for
the first 2 months through a balanced approach, I should say, a
combination of cuts and revenue. That should be the model going
forward and that is the model that we have applied to prevent
the sequester.
Now, just to be clear, since there has been a lot of
attention focused on the jobs lost because of defense cuts, the
cuts in the non-defense as a result of the sequester, on a
dollar-for-dollar basis, does that result in the same amount of
jobs lost?
Mr. Elmendorf. The effects of cuts in defense spending and
non-defense spending will be quite similar dollar for dollar.
The precise timing of the economic effects depends on a timing
in which defense spending and non-defense spending occurs. So
in some circumstances, there could be small differences. But
basically, Congressman, you are right. If the government is
paying people to build battle ships, or paying people to build
other sorts of equipment, or structures, then those will have
comparable effects, dollar for dollar, on the economy, on
output, and on jobs.
Mr. Van Hollen. Right. I have never understood the logic as
to how cuts to defense, meaning you are not building as many
tanks or battleships somehow costs jobs, but cuts to other
government spending somehow do not cost jobs. Obviously, when
you investment money to build roads and bridges and other
transportation systems, you are putting people to work doing
things that are productive for our economy.
If it is scientists at NIH or other people around the
country, those are grants that are being spent to try and find
treatments and cures for lifesaving diseases. It would be
absolutely counterproductive in terms of the long-term
competitiveness, let alone the health of our people, to have
those kind of cuts take place. And on top of that, there is
long-term negative impacts. You have got the job loss, 750,000
jobs between now and the end of the month.
Let me just say something, Dr. Elmendorf, about the tax
reform. I don't know if you have done a recent estimate of the
amount of tax expenditures in the tax code. What is your most
recent estimate, and----
Mr. Elmendorf. So we, in last year's outlook which was a
longer document since we had a little more time, we had an
extended discussion of tax expenditures. We have not updated
that this year, but the staff of the Joint Committee on
Taxation has released a new estimate, I believe, of tax
expenditures, or certainly they are working on one. And tax
expenditures amount to a very large amount of money, and I
think many economists agree that they are really best viewed as
a form of government spending because they are directed at
particular people, or entities, or designed to subsidize
particular activities, are very much analogous to the way that
government spending is often directed at particular people,
remedies, or designed to subsidize particular activities.
So it is essentially a large component of spending by the
Federal Government, even though it is recorded essentially as
lost revenue on the revenue side of the budget.
Mr. Van Hollen. That is right. I mean, it is spending
through the Tax Code by saying to certain interest, sometimes
based on policies we agree, there is consensus on, sometimes
not, that that is revenue that will not come into the Treasury
to help reduce the deficit. And the chairman pointed out that
we just, you know, we passed the $600 billion tax increase
focused on folks at the very high end of the income scale, but
as the President pointed out in the talks with the Speaker, his
goal was actually to achieve $1.2 trillion revenue, which I
would point out to our colleagues is less revenue imbedded in
that plan than in the bipartisan Simpson-Bowles plan which said
that we should do tax reform, but in addition to reducing the
rates, we should have a significant amount go to deficit
reduction.
In fact, the bipartisan Simpson-Bowles Commission Report
would have a lot more revenue coming in than the President has
proposed. I just want to make that clear to our colleagues. I
would also point out that Speaker Boehner, during those
discussions with the President, said he didn't want to increase
rates, but he could raise $800 billion by closing these tax
loopholes and breaks and getting rid of these tax expenditures.
Those are all still there. None of the actions we have
taken eliminate those tax breaks and tax expenditures that the
Speaker was talking about, that all of the candidates in the
past presidential election talked about, and so if we agree,
Mr. Chairman, that those are just different forms of spending
in the Tax Code, it seems to me we should be willing to help
eliminate some of those tax expenditures for the purpose of
reducing the deficit in a balanced way.
And just to be clear, what our colleagues to date have said
is, they are not willing to do that. They are not willing to
eliminate any of those tax expenditures, spending in the Tax
Code for the purpose of reducing the deficit. And we think that
is important as part of a balanced plan, combined with targeted
cuts, reforms, going forward.
A last point I would say, is if you look at the chairman's
chart, there is no doubt, there is no doubt, we have to deal
with this issue. But as you know, you can pass changes to laws
in this 10-year window that have a very important impact in the
outyears, which is, of course, what your budget did last time.
Arbitrarily, trying to squeeze all of that into the 10-year
window, which apparently was what the Speaker had agreed to do
as part of extending the 3-month debt ceiling, is not good
economics. That is politics, and so I would hope that as we go
through this process, we keep an eye on the point I raised at
the beginning. What is the impact on the economy, short term,
middle term, long term? What is the impact on middle class and
jobs? Thank you, Mr. Chairman.
Chairman Ryan. You bet. I would say balancing the budget is
good economics, but I guess we just disagree on that. Dr.
Price.
Mr. Price. Thank you, Mr. Chairman. Let me follow up
quickly on that. Mr. Director, welcome back to the committee.
We appreciate your insight, your input. Is it better to have a
balanced budget than not?
Mr. Elmendorf. Well, Congressman, I think that depends on
what your values are. The reason that CBO doesn't make
recommendations about budget policy, is because the course that
you and your colleagues choose depends not just on the sort of
analysis we can provide, but on your judgments.
Mr. Price. The level of debt that you described, 76 percent
of public debt held right now, 87 percent going under, I guess,
your alternative fiscal scenario, I suspect you would agree
that a level of 87 percent is not as wise as a level of 76
percent given the propensity for a fiscal crisis at 87 being
higher than 76, is that right?
Mr. Elmendorf. Yes, we certainly agree that the higher debt
has higher expected costs and higher risks than lower debt
would have.
Mr. Price. And I would concur. I want to touch briefly on
the fiscal cliff, the $600 billion increase in taxes. Would
that--do you recall what the spending reductions were in that
legislation, the net spending reductions?
Mr. Elmendorf. Well, so Congressman, remember that the
way--the cost estimate that we produced and that we produced
for all bills, is relative to current law.
Mr. Price. Yes.
Mr. Elmendorf. So our cost estimate showed that legislation
as a very large tax cut, not the tax increase that you just
described.
Mr. Price. Yes.
Mr. Elmendorf. There were only small changes in spending. I
don't remember how they netted out. There was an extra,
additional spending in Medicare, but cutbacks in other health
care spending. The sequester was deferred. That was paid for
partly, as you know, through other spending reduction.
Mr. Price. Minimal spending reductions in the fiscal cliff
bill. So that this balanced approach that our friends on the
other side of the aisle talk about is balanced until it isn't.
And that is what we saw with the fiscal cliff.
I want to touch on the whole issue of revenue. Your report
cites that revenue has returned essentially in 2012 to the 2008
levels, or higher than the 10-year average, basically. Is that
accurate?
Mr. Elmendorf. That may well be right. I am sorry, I don't
have all of that history in front of me, Congressman.
Mr. Price. I think that is correct. The revenue of the
Federal Government now has returned to higher than the 10-year
average.
That being the case, and if we look at the deficit in 2008
at about $450 billion, and the deficit in 2012 at $1.3
trillion, with revenue returning essentially to 2008 level,
then isn't it true that the thing that is driving the deficit
to a greater degree at this point is not that the revenues are
lower than they have been, but the spending is higher than it
has been. Is that an accurate statement?
Mr. Elmendorf. Well, certainly in dollar terms,
Congressman, you are right that spending is going up very
sharply. I think the problem that you and your colleagues face
is that from the perspective of many Americans who are now
starting to retire in the Baby-Boom Generation, there are
benefits that they are expecting individually. The fact that
there are many more of them than there were beneficiaries 10
and 20 years ago, doesn't appear to them as an excess of the
benefits they are getting, but it turns out, you take a given
benefit and multiply it by a lot more people----
Mr. Price. Yes.
Mr. Elmendorf [continuing]. That the aggregate spending
goes up, and that is, I think, the challenge you and your
colleagues face is how to respond to that.
Mr. Price. Yes, it is indeed, and we look forward to
working through a budgetary process that will save and
strengthen and secure those programs as opposed to moving in
the direction of essentially lopping off funding for those
programs at the expense of those beneficiaries. That is a
debate that we will have.
I want to touch again back on the 76 percent, 87 percent.
Your alternative fiscal scenario has really been more, in the
past has really been more accurate compared to reality, is that
a true statement?
Mr. Elmendorf. I suppose that is true. I mean, the single
biggest difference, as you know, between that and the baseline,
had been the extension of the expiring tax provisions and in
fact, the Congress chose about a month ago to extend most of
those expiring tax provisions. In that sense, our current
baseline looks more like our last alternative scenario, than
like our last baseline.
Mr. Price. Right. So if past is prologue, then it is more
likely that we will be closer to 87 percent public debt held as
opposed to 76 percent? And if that is----
Mr. Elmendorf. I think if you and your colleagues let
current policy stand, that would be the case. Whether you will
or not is the issue that you are debating.
Mr. Price. The question I want to get to is, when a fiscal
crisis occurs, when a debt crisis occurs, what is the
triggering mechanism? What happens that results in that, the
inability to borrow at an affordable rate as you described it?
Mr. Elmendorf. I think a loss of confidence in the
government's ability to manage its affairs, and to pay the
interest on the debt makes potential investors more concerned,
and makes them expect higher-risk premiums.
Mr. Price. Which is not a predictable moment in time, is
that accurate?
Mr. Elmendorf. That is right, Congressman.
Mr. Price. Thank you.
Chairman Ryan. Ms. Schwartz.
Ms. Schwartz. Thank you, and welcome to a new budget cycle.
Pleased to be back. And these are really keen and important
debates that we are having for our country and I do want to
thank you, Dr. Elmendorf, for being here and outlining where we
are. You did point to some positive news. I appreciate that,
the fact that we are in recovery, that you are seeing some very
positive signs in economic growth in the housing sector, you
pointed out. And that, of course, you have heard already the
disagreement that is making it very difficult to find a way to
actually reduce the deficit in a fair and balanced way that
strengthens the middle class, that grows jobs, that does not
hurt this fragile economic recovery. We have seen economic
growth. We saw the arguments at the end of last year that saw a
contraction in the economy for the first time in 3 years, was
it?
Mr. Elmendorf. Yes.
Ms. Schwartz. So you know, that is significant. The debates
we have here have an effect. And of course, we believe that
this is not just politics. There are very different economic
theories about how we grow this economy, how we strengthen the
middle class, how we actually are economically competitive in a
global marketplace, and how we meet our obligations, not only
to our children and our future, but the obligations that you
and I have talked a good deal about, and we talked about on
this committee, and is that our seniors. And that is what I
wanted to ask you about.
One of the things that we have seen again, positive news
this week, you pointed it out, CBO has pointed it out, the
Department of Human Services pointed it out, and some private
sector institutes have pointed it out, that, in fact, we have
seen slower growth in the costs of health care, in both the
private sector and in the public sector----
Mr. Elmendorf. Yes.
Ms. Schwartz [continuing]. That is quite significant. When
we came in here, we had double-digit growth in costs in the
health care sector for a decade, 100 percent increase and more
in both the private sector, and particularly in the private
sector, more so than in the public sector, but in Medicare and
Medicaid, I think that some of us would contend that we have
seen these delivery system reforms and a very serious
commitment that we have made to really push the health care
system, both doctors and hospitals, to give us better value for
our taxpayer dollar, to improve the quality of health care for
our seniors, to deliver health care in a much more cost
efficient way, and as a result, save taxpayer dollars and
improve the quality of our seniors' health care.
So particularly given the demographic problems around
Medicare, the baby boomers, 10,000 more seniors a day. It is
serious business. But could you speak to the fact that you have
found, again, we have seen other reports, that have said we
have seen very good reduction. Three percent growth rate is
really quite something, when we have seen 10 percent a year in
Medicare.
I will ask you to confirm that, but I will also ask that as
we move, which is the intention, we have legislation to do it
as well, which is to move the way we pay physicians in this
country, not just repeal SGR, but actually change the way we
reimburse all physicians under Medicare, that would require
them to pick a model that does save money and improve quality,
and outcomes for our seniors, has the potential, and I hope can
you actually document that we have said all physicians in this
country move in that direction, the potential cost savings and
cost containment, not only in the public sector, but also in
the private sector.
Mr. Elmendorf. Yes. Let me first quickly emphasize the
point you made about the effects of the retirement of the Baby
Boom generation, because the numbers are really quite striking.
We think that, by 2023, there will be roughly 40 percent more
beneficiaries of Social Security and Medicare than there were
last year, 40 percent more people roughly. And that has a
tremendous effect, obviously, on the overall cost of those
programs.
Ms. Schwartz. We made a commitment to those seniors that
many of us expect us to meet.
Mr. Elmendorf. Your point, Congresswoman, about health care
cost growth has been absolutely right. There has been a market
slowing in Medicare in Part A, that mostly pays for hospital
care, and Part B, that pays for physicians, and part D, that
pays for drugs, and in Medicaid, and in the private sector in
the rate of health cost growth. We and other analysts think
that part of that is because of the recession and the slow
growth of income and loss of wealth that has reduced people's
willingness to pay money for health care. But we think that a
significant part of it is in fact structural. The crucial
question is whether those structural changes are transient or
will be enduring. And that is a topic that we are giving a lot
of thought to and talking with outside experts. I think the
right way to summarize the consensus is that we don't know.
Ms. Schwartz. If we were to pass legislation this year,
before the SGR expires or would go into effect again and see
that kind of cuts, if we actually passed legislation, which
honestly there has been really serious and good discussions
between Democrats and Republicans on, on my bill, on an
innovative way to pay physicians under Medicare, would that
give you the tools to be able to say this is actually going to
happen, this is the window when it is going to happen, this is
the direction we are moving in?
Mr. Elmendorf. I think there is widespread support,
Congresswoman, for the idea that we should be paying health
care providers in a different way than we are paying them
today. And I think widespread agreement that a shift in how we
pay providers can improve both the quality of care and keep
costs down. Exactly what changes in Federal law will lead to
what particular outcomes is a very uncertain business. And we
look forward to continuing to work with you on that.
Chairman Ryan. Thank you.
Mr. Campbell.
Mr. Campbell. Thank you, Mr. Chairman.
And good to see you again, Dr. Elmendorf. So large and
persistent deficits like we have over the long term are a bad
thing for economic growth, job creation, and potentially have
the debt crisis risk that you discussed, right?
Mr. Elmendorf. Yes, Congressman.
Mr. Campbell. Okay. But the solution to that, which is some
kind of fiscal contraction, be it either through tax increases
or spending reduction, can cause a reduction in short-term
economic growth and/or job creation.
Mr. Elmendorf. Yes, exactly, Congressman.
Mr. Campbell. So we are in a bit of a pickle.
Mr. Elmendorf. Yes, Congressman.
Mr. Campbell. So the question is, how do we get out of this
thing? Now, in Europe, Greeks and Spanish and Italians waited
too long, and they had to do a substantial fiscal contraction
in a very short period of time, which resulted in extremely
high unemployment and large contraction in their GDP. Is that
correct?
Mr. Elmendorf. Yes. Other factors have been at work as
well, Congressman, but yes. We think that the sharp fiscal
austerity in some countries in Europe have contracted their
economies.
Mr. Campbell. Right. If we were to decide to try and fix
this whole budget deficit in the next 2 years, or if we were
forced to do it by debt crisis, that would plunge the country
into recession; unemployment would go up worse than it is
today; bad things.
Mr. Elmendorf. Yes, Congressman.
Mr. Campbell. Okay. So we don't want to do that. But if we
ignore it, or we only deal with just a little bit of it, and
the deficits go on as you show in the baseline or even worse in
the alternative scenario, then we risk never getting to our
potential growth and potentially have that debt crisis where a
few years from now we would have to make that kind of overnight
contraction.
Mr. Elmendorf. Yes, Congressman, that is a risk,
absolutely.
Mr. Campbell. So it makes a whole lot of sense to try and
solve this thing in not too short a time and not too long a
time, which--and I don't know whether you feel comfortable
answering this or not, but if 2 or 3 years is too short and not
dealing with it or looking at 30 years is too long, is
somewhere in 8 to 12 years, if it were done in an even
approach, is that the sort of thing that might be able to
balance and get us out of this pickle with as little damage as
possible and as much opportunity for growth?
Mr. Elmendorf. I really don't want to prescribe a
particular time path, Congressman, as you know. But I think you
are absolutely right that the longer--the risk of waiting
longer is that by running with a high level of debt to GDP, or
a rising level of debt to GDP, the costs build up and the risks
build up. And in 2007, debt was 36 percent of GDP. By the end
of this year, it will have risen by 40 percent of GDP, we
project, to 76 percent of GDP because of the financial crisis
and the recession and the actions taken in response to them.
If we run at this higher level of debt and encounter
another crisis, domestically or internationally, that room to
expand the deficit will not be there in the way it has been
over the last half dozen years.
Mr. Campbell. Right. Okay. Just a couple other things here
in my final couple of minutes. Mr. Van Hollen talked about the
sequester and replacing it, 1-year cuts over something that
will be over 10 years. If you were to replace the sequester
with whatever, just a similar amount that matched year for year
what the sequester is of other spending cuts and/or tax
increases, now I understand the composition would have
something to do with it, but if you do $100 billion in fiscal
contraction, there is some negative impact on the economy no
matter where that fiscal contraction comes from.
Mr. Elmendorf. Yes, I think that is right, Congressman. You
are just right that the timing is critical for the economic
effects. The composition can also matter depending on just how
you and your colleagues do it.
Mr. Campbell. Right. But if we put it off, we are putting
off the problem that we discussed we have to deal with. One
final thing on tax expenditures--and I hate that term, but I
know you economists like it. Let's call it tax deductions,
credits, whatever. Is not the vast majority of those, if you
look at home mortgage interest, charitable contribution, IRAs,
401(k)s, other retirement plans, and health care, isn't that
where--I mean, if you really wanted to make a big impact, you
would have to go into those things, would you not?
Mr. Elmendorf. Congressman, you are absolutely right, those
are the largest components. How big an impact one could make
dealing with other pieces we haven't quite assessed. But in
this nice chart we had last year, the single largest tax
expenditure relates to health care, principally the exclusion
of health insurance from taxable income. The second largest
involves pensions. And the third largest involves mortgage
interest.
Mr. Campbell. Okay. All right. Well, thank you very much,
Dr. Elmendorf.
Mr. Elmendorf. Thank you, Congressman.
Chairman Ryan. Mr. Pascrell.
Mr. Pascrell. Thank you, Mr. Chairman.
Dr. Elmendorf, thank you for coming before us again and
opening up a pleasant season for the next 2 years. I think that
I want to respond to my brother from Georgia, what he said
before, about how we have increased spending since 2008,
beginning January 2009, when President Obama raised his hand. I
think we are all here to roll up our sleeves and find a long-
term solution to the debt.
But just as we know that increased revenue is not going to
solve the entire problem by any stretch, neither--we can't cut
our way out of our budget difficulties either. So when you look
at what has happened in terms of budgets since 2009, January
2009 and now, when there was an increase in spending--we can't
just talk about that out of context. Why was there an increase
in spending? Are we spending just to spend? Or was this the
government's response, our response, whether you voted for it
or not, to a very serious problem in the United States of
America? People out of work, health care costs going through
the roof. So how do we do it? No one else is spending. If we
don't have private capital invested, and that started before
the end of 2008, then how do you try to provide an atmosphere
so that there is investment into the economy?
And we want private investment. We know the government
can't solve every problem. We understand that very, very well.
But when you talk about a balanced budget, of course, it is
preferable. But are we to think that because we have this
tremendous deficit problem going into 2009, that all that we
needed to do was cut across the board in view of the social and
cultural things that were going on in this country and, by the
way, much of the world? Are we to think that if we simply cut
and slashed that everything would be fine?
You have created a nemesis. You have created a situation
where folks, you want folks to think that you want to protect
their tax dollar when you know very, very well that in 2009, we
had tremendous unemployment, and if the government didn't do
anything, if there was no recovery--and we could point out
chapter and verse where recovery helped in creating jobs, and
not what happened in the last quarter of last year. Very
interesting comparisons. So we had to come out of two wars; we
never paid for them. We had to come out of two major tax cuts
in 2001 and 2003; we never paid for that either. We didn't even
pay for the prescription drug plan that we passed 8 years ago.
There is a reason why we had to spend that money. And if
anyone is trying to imply here that if we simply stopped
spending the money--isn't that wonderful? And it is our money.
It is the taxpayers' money--that we would be in better economic
shape, well, the American people didn't buy that in the last
election. They just simply did not buy it. Because they are a
lot smarter than we think they are, all of us included, both
sides of the aisle, both sides of the aisle. So instead of a
trickle-down economics, which you had for 8 years--and we will
go into how many jobs were created then and how many jobs have
been created over the last 4 years--instead of going to trickle
down, we got a trickle up. I prefer trickle up. I prefer that
the little guy have a shot at prosperity and not wait for the
big guys to drive this economy, because they certainly flopped
on their face in 2007 and 2008, when capital was not invested
in this country.
Director Elmendorf, it seems to me that the most important
way to achieve long-term deficit reduction is a balanced
approach of revenue and spending cuts. That is what we keep on
talking about. And in fact, according to your report this
month, the CBO expects the deficit to shrink from 8.7 percent
of GDP--because we don't want to quote these things because it
doesn't fit into our script--that that will shrink to 5.3
percent. Is that correct?
Chairman Ryan. Thank you. Time has expired.
Mr. Elmendorf. Yes, Congressman.
Mr. Pascrell. Can he at least answer the question?
Chairman Ryan. You know, we got a lot of people here. He
said yes. But if we wait until the clock is at zero to ask our
question, we are not going to get to these other members who
are waiting patiently for their turn.
Mr. Pascrell. Your point is well taken, Mr. Chairman.
Chairman Ryan. Mr. McClintock.
Mr. McClintock. Thank you, Mr. Chairman.
Dr. Elmendorf, let's get to some basics here first. In
order to pay for spending, we either tax it now or we borrow it
now and tax it later. Are there any other ways of spending, I
mean other than monetary policy, which is itself simply a tax
on existing capital?
Mr. Elmendorf. Well, the amount by which you raise taxes
later depends on the level of debt that you are willing to
support the country.
Mr. McClintock. But you either borrow it or you tax it if
you are going to spend it.
Mr. Elmendorf. Yes, Congressman.
Mr. McClintock. All right. So government really cannot
inject a dollar into the economy that is not first taken out of
the same economy either by taxing now or borrowing now and
taxing to repay it in the future.
Mr. Elmendorf. I think, Congressman, under our current
economic conditions, if the government borrows money, it is not
taking a dollar out that would otherwise be invested. It can in
fact increase the total demand for goods and services in the
economy, and thereby boost employment and output.
Mr. McClintock. If the dollar is being borrowed by the
government, presumably it is not there then to be borrowed by a
consumer seeking to make consumer purchases, or a home buyer
seeking to reenter the housing market, or a small business
seeking to expand jobs.
Mr. Elmendorf. That logic is exactly right, Congressman, at
a point where the economy is at full employment. But that is
not the current economic circumstances.
Mr. McClintock. Now, would you explain the economic impact
of debt?
Mr. Elmendorf. So, in a fully employed economy, of the sort
that we project for the second half of the coming decade, then
higher debt, as I mentioned, crowds out private investment and
reduces incomes relative to what they would otherwise be.
And in an economy like the one we have today, the effects
are starkly different. And in an economy like we have today, we
think that additional borrowing to support higher spending or
tax cuts would provide a boost to the economy in the short
term.
Certainly if that extra borrowing is not paid down later,
it will weigh on the economy later. But in the short term, it
would provide a boost to the economy.
Mr. McClintock. But you are borrowing a dollar from the
same capital market that would otherwise be funding loans to
consumers or to businesses or to home buyers, for example. So
it is the same dollar. The only question is whether it is
borrowed by the government to spend or is borrowed by somebody
in the productive sector to spend.
Mr. Elmendorf. But under current conditions, Congressman,
the demand for private borrowing is very low. There isn't a
conflict in the credit markets. That is why the Federal
Government's interest rates are so low right now. Under other
conditions, there would be more of a competition for funds of
the sort you are describing. But these conditions are unusual.
Mr. McClintock. I would suggest you talk to some small
business people who are desperately trying to get loans or home
buyers who are desperately trying to get loans, and they are
telling us they can't get them. Now, tell us about the economic
impact of spending--or pardon me, of taxes rather.
Mr. Elmendorf. So taxes have two kinds of effects. One is
they just take money that households would otherwise have to
spend. The other is they can affect the incentives for people
to work and to save. And in our macroeconomic modeling, we try
to capture both of those sorts of effects.
Mr. McClintock. In fact, didn't your office estimate that
the tax increases back to the Clinton era rates on those
earning $200,000 as individuals, $250,000 as couples, would
cost about 200,000 jobs?
Mr. Elmendorf. That sounds roughly right, Congressman. I
don't remember the specifics. You are referring to our report I
think on the fiscal cliff from last fall. I don't remember the
precise numbers.
Mr. McClintock. Now, we are also told by your office that
the sequester reductions in spending would affect about 0.6
percent of growth, you said about 750,000 jobs, because
government would not be spending that money on creating
government jobs. But as we just established, government doesn't
inject a dollar into the economy that is not first taken out of
the economy. So I am afraid we are getting to a situation where
we are being told that tax increases are bad for the economy,
too much borrowing is bad for the economy, particularly in the
future that you are projecting, and spending cuts are bad for
the economy. And that doesn't leave us with many options.
Mr. Elmendorf. So, Congressman, I think the effects of
fiscal policy on the economy are different under different
economic circumstances. That is a widely held, not universally
held, but a widely held view among economists. And that is the
perspective that we take. So under current economic
circumstances, when private demand for goods and services is
low, additional government demand through higher spending or
the government spurring additional private demand through lower
taxes can both increase the overall demand for goods and
services and thus encourage businesses to hire more.
Under different economic circumstances, of the sort that we
usually have in this country and we expect that we will have
again 5 and 10 years from now, then this competition you are
describing between the government's use of funds and the
private sector's use of funds can become acute. And that is why
under those economic circumstances smaller government deficits
are good for the economy.
Chairman Ryan. Thank you.
Mr. McDermott.
Mr. McDermott. Thank you, Mr. Chairman.
I have asked they put up a chart on the screen so that you
can--a picture is always worth a thousand words.
And it is good to see you, Mr. Elmendorf. Your budget
analysis is very interesting. For years we have had to listen
to the Republicans lighting their hair on fire on cable TV
about the temporary large deficits we have. We were told if
Simpson-Bowles was not enacted, it would be the end of the year
as we know it. Two years later, we are going right along. And
in fact, if you notice on that chart, the jobs are going up. We
have had 35 months of people increasing. And the only places
you see dips, if you check them out, are when the Republicans
began to play roulette with the budget, when they created chaos
about whether we were going to pay our bills internationally,
or we have these big fights we have on the floor; the
unemployment goes up because business doesn't have any
confidence. They are not going to hire anybody.
And it seems to me that what you said is that the long-term
problems in this country really are about health care costs, as
Ms. Schwartz has already pointed out. When I came to Congress
in 1988, we were talking about the big problem that was going
to come in 2011. Well, it is here. The Baby Boomers are now
enrolling in Medicare, and it is going to go from 40 million to
60 million. And that has been absolutely predictable, and
nobody wanted to deal with it until it is now. It is nothing
new. It is not we are suddenly having massive spending, except
we are honoring our commitments to the people in this country.
And it seems to me that the issue really here is whether we
are going to tear the safety net out, say to seniors, we are
not going to cover you. You are on your own. You and your
family go find out whatever you want.
But what is interesting is I think we have a triumph to
talk about. And I want to talk a little bit about that.
Medicare spending, as I understand it, is flat per person. Is
that correct?
Mr. Elmendorf. I don't have those precise numbers in front
of me, but you are certainly right, Congressman. It has slowed
very sharply in the past few years from what it was before.
Mr. McDermott. And in my reading of your analysis, at least
you give some credit, if not a good bit of credit, to the fact
that we enacted the Affordable Care Act. Is that correct?
Mr. Elmendorf. So, Congressman, we have not attributed the
slow down to any particular factors, like the Affordable Care
Act. What we have said is that we think part of it is related
to the recession; part of it is structural. The structural part
can have a number of possible causes. One could be providers
thinking about the current and incipient effects of the
Affordable Care Act. But they are also driven by pressures from
private insurers. I think providers are driven by their own
sense that they are not providing care in as efficient a way as
possible. And we have not tried at this point to--well, we
tried to think through, but we have not said anything, because
we don't know about what factors are driving those structural
changes. If we understood better what factors were driving
them, we would understand better what the prognosis was as
well.
Mr. McDermott. That is my point. If you pass a law, even
the threat of passing the law, under the Clinton
administration, suddenly health care costs kind of leveled off.
And again, we see it when the Congress acts, that we basically
see the flattening of costs.
Now you can't directly tie it, point A to point B, but you
know that the whole United States is watching what the Congress
is doing. And when we don't pay our debts, they stop hiring.
That is clear. I mean, you can look right at the graph and
trace it down to the time when it happened, and you can see how
it happened.
I think that the thing that is most amazing about this is
that the industry, the medical-industrial complex is actually
responding because they know it is not sustainable. And my
question to you is the effect of throwing people off of
Medicare, or raising--let's raise the age to 67 or 70 before
you can get on. What would that effect, how would that affect
the economy? Do you have an idea?
Mr. Elmendorf. Congressman, it depends a lot on what else
is going on and exactly how that provision would be structured.
We wrote a report early last year about the effects of raising
the eligibility age for Social Security and for Medicare. And
we talked about the consequences. Certainly some people who
aren't on Medicare would end up on other Federal health care
programs. Some people we think would end up without insurance.
Some people would choose to work longer to maintain their
employer-sponsored health insurance. There is a whole
combination of responses that we think would occur.
Mr. McDermott. So the real issue here is how do we control
health care costs.
Mr. Elmendorf. That is a very important question,
obviously, Congressman.
Chairman Ryan. Mr. Garrett.
Mr. Garrett. Greetings. And this will follow up on our
private conversation initially, and maybe some of the points
when I was out of the room with regard to interest rates. And
so one number that I heard, maybe somebody threw this out to
you, because you were saying that we are at here now, basically
zero, right, projection over the 10-year, going up around
three. And so the interest payment on the debt is going to
increase during that period of time. I think the one number
that you threw out to us is $1.1 trillion for a 1 percent
increase in interest. You base that--you basically factor that
in to your projections over the 10-year, going from zero up
to----
Mr. Elmendorf. Right. So the increase in interest rates
that we show is the underlying feature of our projection of
Federal interest payments.
Mr. Garrett. Right. So one of the other uncertainties is
the maturation dates that the Fed has on the securities going
out, that it is inverted, right, between long and short. Do you
take that into consideration as well? In other words, one of
the numbers I heard was that you could look at a 3 percent
increase--3 percent, you would look at around $140 billion
increase in year one, and that would only last for 2 to 3 years
as the maturation date changes for the securities. Are you with
me on that?
Mr. Elmendorf. So you are right, Congressman, that our
projections of government's interest payments depend not just
on the level of interest rates at that moment in time in the
financial markets, but what the Federal Government has issued
when, and when it is rolling over those maturing securities
into new securities.
Mr. Garrett. And so I guess one of the multiple bottom
lines of this is we are going through the whole sequester issue
trying to save roughly a hundred billion dollars, maybe $86
billion with interest payments, and that basically pales in
comparison if interest rates go up just 1 percent.
Mr. Elmendorf. Yes, that is right, Congressman. Now, a 1
percentage point higher level of interest rates in an entire
decade would be a sizable change.
Mr. Garrett. Well, we could do everything--well, a sizable
change and a historically accurate change. In other words, we
are at historically low numbers right now.
Mr. Elmendorf. Yeah, I mean above and beyond the increase,
I was suggesting that we have built into our projection, which
is a return of interest rates to slightly above their
historical average level. Further increases are certainly
possible. But I am just noting a percentage point difference
for the entire decade is a fairly large difference.
Mr. Garrett. Let me turn real quick over to the FHA. The
FHA revealed in their housing industry report that cash
reserves are down 45 percent from last year, and chances of
future losses on the current outstanding portfolio could exceed
50 percent is not out of the norm, which would require
potentially that the taxpayers would have to bail out the FHA
going forward. Further, the report shows from the FHA that they
are overleveraged right now. They are at a leverage ratio of
400 to 1, which sort of makes Bear Stearns, Lehman Brothers,
and the rest sort of--and the GSEs even--pale in comparison.
Have you examined the FHA's report and the budgetary
implications on that in your projections?
Mr. Elmendorf. Let me say two things, Congressman, quickly.
First, as you know, when you refer to a government bailout,
there is no explicit action by the Congress that would be
required. It is simply the case that if people don't pay back
their mortgages and the FHA is on the hook, that taxpayers will
suffer those losses.
Mr. Garrett. They have a line of credit due the Treasury.
They don't have to come to Congress, but the Treasury can
basically give them the money without us authorizing. Did you
take that into consideration?
Mr. Elmendorf. Yes. The second thing I would say is that as
you know, again to explain to others, there is a few years of
FHA lending that has turned out particularly poorly in terms of
delinquency and default rates. And we have not done a separate
projection of what the draw on the Treasury might ultimately
be. If there is a change, it would turn up, as you know, as a
credit reestimate in the budget. But we don't have a specific
projection that I am aware of, of what the FHA----
Mr. Garrett. Would that be something that you could do and
take a look at?
Mr. Elmendorf. I think we could take a closer look at it,
yes. We have to talk with you more specifically. And I don't
know about the data that we can get. But yes, we could try.
Mr. Garrett. That would be very helpful to us over in
Financial Services and Approps as well.
So last question is with regard to Medicare. As you well
know, there is a law in place that says when costs exceed
revenues by 45 percent, something has to happen, right? That
the President has to issue a report on how to solve the
problem, correct?
Mr. Elmendorf. Yes.
Mr. Garrett. Okay. So has that ever been triggered?
Mr. Elmendorf. So that threshold has been exceeded for a
number of years, I think, Congressman.
Mr. Garrett. Was that triggered in 2009?
Mr. Elmendorf. I don't know the precise years, Congressman,
but I would take your word for it.
Mr. Garrett. Would you believe 2009, 2010, 2011, 2012?
Mr. Elmendorf. I would believe it, Congressman.
Mr. Garrett. Have you scored the President's proposal in
response to that?
Mr. Elmendorf. We have never scored a specific response to
that. We have estimated the President's----
Mr. Garrett. Has the President ever, as required by law,
provided a report as required in the law?
Mr. Elmendorf. I am not aware of any, Congressman.
Mr. Garrett. So he has violated the law in that sense?
Mr. Elmendorf. I am not a lawyer, Congressman.
Mr. Garrett. But he was required to do so.
Mr. Elmendorf. There is a requirement for a proposal to be
made. I am not aware of any proposals having been made. I may
be unaware, and I am not in a position of speaking to the
legalities.
Mr. Garrett. You would have scored it had he done it, would
you not?
Mr. Price [presiding]. The gentleman's time has expired.
Mr. Elmendorf. Well, it depends. As you know, we estimate
the President's budget once a year. Otherwise, we estimate
things that you and your colleagues bring to us, not the
administration directly.
Mr. Price. Thank you, Dr. Elmendorf.
The gentlelady from California, Ms. Lee.
Ms. Lee. Thank you very much, Mr. Chairman.
First of all, let me just say it is an honor to serve on
this committee. And I hope to work with this committee to
create a useful road map for the American people, one that will
create jobs, lift people out of poverty and into the middle
class, grow our economy for everyone, and reduce the deficit.
And let me thank you, Mr. Director, for your testimony and
for being here.
Our budget is not only a road map to fiscal responsibility,
but it is also a moral document. It shines a light on what the
priorities are of our government and who we are as a country.
Our Nation's budget must reflect our values, and it must raise
enough revenue so that we can invest in our people and meet our
Nation's challenges head on.
While our economy continues to slowly recover, I believe we
also must focus on lifting the millions of Americans who are
living in poverty up the economic ladder and into the middle
class. And so, in addition to looking at policies that
strengthen the middle class, I will continue, as a member of
this committee, to remind this committee that nearly 50 million
people live in poverty; 16 million are children. And this is
unacceptable.
Now, unless Congress acts by March 1, the sequester will
slash thousands of jobs, which we have heard earlier, and
economic security of the middle class, but it will also push
the poor and low-income individuals really over the edge. It
will eviscerate any gains our recovering economy has made in
recent years.
So there is no question that we need to prevent these cuts
from taking place, and we must do so in a way that protects
investments that create and continue this economic growth. So I
think we need to take a hard look at the loopholes and tax
expenditures in our Tax Code that allow some of the wealthiest
individuals and businesses to not pay their fair share.
But also we need to look at the ongoing waste, fraud, and
abuse going on over at the Pentagon. And so, you know, I can't
for the life of me figure out how we can budget when the single
largest discretionary item on our budget cannot be audited. We
need the Pentagon to pass an audit so we can get to know where
the money and where our tax dollars are going, and adequately
set priorities.
Now let me just ask you about the CBO report on the
American Recovery and Reinvestment Act. I would just like to
ask you, Mr. Director, can you explain how our government's
targeted investment in the American people and in our Nation's
critical infrastructure, how that created jobs and how it
helped to begin to grow the economy?
And also, if we invested in a program that provided
coordinated benefits in social services that lifted the long-
term economic stability and incomes, let's say half the
families living in poverty, what impact would that be and what
impact would that have overall in terms of our economic growth?
Mr. Elmendorf. So, Congresswoman, as you know, we have
estimated consistently for the past 4 years that the Recovery
Act, taking effect at the time it did with the economic
circumstances the country faced, increased output and jobs
relative to what would have happened in the absence of the
Recovery Act.
And we think it did that by some additional direct
government purchases, by giving money to State and local
governments that they then used to purchase goods and services,
or to provide benefits, and by cutting taxes to Americans that
let them then spend more money themselves. And that additional
demand for goods and services filled in part, only part, but
part of the great shortfall in demand that had come about in
the wake of the bursting of the housing bubble and the
financial crisis. So we think the path of output and employment
has been higher than it would have been otherwise because of
that act. And we think that this year, with an economy stronger
but not that strong yet, that easing of fiscal policy, such as
a deferral of the sequester, would boost output and employment
this year relative to what would occur under current law.
You also asked about longer-term effects of policy. I think
those effects are ones that we worry about, but are harder to
know for sure. So if the government can strengthen the
economic--can strengthen people's skills, help them have better
education and more training, that should make them more
productive over time. But the overall economic effects will
also depend on how the government does that and where the money
comes from to do it. So spending a dollar in a certain place
can be good for the economy, but in the longer run, it does
come out of something else. And you think of the overall
economic effects, we need to think about what it is coming out
of in addition to what it is going into.
Mr. Price. The gentlelady's time has expired.
The gentleman from Oklahoma, Mr. Lankford.
Mr. Lankford. Thank you, Mr. Chairman.
Thank you. I want to be able to continue on that same line
of conversation about the long-term impact. Is there an
economic benefit to balancing our budget? Not adding to
additional, let's say, principal year after year. Is there a
benefit to our economic development as a Nation?
Mr. Elmendorf. Well, I think, yes, Congressman, a smaller
deficit, all the way down to zero, can be better for the
economy in the medium and long run than a large deficit. But
what the economic effect is ultimately depends on how you do
that.
Mr. Lankford. How you get it. Right. I understand that, is
the how you get there to the balance point also matters.
Mr. Elmendorf. Yes.
Mr. Lankford. And that has to be done in a way that is
judicious and that makes sense for the economy itself.
I interact with a lot of families that have a challenge of
understanding this as they walk through the document. And they
want to know how this applies to their individual family. So
can you help bring that down to the individual family? What is
the effect of a $16.5 trillion debt on a family? And what is
the effect on how that grows, let's say as you mentioned, $7
trillion over the next 10 years? What effect does that have on
an individual family? Now, I know you can't name the family and
the address and say this family will lose their job, this
family will benefit. I get that. But the overall impact on a
family.
Mr. Elmendorf. I think, Congressman, over the next few
years, with a weak economy, the government borrowing in order
to keep taxes lower and spending higher helps the average
family by producing more demand for goods in the economy and
thus increasing the chance they will be employed and get paid
more.
But as you go into the second half of the coming decade,
when we think people will mostly be back at work, then the
government's borrowing is competing with the borrowing that
households want to do for their mortgage borrowing. It competes
with the borrowing that the businesses they work for may be
trying to do. And at that point, that competition for borrowing
makes it harder for businesses to invest. That will tend to
limit the extra equipment that workers have to work with. And
because of that, it will tend to lower their wages and their
family incomes relative to what would have happened if instead
the government had not been borrowing so much in the credit
markets.
Mr. Lankford. Right. And that is not something you can just
shut off and say, for the next 5 years, we are going to have
the sugar high, and then once we get 5 years out, we are going
to balance immediately, and then we will correct that. That is
something that has to be corrected when?
Mr. Elmendorf. Well, so balancing immediately would have
the consequences we have been discussing.
Mr. Lankford. Right. I understand. That would be too risky.
Mr. Elmendorf. The exact timing is a matter of trade-offs.
And we have written about this before. The sooner that the
Congress acts, the lower the level of debt is likely to be 5
and 10 years from now. On the other hand, the sooner the
Congress acts, the greater the contraction would be in the
short term.
Mr. Lankford. Short term and long term. This is, do you
like it right now, or do you like it 5 years from now or 6
years from now?
Mr. Elmendorf. Yes, that is right.
Mr. Lankford. Basically have to be able to deal with the
consequences and the issues. So you are saying on the current
path, we can postpone the pain for 5 years, but it is coming.
Mr. Elmendorf. I think it is coming, yes, Congressman.
Mr. Lankford. Okay. Let me ask you a question about the
size of the interest. We talk a lot about the interest rates
and such. Project out. I mean you talk about another $7
trillion being added to the debt. What are we talking about of
the actual dollar size of an interest payment based on your
projection? Right now, we are paying around, give or take a few
billion, around dollar $300 billion a year in interest
payments. What is your best guess on getting out to the end of
the 10-year window what we are paying in interest in a single
year?
Mr. Elmendorf. So, Congressman, our projection for this
year, fiscal year 2013, is the government would spend $224
billion on interest payments. We project that would grow to
$857 billion in 2023. That is an increase as a share of GDP
from about 1.4 percent to 3.3 percent, or almost 2 extra
percent of GDP devoted to net interest payments.
Mr. Lankford. All right. So current path, that is with the
SGR cuts, that is with everything else----
Mr. Elmendorf. Yes.
Mr. Lankford [continuing]. Current path by the end of the
next decade, we are paying $857 billion just in interest.
Mr. Elmendorf. Yes. Just in that single year.
Mr. Lankford. How many things do we have in our budget that
are $857 billion?
Mr. Elmendorf. Not very many, Congressman. It would be one
of--there is a nice picture in our outlook--this would be one
of the largest components of Federal spending. Those who have
the outlook in front of you, figure 1-3, you can see that by
2023 the major health care programs as a group and Social
Security as a group would be more than net interest payments,
but the net interest payments would be higher than defense
spending. It would be higher than all nondefense discretionary
spending. And it would be higher than all mandatory spending,
all the benefit programs apart from Social Security and the
major health care programs.
Mr. Lankford. Thank you.
I yield back.
Mr. Price. Thank you.
The gentleman from Rhode Island, Mr. Cicilline.
Mr. Cicilline. Thank you, Mr. Chairman.
I want to thank Chairman Ryan and our Ranking Member Van
Hollen for the warm welcome, and look forward to serving on
this committee.
And thank you, Dr. Elmendorf.
I think I have not heard from an economist or read the
thinking of an economist who has not said that we have to
approach this serious economic challenge by a balance of
reducing spending and generating new revenues. And I think
there is really no question that the President's articulation
of that model is something that we have to do so that we both
do it in a way that is properly timed but also which is at the
same time making the investments that are necessary to grow our
economy. But clearly we have to reduce spending, and so we are
going to have to make choices about what we invest in. And so I
am wondering if you would share some thoughts with us in terms
of getting the most bang for our buck. What are the kinds of
policies that, when we are engaging in spending, we are likely
to produce the greatest economic growth and the greatest help
to our economy? Because not all spending is the same. So, in
that regard, in particular, I am interested to know your
thoughts about infrastructure spending, really rebuilding the
crumbling infrastructure of our country in sort of the old-
fashioned WPA way, which leaves behind an asset which
contributes to economic growth and our ability to move goods
and services and information to compete in the global economy
and, at the same time, puts people to work immediately but
leaves behind a valuable asset. How does infrastructure in
particular relate to economic growth when we are making choices
about how to do spending? And secondly, if you would speak to a
proposal the President spoke about last night, which is a
proposal to allow millions of American homeowners to refinance
their homes at a lower interest rate, the market rates today,
which I suspect, not being an economist, would produce, on
average, I think they said $1,200 a year in new spending
opportunities for families, provide substantial economic
relief, help stabilize the housing market. But I also expect it
would be a huge economic generator in terms of job creation. So
if you could speak to those two issues.
Mr. Elmendorf. Yes, Congressman. So when we talk about bang
for the buck, sometimes we talk about that in the short-term
context and sometimes in the medium- or long-term context. And
the interests can be different. In the short term, what matters
most is how much of the extra dollar of government spending or
how much of the lost dollar of taxes is spent and how quickly
it is spent. Giving more money to spending increases or tax
cuts to lower-income people tend to be more effective than
doing the same for higher-income people because they tend to
spend a larger share of the difference.
In infrastructure spending, a lot of that gets spent, but
depending on the project, it may get spent somewhat slowly. So,
in that sense, infrastructure can have a high bang for the buck
ultimately, but it may not have as large a bang for the buck
right now. Because certain projects just take a while to get
started on.
In the medium term and long term, infrastructure
investment, if devoted to high-return projects, can in fact
have a big effect on the state of the economy. About half of
nondefense discretionary spending can be viewed as investment
either in physical structures or in people in the form of
education and training. Not all that money is spent well, but
some of it is clearly spent for things that the private sector
would not otherwise provide. And some of those projects then
can have high rates of return and can boost the economy in
significant ways over time.
I think the one concern that people have raised about the
cutbacks in discretionary spending as a share of GDP that are
in place under the sequester, but even under the original caps,
people have expressed concern that that can end up limiting the
investment that the Federal Government does. Of course, it is
hard to know for sure because you and your colleagues haven't
made those specific choices yet.
On helping households to refinance in the way the President
discussed last night, I don't know precisely what his proposal
is. We will see that when he releases his budget. But we have
in the past done analysis of different ways of encouraging more
refinancing. We think that can have a positive effect on the
economy in addition to helping those households. The overall
effect depends crucially on how many households end up
refinancing. So it depends crucially on how a program is
designed, who is eligible, what the incentives are to
households and to the lenders to do something differently than
they are doing under current law. So the effects in the
aggregate can vary a lot across different ways of doing that.
But dollar for dollar, it can be effective, as we reported in a
report about a year or so ago.
Mr. Cicilline. When you say it depends on the amount,
obviously the more Americans who are able to take advantage of
it. If it is an easy program to administer, lots of eligible
Americans, it will have a greater and more positive impact.
Mr. Elmendorf. Yes. Exactly, Congressman.
Mr. Cicilline. Thank you.
Mr. Price. The gentlelady from Tennessee, Mrs. Black.
Mrs. Black. Thank you, Mr. Chairman.
And thank you, Dr. Elmendorf, for being today. I think I
can thank you for the this budget outlook, although it does, as
you read through it, certainly bring up a lot of concerns about
where we are going and the huge challenges that we will expect
going down the road. And as I was reading through here, I made
some notes where I see a lot of things are unsustainable.
Social Security is unsustainable, and without reform, it will
go bankrupt in 2033. Medicare is unsustainable. Hospital
insurance trust funds end in 2023. Social Security Disability
Insurance, which we don't talk very much about, and I think
that is really an important topic that I would love to see
either this committee or some other committee take a look at,
because I got concerned about this last year when I started
reading about it, it will go bankrupt in 2016. A big concern.
And then, on the education side, Pell Grants, $1 billion
shortfall in fiscal year 2015, and then annual shortfalls of $5
billion or more from fiscal year 2016 through 2023. All of
these programs, as we are looking at them, it is very, very
scary to see that they are going to go bankrupt unless we have
some form of reform.
But let me now turn to look at the health care issue,
because CBO cites that rising health care costs as a leading
driver of our debts and our deficits. And the Federal Exchange
Subsidies alone are expected to cost $1.2 trillion, while the
Medicaid expansions are expected to reach $638 billion. In
knowing all this, will this increase in spending--well, first
of all, the Affordable Care Act, or the ObamaCare, adds another
trillion dollars in new health care entitlement spending. So
here we go again, more health care entitlement spending. But
will this increase in spending, with the Medicaid expansions
and the new exchange subsidies, reduce health care cost growth
as we look at the growth down the road?
Mr. Elmendorf. Well, Congresswoman, the Affordable Care
Act, as you know, had a number of different pieces with
different sorts of effects. The expansion of insurance coverage
we now estimate will cost $1.3 trillion over the 2013 to 2023
period, those 11 years.
Mrs. Black. And Dr. Elmendorf, let me just interrupt you
there to make sure that I understand, this is $1.3 trillion
more than what was anticipated in previous outlooks of the
program. Is that correct?
Mr. Elmendorf. No, no, Congresswoman. I am saying that the
costs of the coverage expansion relative to a world that did
not have that coverage expansion.
Mrs. Black. Okay.
Mr. Elmendorf. There will be extra costs to the Federal
budget of $1.3 trillion.
Mrs. Black. But extra costs.
Mr. Elmendorf. We have made many, many changes to our
projections of the costs of the Affordable Care Act coverage
expansion, but they have netted out to actually very little
change on balance for any given period of years. Our estimates
through 2019 are now actually slightly below what they were
when we first estimated the effects of that expansion 3 years
ago. As one moves the budget window further along, though, then
of course one ends up with larger numbers for this expansion,
and for all, really almost all, existing Federal programs, and
for tax revenue, because the economy is growing over time. So
this particular part of the law raises Federal costs in order
to subsidize health insurance for people in particular ways.
The law also included changes to Medicare that have the effect
of bringing down the growth rate of Medicare spending over
time. Taking those pieces together, we think the law has
increased the Federal Government's budgetary commitment to
health care in the long run. Because ultimately those coverage
expansions outweigh the Medicare savings, the law as a whole--
in addition included changes in tax provisions--and as a whole
we think it is a small deficit reducer. But the government's
commitment to health care is increased because of the
Affordable Care Act.
How those Medicare changes will affect the growth of
Medicare spending we made our best estimate of, but it is an
uncertain business. And whether those changes in Medicare would
spill over to the private sector we don't know either. So we
have not offered a view about whether the--and we don't do
estimates of total national health expenditures. So we really
tried to focus what we have done what we have said to the
Federal budgetary effects.
Mrs. Black. And yet all of this, and I brought the chart up
that you were actually referencing, this figure, to show that
the major health care programs are the greatest amount of money
that is spent in any one particular category. And we are
showing that it does grow.
Mr. Elmendorf. Yes.
Mrs. Black. It doesn't come down, it doesn't curve down and
level out.
Mr. Elmendorf. Yes.
Mrs. Black. It continues to grow. And yet despite this, and
this is the point I want to make at the end of the day, is yet
despite this, we know that there are going to be people out
there, more people that will be uninsured than previously
expected, because there are a lot of dynamics that are also
occurring here that are going to cause that reaction that we
will have more people uninsured.
Mr. Price. The gentlelady's time has expired.
Mr. Elmendorf. I am sorry, Mr. Chairman, but we project
that the law will greatly reduce the number of uninsured
Americans relative to what would be the case without that law
in force.
Mr. Price. The gentlelady's time has expired.
With apologies to the gentlelady from Florida for not
recognizing her in order, Ms. Castor is recognized for 5
minutes.
Ms. Castor. Thank you, Mr. Chairman.
And thank you, Dr. Elmendorf, for being here today and
sharing your economic budget outlook.
I think there are positive signs that should not be
overlooked that our economy is growing and we are adding jobs.
That is consistent with what I see back home in Florida. There
is greater construction work and more cranes popping up across
town. Housing prices are up. So if you are a seller, I guess
that is pretty good news. We have a seen a significant drop in
unemployment.
The tourism industry has rebounded quite strongly after the
BP disaster. And if you are fortunate to have money in the
stock market in the past few years, you have done very well.
Last year I asked you if you we had more people working
across America, would our debt and deficit situation be largely
improved? You said, yes. And I assume you still believe this is
the case.
Mr. Elmendorf. Yes.
Ms. Castor. Correct?
Mr. Elmendorf. Yes.
Ms. Castor. But it seems like we still have significant
headwinds to getting past that 7.5 percent unemployment rate.
And in your outlook, in your early testimony, you said that you
don't see great improvement there in the near term. So talk
about the headwinds to greater employment across the economy,
especially what is in the control of the Congress? What are the
current policies that are in place that prevent us from
lowering that unemployment rate?
Mr. Elmendorf. So, Congresswoman, I think you described
well a number of the factors that we see, underlying factors
that are leading to economic growth. But as we have said, we
think that the remaining parts of what had been the fiscal
cliff of a few months ago, the remaining parts are still a
substantial damper to economic growth this year. And one of the
things that Congress might do to boost economic growth this
year is to not let that fiscal tightening take effect. Of
course, as you know----
Ms. Castor. Is this the sequester?
Mr. Elmendorf. Yes. So there are a number of pieces of
that, but one crucial piece is the sequester. And we think that
if the Congress were to not have the sequester, then that would
strengthen output this year and would lead to about 750,000
more jobs in the fourth quarter. At the same time, of course,
as you know, that if there aren't offsetting changes made
later, then that extra debt would become a drag on the economy
in the medium term and long term.
Ms. Castor. That is what I am hearing from folks at home,
our major employers. For example, we have a large port. If we
reduce infrastructure spending, they anticipate cutbacks, and
private businesses especially. Our large research university,
they rely a lot on innovation and science and medical research.
They are also telling me, along with the Cancer Research
Institute, very significant damage to what they are doing, but
a loss of jobs. Our large school district, the ninth largest
school district in the country, and a large Air Force base, the
MacDill Air Force Base, civilian workforce projection.
So, colleagues, we really--time is short. And I think what
we are hearing today, if we want to address the debt and
deficit, let's not do this to ourselves. Let's not self-inflict
a wound that will set us back further, put us back, dig us in
deeper on long term deficit and debt reduction. I think this is
a warning sign, and Dr. Elmendorf is being very clear with us
that we have got to work together and replace the sequester.
That doesn't mean we are going to shirk our responsibility to
address the long-term debt, the medium-term debt.
But if we are going to be stuck with this 7.5 percent
unemployment rate, that is not sustainable, to borrow a word
that has been used this morning quite a lot.
Dr. Elmendorf, are there other policies that could help us
that are within the control of the Congress to create more
jobs?
Mr. Elmendorf. So, Congresswoman, you can think of them in
a few categories. I think there are a number of changes in
fiscal policy, higher spending, or lower taxes than are under
current law. And we have done, as you know, a few reports in
the past few years of trying to evaluate the bang for the buck
of different sorts of changes in tax and spending policy.
Turning off the sequester would be one item on that list, but
there are other items as well.
Ms. Castor. Did you also mention immigration in your
outlook?
Mr. Elmendorf. So we don't talk about it in the outlook. Of
course, we have done other work on immigration. I think
immigration can be a very positive force--more immigration can
be a very positive force for the economy in the medium term and
long term, depending on exactly what the reforms were that
Congress might consider. Those reforms wouldn't take effect
quickly enough to provide a big boost to the economy this year
and next year.
In terms of the short-term boosts, in addition to changes
in fiscal policy, there are possible changes--I think just
greater certainty about the course of fiscal policy would help.
And maybe other changes that could be made as well.
Mr. Price. The gentlelady's time has expired.
The gentleman from Texas, Mr. Flores.
Mr. Flores. Thank you, Mr. Chairman.
Dr. Elmendorf, thank you for joining us again. Let's talk
about a different subject for a minute. When you looked at the
President's budget from last year, can you tell me when that
budget balanced?
Mr. Elmendorf. In our estimate of it, Congressman, it never
reached a balanced budget.
Mr. Flores. Okay. And what would--would you say that the
spending and revenue profile in that budget was one that would
help create a sustainable economy?
Mr. Elmendorf. Well, Congressman, we did think the economy
would be sustained, yes. So we did an analysis of the economic
effects of that budget. I don't remember the precise numbers.
We still think the economy would be growing. But as I have said
on many occasions, a path that had less government debt would
by later in the decade and beyond lead to a stronger economy
all else equal. And it depends on what else is occurring.
Mr. Flores. Even the OMB by its own admission said that
debt beyond the 10-year window was going to reach unsustainable
levels, and the economy would suffer as a result of that.
What would the economic impact be if we were to raise taxes
by $85 billion for the rest of this fiscal year starting on
March 1 vis-a-vis having a $85 billion cut due to the sequester
that also starts on March 1?
Mr. Elmendorf. Well, Congressman, that would depend on the
nature of the tax increase.
Mr. Flores. Let's assume for a minute it is done through
tax rates, tax rate increases.
Mr. Elmendorf. I don't want to be difficult, it would still
depend, as you know, on whose tax rates were cut. But in
general, we think that----
Mr. Flores. Let's just say we raised it on the top 1
percent again, include small business owners and----
Mr. Elmendorf. So if the sequester were replaced by an
equivalent dollar amount of increase in tax rates on high-
income people, we would think that would be an improvement for
the economy because we think that the propensity to spend of
those high-income people would be smaller, dollar for dollar,
than would be the spending that would arise from the sequester.
Mr. Flores. So the lady on the corner that owns the dry
cleaning store, when she has her taxes increased dramatically,
is going to hire as many people and invest as much in the
economy and continue with her expansion plans that she had
prior to that tax increase?
Mr. Elmendorf. Well, so I think, Congressman, that the lady
on the corner would find that more people would come in with
dry cleaning if they were the people who were working for the
government or working on government contracts of the sort that
would be increased by taking away the sequester. And I am not
trying to play a game here, but I think that is the effect we
have in mind, which is that what businesses are most concerned
about now is weak demand for their products.
Mr. Flores. So, I mean, under that line of thinking, what
you do is you raise the taxes to 100 percent on high-income
people, and then spend all their money on government contracts.
Mr. Elmendorf. So, Congressman, you posed a particular
question. We do try to be careful about extrapolating out.
Mr. Flores. It was more rhetorical than anything.
How do you gauge the strength of this recovery over the
last 4 years versus other economic recoveries post-World War
II?
Mr. Elmendorf. This has been a markedly weaker recovery.
Mr. Flores. Okay. How does it compare to the recovery that
we had during the 1981-1988 time frame? Or even you can go
through 1993 if you would like to.
Mr. Elmendorf. This has been a much weaker recovery than we
had in the early 1980s.
Mr. Flores. Okay. All right. The next thing, what was the
10-year cost of the Affordable Care Act when it was enacted? Do
you remember that? Your cost estimates? Gross costs, not the
deficit impact.
Mr. Elmendorf. Yes, right. As you know, the deficit impact
we thought was a slight deficit reduction.
Mr. Flores. Right.
Mr. Elmendorf. The cost of the coverage expansion may be
what you are referring to over the 10-year window at the time.
I don't know that number offhand. As I mentioned a little
earlier, the number of the cost of the coverage expansion over
that 10 years we now think would be smaller by a little bit
than we thought at the time. But as you know, the budget
window, the 10 years that we now provide projections for has
moved out in time through 2023. And that increases the 10-
year--the current 10-year cost defined in that way is higher.
Mr. Flores. Okay. And again switching subjects for a
minute, does the CBO look at unfunded obligations like what the
actuarial obligations are of Social Security, of Medicare,
Medicaid? Does CBO look at those?
Mr. Elmendorf. Yes, Congressman. So, in our long-term
budget outlook, we include the cost of those programs, and we
include comments on the Social Security Trust Fund and the
Medicare Hospital Insurance Trust Fund.
Mr. Flores. But do you discount those back and say, this is
what the net unfunded obligation is for Social Security today?
Mr. Elmendorf. Yes, we do, Congressman.
Mr. Flores. Okay. Do you have those numbers off the top of
your head?
Mr. Elmendorf. I am sorry, I don't. It is substantial,
Congressman.
Mr. Flores. It is tens of trillions of dollars between
Social Security and Medicare. Correct?
Mr. Elmendorf. I think that is right. We talk about this
usually as a share of GDP, because we think that is a useful
way to measure the burden on the economy.
Mr. Price. The gentleman's time has expired.
The gentleman from New York, Mr. Jeffries, is recognized
for 5 minutes.
Mr. Jeffries. Thank you, Mr. Chairman.
You were just asked whether this has been a more robust or
a weaker recovery than the ones I guess post-World War II,
including the ones in the 1980s. And I think you testified that
this was a weaker recovery. Is that correct?
Mr. Elmendorf. Yes, that is right, Congressman.
Mr. Jeffries. Would it also be fair to say that in 2008
this country confronted the worse economic crisis and collapse
that we have experienced in the history of the republic with
the exception of the Great Depression?
Mr. Elmendorf. Yes, that is right, Congressman.
Mr. Jeffries. Okay, and the economy, since 2009 under this
administration, is moving in the right direction based on any
reasonable objective economic measure, wouldn't that be
correct?
Mr. Elmendorf. So the GDP has been growing since the summer
of that year, yes, Congressman.
Mr. Jeffries. Let's take a look at some other numbers. So 6
million private-sector jobs have been created over the last
several years, is that correct?
Mr. Elmendorf. Yes, I think so, Congressman. It depends on
the point at which you start that tally.
Mr. Jeffries. Okay, and I believe about 500,000
manufacturing job have been created in America over the last
few years, is that right?
Mr. Elmendorf. That may be. I don't know that offhand.
Mr. Jeffries. Okay, I think unemployment, the unemployment
rate is at or near its lowest level in the last 4 years, is
that right?
Mr. Elmendorf. Yes, Congressman, I think that is right.
Mr. Jeffries. Okay, and home prices are rising at the
fastest rate in the last 6 years, is that correct?
Mr. Elmendorf. Yes, Congressman.
Mr. Jeffries. And I think home purchases are up
approximately 50 percent at this point in time?
Mr. Elmendorf. They are rising a good deal. I don't know
the exact number.
Mr. Jeffries. And I think we have also reduced the deficit
by about $2.5 trillion in the last several years, is that
correct?
Mr. Elmendorf. Sir, we have not tried to do a calculation
like that. How much has been accomplished so far depends very
much on the point in time at which one starts counting, and the
benchmark one is comparing to, so we have not done that
calculation ourselves.
Mr. Jeffries. Okay, so it seems though, based on, you know,
any reasonable economic measure, the economy is clearly moving
in the right direction.
The question has been asked a few times today, is there any
economic benefit to balancing the budget? I would like to ask a
different question. Is there any economic benefit to simulating
economic growth in the country at this moment in time?
Mr. Elmendorf. Yes, Congressman, there is.
Mr. Jeffries. And what would be the best way, in your
estimation, as you have examined this question, to stimulate
economic growth?
Mr. Elmendorf. Well, so the ultimate choices depend on
people's judgments, your judgments, on behalf of your
constituents as to what you think the government should or
shouldn't be doing. But we have said that we think cuts in
taxes or increases in spending that put money into people's
hands where it is spent quickly, can provide a crucial boost to
the demand for business services and encourage businesses to
hire workers, which then gives them income, which allows them
to spend more, and so on.
Mr. Jeffries. And you have indicated that the best way
perhaps to increase consumer demand is to make sure that we
increase the amount of money that is placed into the hands of
low income or modest Americans, is that right?
Mr. Elmendorf. I think in terms of the bang for the buck,
lower income Americans tend to spend a larger share of extra
money they get, or reduction in taxes that they enjoy.
Mr. Jeffries. And do you think it would be reasonable to
conclude that an increase in the minimum wage, that was
proposed recently by the President, and has been advocated by
others, which would therefore place a greater degree of money
in the hands of low income or modest income workers would lead
to an increase in consumer demand, and therefore be good for
the economy?
Mr. Elmendorf. We have not studied a particular increase in
the minimum wage carefully, Congressman. I think there are
various specs at work. I think you are right, some people would
get paid more, which they could then spend and would presumably
spend. It is also true, though the evidence is mixed, we think
there would probably be a small reduction in employment because
the cost of workers would go up.
We have not tried to work through those effects or others.
It also, of course, depends on how much the minimum wage is
increased, and how the increase compares with what is the
current minimum wage in many States, and in many States, of
course, there is different minimum wage, a higher minimum wage
than the Federal minimum.
Mr. Jeffries. I think the greatest reduction in employment
at least that we could possibly face in the short term would be
to allow the sequestration to take place, is that correct, we
would loss about 750,000 jobs in your estimation?
Mr. Elmendorf. I think, again, the Congress could examine a
range of fiscal policy options, but of the things that are
about to happen under current law that you all talk about a
lot, the sequester, taking away the sequester would have a
noticeable effect, in our judgment, on output and jobs over the
rest of this year.
Mr. Jeffries. Now, you mentioned that a loss in confidence
in the government's ability to manage its affairs could trigger
the fiscal crisis where our ability to borrow at affordable
rates is reduced, is that right?
Mr. Elmendorf. Yes.
Mr. Jeffries. And would it be reasonable that confronting a
fiscal cliff in January, a potential debt ceiling default, in
March sequestration, debt ceiling default in February,
sequestration in March, government shutdown in April, another
potential debt ceiling default in May, could perhaps shake the
confidence of some investors in our ability to deal with our
responsibilities?
Mr. Elmendorf. Yes, Congressman. We think that perennial
crisis mode of fiscal policy over the past few years is
reducing people's confidence. How big an effect that is, we
don't know.
Mr. Price. The gentleman's time is expired. The gentleman
from Indiana, Mr. Rokita.
Mr. Rokita. Thank you, Mr. Chairman. And thank you, Doctor,
for being back with us. I think by anyone's objective measure
in this town or country, we would consider you a smart man, an
intelligent man, a good economist, right?
Mr. Elmendorf. I can't comment on that.
Mr. Rokita. That is why it befuddles me, although it is
certainly the member's privilege and prerogative, it strikes me
that some of us want to speechify rather than use this precious
time to engage you in conversation through some questioning.
And that is, for the record, I would like to say, I really
appreciate Mr. Jeffries' line of questioning. I will try to
continue on in that regard.
Speaking of speechifying, we have heard that it is
impossible to get ourselves out of this debt situation through
spending cuts alone. And I just want to understand if I am
correct that the CBO projects that revenue will double from
2012, the 2012 level at $2.4 trillion to $5.0 trillion by 2023?
Mr. Elmendorf. Yes, Congressman.
Mr. Rokita. Okay, and that this year alone, revenues will
grow my $259 billion from the previous fiscal year level?
Mr. Elmendorf. Yes, Congressman.
Mr. Rokita. Yes. According to your report, revenues have
averaged just under 18 percent of the economy in recent
history. Am I correct that you project under current law that
revenues will rise to over 19 percent?
Mr. Elmendorf. Yes, Congressman.
Mr. Rokita. And isn't that above the historic average since
World War II?
Mr. Elmendorf. Yes, Congressman.
Mr. Rokita. Am I correct that in a letter you wrote to Mr.
Boehner last year, you estimated that the President's
Affordable Care Act, or Obamacare will increase revenues. I
would say ``taxes,'' but increase revenues by a trillion
dollars?
Mr. Elmendorf. Yes, Congressman, that is right.
Mr. Rokita. Yeah, and that is because why?
Mr. Elmendorf. That is because the law included a number of
changes in tax rules that collect more money.
Mr. Rokita. Increase taxes, in other words.
Mr. Elmendorf. Yes, yes, exactly.
Mr. Rokita. I think most people are focused on the tax
increases that hit higher income tax payers. But am I correct
that the payroll tax holiday expired as part of the fiscal
cliff deal or not being included in the fiscal cliff deal?
Mr. Elmendorf. Yes, yes.
Mr. Rokita. Okay, great, thank you. Now, when you talked in
your opening remarks to the public debt, I think, interject if
I have these numbers wrong. You said that the public debt was
76 percent of our gross domestic product, the value of goods
and services this whole country, man, woman, and child
generates in a year?
Mr. Elmendorf. That is the projection for end of this year,
yes, Congressman.
Mr. Rokita. Seventy-six percent. But going back to Mr.
Flores' line of questioning, that is not the whole picture,
right? I mean, go through the definition of public debt and why
I think it might be higher that if you include what is missing
from the Social Security Trust Fund, et cetera.
Mr. Elmendorf. So in addition to the debt that is held by
private citizens here and abroad, and by the Federal Reserve
system, there is also a substantial amount of government debt
that is held by other government accounts, the most prominent
of which, the largest of which is the Social Security Trust
Fund. That debt is honest-to-goodness government debt, backed
by the full faith and credit of the government. We don't
include it in the debt measure that we focus on, nor do most
analysts, because we and most analysts look at the government
as a unified whole, and when we do projections of future
spending, we take account of future Social Security and
Medicare, other components of spending, so we capture the
future obligations of those programs under current law in the
way we do our projections of spending.
Mr. Rokita. So we----
Mr. Elmendorf. So when we look at the debt, we look at the
debt the government owes to outside the government.
Mr. Rokita. So you don't calculate that debt until that
debt becomes due, so when the Social Security Trust Fund has an
IOU and gives it to the other hand of government to pay that
IOU, that is when you count it, at that time, right?
Mr. Elmendorf. Yes, and as you know, we actually produce
projections of this larger--of gross debt. We report them in
this outlook, but we don't focus on them.
Mr. Rokita. If I wanted to include the Social Security
Trust Fund in my remarks to constituents, and trying to educate
America to what is really happening here, what would be the
debt-to-GDP ratio if you included the trust fund and any other
significant debt?
Mr. Elmendorf. I am sorry, Congressman, I actually don't
know that. I don't know that number.
Mr. Rokita. Do you think it would be over 100 percent?
Mr. Elmendorf. That seems plausible, yes, Congressman.
Mr. Rokita. Okay, thank you. And with the remaining time I
have, and remember, when I started my questioning, I
complimented you about how smart you were, certainly relative
to me, so take you in this vein. If I was a taking your credit
card application, your personal one, and under the question,
occupation, would it be plausible for you to tell me you are an
economist?
Mr. Elmendorf. Yes, Congressman.
Mr. Rokita. Okay. So you are familiar with the Austrian
School, the Chicago School----
Mr. Elmendorf. Yes, Congressman.
Mr. Rokita [continuing]. The Keynesians, the neo-Keynesians
and all that?
Mr. Elmendorf. Yes, Congressman. You and I have discussed
this before, I think.
Mr. Rokita. Okay, which one do you prefer, and why are the
other ones inferior, which school?
Mr. Elmendorf. So I think the consensus view in the
economics profession, is that what people think of as Keynesian
economics, which is the output in employment depend on the
demand for goods and services, answers important questions
about what will happen in the economy when unemployment is very
high, as it has been over the past several years, but the
consensus also thinks that over the medium term and long term,
when unemployment is not generally so high, that what we think
of as neoclassical economics is a better guide to what happens
in the economy.
Mr. Rokita. And even Keynes thought that you have got to
stop the spending at some point.
Mr. Elmendorf. I don't know.
Mr. Price. The gentleman's time has expired.
Mr. Rokita. My time is expired, I am told. I yield back.
Mr. Price. The gentleman from Wisconsin, Mr. Pocan.
Mr. Pocan. Thank you, Mr. Chair, and thank you, Dr.
Elmendorf. It is a pleasure to be on the committee, especially
with so many people from Wisconsin. I know Mr. Ryan and I share
a county. Back home we have neighboring districts. So it is
great to be here representing my State.
Dr. Elmendorf, you know, one of the top priorities, as I
look at it, is growing the economy. How can we create more jobs
right now to really get things going? That is the best way to
get out of the deficit situation, and when, you know,
especially before being here, watching the news, it seems like
all they ever talk about is deficit reduction as the economic
plan as if Congress can't walk and chew gum. And I think we can
do both.
And part of that is how do we help grow the economy to help
create those jobs. When I was on our joint committee on finance
back home in the legislature, I used to be the chair of the
committee, and we had to approve every single recovery dollar
that, stimulus dollar that came through Wisconsin that came
from Congress. And at that time, you know, anecdotally I have a
small business. I heard from small business owners who benefit
from it, but more importantly, at that committee we had the
road building industry, and the vertical construction industry.
So, you know, road building, and building, buildings--not
exactly your most liberal entities--put out a report saying
that 54,000 jobs were saved or created just in the State of
Wisconsin, thanks to those stimulus dollars, and some other
minor things we did in the legislature. And you know, I look at
that and then I look at what the President said yesterday about
kind of investing it back again. And then I saw a release from
Speaker Boehner yesterday, and he said in his release, tonight
he offered them little more than the same stimulus policies
that have failed to fix our economy and put Americans back to
work.
And you know, I know Wisconsin is a very unique place
because those of us from there are very proud to be from there.
I think we have very commonsense Midwestern values, but our
experience was very different than that comment. I was just
curious. I believe the CBO has done a report on the ARRA
effects. Were there, indeed, is it unique to Wisconsin or were
there total job increases across the country because of those
investments?
Mr. Elmendorf. So Congressman, we think that there were
more, there were more jobs and more output produced because of
the Recovery Act.
Mr. Pocan. And what kind of numbers jobs are we talking?
Mr. Elmendorf. So it varies over time because the spending
and the tax reductions from the Recovery Act varied over time.
At the peak effect of the Act, in 2010 and 2011, we think there
were between basically half a million and 3.5 million
additional jobs.
Mr. Pocan. Okay, so up to 3.5 million. And then were there
additional jobs since then through that peak period?
Mr. Elmendorf. Yes, so there continues to be, in our
estimate, slightly more employment than would otherwise be the
case. But most of the money from that, both the spending side
and the tax cuts has now been spent, so the effects are
dwindling.
Mr. Pocan. So because of the job increase, I think it is
fair to say, too, that it reduced the unemployment rate during
that period?
Mr. Elmendorf. Yes, Congressman.
Mr. Pocan. Okay, and how about the effect on economic
growth in that period? Did it have any net effect to the
economy?
Mr. Elmendorf. Yes, we think it boosted economic growth in
2009 and 2010 by a considerable extent and brought down the
unemployment rate again, particularly, in 2010 and 2011.
Mr. Pocan. Okay, so you know, I just think as we look at
what we are talking about, you know, so often people talk about
whether you raise taxes or you cut spending, as if those are
the only two alternatives on the table, and I think maybe
sometimes in Washington, those are the only two alternatives
people seem to look at. But from those of us who come from the
heartland or maybe are new around here, you know, I have had a
small business since I had hair, and it was dark. All right, so
I come from a little different perspective, but it does seem
that there is another way that if we can actually help to
increase people getting to work and getting jobs and if they
are paying taxes, that trajectory we saw on spending is the
problem on that chart, we could start to then close up that
trajectory by bringing in real revenue without raising taxes on
anyone just by having more people becoming taxpayers. Is that a
fair assessment?
Mr. Elmendorf. So you are right Congressman, that if more
people worked and they earned more money, that could have a
substantial positive effect on the budget. The question is what
policies the Congress might enact and what the cost of those
policies would be for the budget.
Mr. Pocan. Got you. And then when people have talked about,
too, you know, when there is a dollar expended to do that, I
mean, just like in business, if I invest in something you have
got a cost to do that, but I would make a profit off of that
ultimately. So there may be a 20, 40, 60, 80 percent, whatever
the cost is depending on their product, ultimately, you still
could have a net gain, correct? So having that investment, if
it is the right policy and it creates jobs, can help close that
trajectory?
Mr. Elmendorf. It is possible, Congressman, but if the
government invests in something, even if that project earns a
fairly high return for the economy as a whole, the government
will collect only a small share of that higher return in future
tax revenue. So funding projects that would pay for themselves
by the Federal Government, I wouldn't want to rule out. But on
the other hand, I think you should view that as a very high
bar----
Mr. Price. The gentleman's time is expired. The gentleman
from Georgia, Mr. Woodall, is recognized for 5 minutes.
Mr. Woodall. I thank you, Mr. Chairman, and I want to say
how proud I am that we have a Georgian sitting as vice chairman
of the committee this cycle. My freshman colleague from
Wisconsin talks about commonsense Midwestern values. It is
those commonsense Georgia values that they give me great hope
off of this institution. So congratulations to you in that new
role.
So I do want to talk about the common ground we have with
Wisconsin. In fact, Rhode Island, the gentleman from Rhode
Island, Mr. Cicilline was talking earlier about the great
public works programs, and before we started our questioning,
and I just wanted to read from FDR's State of the Union speech
back in 1935 when he said: ``I am not willing that the vitality
of our people be further sapped by the giving of cash or of
market baskets. We must preserve not only the bodies of the
unemployed from destitution, but also their self-respect, their
self-reliance, their courage and their determination.''
He called the payments going out at that time a narcotic, a
subtle destroyer of the American spirit. And I would certainly
hope as we talk about revenues, and I think about refundable
tax credits as being these cash payments, anything we can do to
work together to redirect those cash payments into those real
jobs that provide real benefits to the human spirit, not just
to the pocketbook, I would look forward to working together on.
But thinking about my common Georgia upbringings, Director, I
wanted you to help me with some things.
I heard a lot of discussion about, we can't get to balanced
budgets just by cutting spending. There has to be a revenue
component. And my friend from Indiana pointed out that revenue
was going to double over the next 10 years under your
projection?
Mr. Elmendorf. Yes, Congressman.
Mr. Woodall. So our revenue component, if we do nothing
more, we are going to double revenues to the Federal Government
over the next 10 years?
Mr. Elmendorf. Yes, Congressman, that is our projection.
Mr. Woodall. Now, thinking about the cutting of the
spending that we are going to be doing over the next 10 years,
if we do nothing over the next 10 years, how much will spending
fall below current levels?
Mr. Elmendorf. In dollar terms, Congressman, as you know,
we expect the spending at the end of the decade will be quite a
bit higher than spending is now.
Mr. Woodall. Well, you say in dollar terms. What if we did
it as a percentage of the economy to adjust for inflation, then
how much lower would spending be in 10 years than it is today?
Mr. Elmendorf. Well, as a share of the economy, we project
outlays in 2023 will be 22.9 percent, and last year they were
22.8 percent.
Mr. Woodall. So over the next 10 years, they are not going
down either?
Mr. Elmendorf. There is a dip and then there is an increase
again.
Mr. Woodall. Okay. So just to be clear, tax is going to
double over the next 10 years in real dollar terms, spending
not going to decline over the next 10 years either in real
dollar terms, or nominal dollar terms?
Mr. Elmendorf. That is right, Congressman. That is right.
As you know, as I mentioned earlier there will be roughly 40
percent more beneficiaries of the largest, most expensive
Federal programs a decade from now than they are today, and
that is a critical factor driving those numbers.
Mr. Woodall. Unquestionable, which leads me to believe,
when you have serious people looking at these issues as we do,
that no one is actually talking about cutting spending. We are
just arguing about how much more we are going to increase
spending. Are we going to increase a whole lot more? Are we
going to increase it a little more because there are folks out
there that we have to keep commitments to. As useful as I find
the baseline, I can't tell you how much I appreciate the work
that you do. I am glad that you do it instead of me doing it. I
tell folks, the best part of my job is really smart people are
willing to invest time in me to make me smarter.
But something I don't understand. You mentioned in your
testimony that the alternative fiscal scenario assumes the
sequester doesn't go into effect because you have had some
members mention that. But does the baseline assume that the war
in Iraq and Afghanistan comes to an end and that money ceases
going out the door?
Mr. Elmendorf. No. So what we do for, and have done for
years----
Mr. Woodall. Maybe a follow onto that. Does it assume that
the Sandy supplemental spending was just a one-time effect and
also won't go on?
Mr. Elmendorf. No, Congressman. The answer to both parts of
the question is that our projections of discretionary spending
have never been about the cost of doing particular sorts of
programs. They have always been extrapolations of the latest
funding Congress has provided, with the one crucial exception
now of the caps on most discretionary spending. But the current
funding for overseas wars and the funding that Congress has
provided for, really to Hurricane Sandy, we have extrapolated
those with inflation, the way we have traditionally done
discretionary spending as a whole.
Mr. Woodall. And why is that? I mean, here we have done an
alternative scenario because some Members have suggested that
something might happen, and yet we baked into the baseline, 10
years of Sandy aid, which we know with absolute certainty will
never happen. What is the reason for that?
Mr. Elmendorf. So Congressman, I think for the things that,
as you know, our table of alternative policies includes numbers
that allow you and your colleagues to subtract those particular
provisions if you would like, to construct your own projections
of the budget balance. The reason we view those as somewhat
different from the provisions in the alternative scenario, is
the alternative scenario has a set of permanent features of law
that the Congress has, in the past, extended or deferred taking
effect. Whereas discretionary spending, as I said, has never
been about particular programs, so we have written other
reports, for example, on veterans' health care, which is
indiscretionary spending. We think that providing the level of
care people now get to the people who are now eligible will be
more expensive 10 years from now than is captured in the
discretionary baseline.
Mr. Price. The gentleman's time is expired.
Mr. Elmendorf. Hurricane Sandy may not recur, but other
storms may come, other wars may come. So we try not to judge
what the level of discretionary spending that you all would
like to have in the future.
Mr. Price. The gentleman's time is expired. The gentleman
from California, Mr. Huffman.
Mr. Huffman. Thank you, Mr. Chairman, and it is an honor to
serve with you on this committee. Thank you, Dr. Elmendorf for
your testimony. It has been very useful. I have a pretty quick
question here. We have spent most of our time today discussing
the deficit, our debt, and the health care costs that are the
big driver of future expenditures. But a couple of my
colleagues have brought up Social Security, and so I just
wanted to ask you, Dr. Elmendorf, if you could please explain
the extent to which Social Security contributes to the deficit
and the public debt that we saw illustrated on the chart. And
also, if you assume that we should be focused like a laser beam
on bringing the deficit down so that we can get our debt under
control, would you agree that the discussion of reducing Social
Security costs is a bit of a red herring?
Mr. Elmendorf. So Congressman, starting a few years ago and
continuing indefinitely into the future under current law, the
Social Security benefits that are being paid out exceed the
Social Security tax revenues that are being collected. The
Social Security Trust Fund also receives, as you know, interest
payments on the debt that it holds. So at this point in time,
Social Security benefits, as I said, are greater than tax
revenue, a little less than the tax revenue plus the interest
payments, but on a unified budget basis, where the interest
payments from one part of the government to the other wash out,
Social Security taxes benefits and taxes actually are
increasing the budget deficit. And if you look in our
projections out half a dozen years or so, by that point, the
benefits will exceed the tax revenues plus the interest
payments that will be paid in, so that the Social Security
Trust Fund as a whole will be suffering annual deficits.
Mr. Huffman. At what point--excuse me, at what point does
Social Security begin to contribute to the deficit?
Mr. Elmendorf. Well, again, Congressman, on a unified
budget basis, taking account of just the tax revenues, the
dedicated tax revenues, and the benefits, it is contributing
the deficit now. If one instead looks at just the balance in
the Social Security Trust Fund, that balance is, the annual
balance is positive now, but will be negative within about a
half dozen years. I am looking for the exact number and I can't
find it, but it is changing quickly.
Mr. Huffman. Okay.
Mr. Price. The gentleman yields back? The gentleman yields
back his time.
Mr. Elmendorf. Actually, Mr. Chairman, I do have the number
to fully answer the question. Which is we think that by 2021,
the Old-Age and Survivors Insurance Trust Fund will have an
annual deficit. The Disability Insurance Trust Fund is
currently an annual deficit. Taking those pieces together as
people often do, we think the overall Social Security Trust
Funds will be running annual deficits beginning in 2017.
Mr. Price. Thank you. The gentleman from Ohio, Mr. Renacci.
Ms. Moore. Excuse me, Mr. Chairman.
Mr. Renacci. Thank you, Mr. Chairman.
Mr. Price. The gentlelady from Wisconsin.
Ms. Moore. I do have time constraints, and I do believe
that I have been overlooked.
Mr. Price. The gentlelady is up following Mr. Renacci.
Ms. Moore. Well, is he, how many Republicans have we taken?
Mr. Price. We have gone back and forth, Republican,
Democrat. Mr. Huffman just had the time.
Ms. Moore. Okay, I am so sorry.
Mr. Price. That is all right. The gentleman from Ohio.
Mr. Renacci. Thank you, Mr. Chairman, and thank you,
Doctor, for being here. I just want to go back to my
colleague's question on Social Security because I do have a
question on it. But the CBO baseline shows, and you previously
mentioned that Social Security will run a cash deficit of $1.3
trillion over the next 10 years. Is that a true statement?
Mr. Elmendorf. That may be, Congressman. I don't have that
number in front of me, I am afraid.
Mr. Renacci. Okay, going back to some of the discussions
that have occurred, and it has been an interesting day for me.
I have been a businessman most of my life, only been here a
couple of years. So when I look at the business of the Federal
Government as to how it is going, and how my current business
is ran, my small business is ran back home, I would be scared
to death of the trajectory direction that we are going. And I
think you said that continuing under the current policies, it
is just not sustainable, is that correct?
Mr. Elmendorf. Yes, Congressman.
Mr. Renacci. Okay. One question earlier, somebody talked
about jobs, net jobs created over the last 4 years. Is that a
negative number or a positive number, net jobs?
Mr. Elmendorf. I am sorry, Congressman, I don't have that
number.
Mr. Renacci. Okay. Let's go back to tax rates. And again,
as a business owner, when my tax rates increased, I was
concerned and would not employ more people. That was an easy
answer for me. And if I didn't have any certainty and
predictability of what those rates were going to be, I
definitely didn't do much as far as the future. Do you have any
correlation to the raising marginal rates and how it affects
the economy, because we have talked a little bit about that?
Mr. Elmendorf. Yes, Congressman, so when we modeled the
effects of big changes in fiscal policy like the President's
budget proposals each year, our models explicitly include the
effects of changes in tax rates on people's work effort and on
our saving behavior. We recently did a reexamination of the
assumed amount of response that we have with a lot of
consultation with outside experts, and made some adjustments in
what we do and published reports describing how we read the
evidence. But it is certainly the case, in our view of the
research literature, that higher tax rates will tend to
discourage work effort, and saving.
Mr. Renacci. So as we talked about earlier, you heard that
if we--if we add taxes, if we do a balanced approach, when
marginal tax rates go up, that is also going to slow the
economy down?
Mr. Elmendorf. That is right, Congressman. Again, all else
equal. So the crucial question is what else is going on in the
Federal budget.
Mr. Renacci. Do you think that comprehensive--well,
actually, let's go back to the fiscal cliff. When we passed the
fiscal cliff here recently, do you think people moved their
taxable income? Was there a shift in taxable income and a
change in what they were going to do knowing the rates were
going up?
Mr. Elmendorf. Yes, Congressman. I think that both
corporations and individuals behaved differently the last part
of last year, not--based on their expectation and their
uncertainty about what was going to happen with the fiscal
cliff.
Mr. Renacci. So we will see a jump up maybe in receipts
this year because of that?
Mr. Elmendorf. And in fact, Federal receipts were strong in
January, and that may be--that is, I think, part of the story.
There is also, of course, the end of the temporary reduction in
the payroll tax, and other factors.
Mr. Renacci. Let's talk a little bit about capital gains,
which I know also changed. Capital gains rates could lead to--
in 2012, JCT and the CBO said that higher tax rates on capital
gains could lead to a level of inefficiency and conversely,
lower capital gain rates could, in fact, encourage investment.
Do you agree with that statement?
Mr. Elmendorf. Yes, Congressman.
Mr. Renacci. Do you believe an increase in the capital
gains tax could increase the long-term productivity.
Mr. Elmendorf. So you said the----
Mr. Renacci. Increase.
Mr. Elmendorf. Increase.
Mr. Renacci. Assuming that we are increasing capital gains.
Mr. Elmendorf. All else equal, Congressman, no, we don't
think that an increase in the tax on capital is going to boost
investment output in the future. The question, again, I
emphasize, is all else is not usually equal. If that money is
used to reduce borrowing, then that reduction in borrowing has
a positive effect on the economy.
Mr. Renacci. My colleague earlier talked about revenues
doubling over the next 10 years in your projection, and
spending going up significantly. Do you have an idea how much
spending is going to go up over the next 10 years?
Mr. Elmendorf. I don't have that number calculated,
Congressman. We think spending this year will be about $3.5
trillion, and in 2023, will be pushing $6 trillion. But I don't
know the percentage change, I am afraid.
Mr. Renacci. Okay. I yield back at this time.
Mr. Price. The gentleman yields back his time. The
gentlelady from Wisconsin, Ms. Moore, for 5 minutes.
Ms. Moore. Thank you so much, Mr. Chairman, and thank you,
Dr. Elmendorf, for appearing today. I have seen how you have
done this very delicate dance all morning as Members have
attempted to get you to agree with their approach about how to
reduce the deficit, about how to grow the economy. What is more
important? Is this tax policy better or worse? So I do
appreciate your indulgence and your patience in this. But what
I guess I learned and heard from you today, is that ultimately,
we make the decisions around here about what happens, and that
you know, it is, you know, all things are not equal.
So for example, the American Taxpayer Relief Act of 2012
the so-called fiscal cliff thing we did New Year's Day, it
doubled the deficit, didn't it? It went from like $2.3 trillion
to $4.6 trillion, and all, you know, and in that, I think we,
for example, did not extend the payroll tax relief, and so
therefore, we didn't help poor people there. We did things like
make the unemployment insurance until December 31st of this
year, whereas we increased the estate tax relief, went back to
former law, made that permanent so that couples up to $10
million have an exemption.
So when we think about this provision, for example, in
terms of long-term debt and the stimulative ability, or lack
thereof, do you have an assessment of this particular--this
particular policy with respect to long-term deficit reduction?
Mr. Elmendorf. So Congresswoman, you actually understated
the point. We thought deficits under current law had been $2.3
trillion over the decade, and the New Year's law added about
$4.7 trillion to deficits over the decade, so it essentially
tripled the deficits under current law. That change greatly
increased government borrowing. It also reduced tax rates.
Those two changes have opposing effects on future output. We
haven't actually done a specific estimate of the economic
effects of that law, but as I said before, the level of
government borrowing has an important--negative higher
borrowing has a bigger negative effect on future economic
outcomes, and I think that----
Ms. Moore. My time is waning, but I think that, you know,
you have really made the point that all--that there are
consequences of policy, and here this was an initiative, I
think, that helped wealthier people more because the Bush era,
Obama era, whatever people want to call it, tax rates,
disproportionately helped richer people. Same thing with tax
expenditures. We heard discussion here earlier about. And
Greenspan calls them not tax expenditures, but tax
entitlements. Isn't it, in fact, true that the tax expenditures
almost equal the Medicare, and Medicaid, and the Social
Security all together; that they almost equal that amount, and
that they disproportionately go to wealthier people? I mean, 60
percent of our tax entitlements go to, you know, maybe 20
percent of the wealthiest people?
Mr. Elmendorf. So Congresswoman, in our report last year we
showed that tax expenditures through the individual income tax,
and the payroll tax were larger than government spending on
Social Security, larger than spending on defense, larger than
spending on Medicare. The distribution varies a good deal
across tax expenditures. Some of them benefit higher income
people disproportionately, others are more focused on lower
income people. We have some work underway.
Ms. Moore. There is a lot of complaints, Dr. Elmendorf,
about the 50 percent of people who don't pay any income tax,
and so, I mean, the tax expenditure program for homeowners, and
for charitable donations which are good tax expenditures, there
is a lot of waste in it as well. I just want you to stipulate
in your testimony here that, in fact, there is a lot of
spending that is done through tax expenditure programs, and it
increases the income disparity.
Mr. Elmendorf. So I think, Congresswoman----
Ms. Moore. Very regressive.
Mr. Elmendorf. Many economists agree that tax expenditures
are best thought of as government spending, even though they
appear in the budget as----
Ms. Moore. And are they regressive?
Mr. Elmendorf. We have work underway on the distribution of
tax expenditures, and it is not finished yet and I don't want
to speak ahead of our not having completed that analysis.
Mr. Price. The gentlelady's time is expired.
Ms. Moore. Thank you for your indulgence, Mr. Chairman.
Mr. Price. Thank you, the gentleman from Indiana, Mr.
Messer, for 5 minutes.
Mr. Messer. Mr. Chairman, I am the final questioner today.
Mr. Price. I think that is accurate and we appreciate you
turning on your mic.
Mr. Messer. Yeah, I was going to say, I have already eaten
up my time without the mic. Thank you, Mr. Chairman, and thank
you, Doctor. I just made the point I am the final questioner
today. I appreciate that. Somebody gets to do it and today it
is me. Doctor, I want to thank you for your eloquence. Thank
you for your knowledge and wisdom and thank you for your
stamina at today's committee hearing.
Mr. Elmendorf. And yours, Congressman. You are one of the
few people who actually sat through an entire hearing. And you
too, Congressman.
Mr. Messer. Well, you know, when you are new here you want
to learn and I appreciate the knowledge that I have been able
to gather today. I want to focus just for a second on a comment
that you made earlier. I want to make sure that I have it
accurate. You mentioned that by, was it 2023, we would have 40
percent more recipients of Medicare and Social Security than
today?
Mr. Elmendorf. Roughly yes, Congressman.
Mr. Messer. You know, there is a lot of rhetorical energy
spent around this building, appropriately so, making the point
that we want to make sure we keep our commitments to those who
have invested through a lifetime in Social Security and
Medicare, certainly a commitment I intend to keep. I know of no
one on either side of the aisle who believes any differently.
If you saw that number and saw that we were going to increase
by 40 percent by 2023, but you also knew that we were going to
increase our workforce by 40 percent by 2023 so that you had
the same number of taxpayers footing the bill for those
benefits, or at least per recipient, then you wouldn't be
nearly as alarmed by that number as you might be in a scenario
that is far different. And so----
Mr. Elmendorf. Yes.
Mr. Messer. I was hoping that you could comment just a
minute about maybe the historical trend of how many taxpayers
we have had per recipient in those programs, and where we are
going in that same trend.
Mr. Elmendorf. Yes, Congressman. So we project that the
labor force will grow much more slowly in the coming decade
than it has grown in over the past several decades. And there
are two main reasons for that: One is the retirement of the
baby boom generation. They came into the labor force. They
boosted the labor force growth, and as they retire, they will
be holding it down. And the second is an end to the
longstanding increase in women's labor force participation,
which, again, pushed up the participation rate late in the late
century, but has been pushing the other direction. But it has
not been doing that now.
So the labor force growth will be a good deal slower going
forward than it has been in the past. A lot of that is outside
of the control of the Congress, but there are policies that
Congress can enact or not that can have effects on labor force
participation and policies on both the tax and spending sides
of the budget.
Mr. Messer. Yeah, and you know, I know you are probably
reluctant to just throw out numbers that you may not have
access to right in front of you, but could you talk just a
little bit at least--if you have the numbers, great, but in the
last 10, to 20, to 30 years how many workers per recipient did
we have? What are the likely trends by 2023, for example?
Mr. Elmendorf. I know that I have one fact, which is that a
few years ago, 21 percent--a few years ago, the population age
65 or older was 21 percent of the population between ages 20
and 64. So 65 or older relative to those of working age, 20 to
64, that share was 21 percent a few years ago, and it will be
37 percent 25 years from now.
Mr. Messer. Which would lead to, there will be fewer people
paying for each recipient later?
Mr. Elmendorf. Yes.
Mr. Messer. If you can get those numbers to me, I would
appreciate it. I would like to see whatever we are able to get
track of.
Mr. Elmendorf. Yes, Congressman. Yes.
Mr. Messer. I just would want to make this very simple
point, rightly so. A lot of energy is spent talking about the
injustice that would fall to those who have invested and paid
in over their lifetimes if they did not receive the benefits
that they rightly should receive, but probably not enough
energy is spent talking about the injustice to the next
generation, those who will pay far more into a program that
through which they may receive far less if nothing is done
either. And so as we focus as a body on the importance of the
justice of making sure that current recipients and those
nearing retirement receive those benefits, I hope we spend
equal energy thinking about the next generation and how we
preserve these programs for them.
Mr. Elmendorf. I would just say, Congressman, we produce a
report every summer or fall on the Social Security program
which lays out just the points you are making about the ratio
of workers to beneficiaries, and about the effects of--the
differential effects of the program on people born in different
birth cohorts and at different points in the income
distribution.
Mr. Messer. I would love to see that.
Mr. Price. The gentleman yield back. I want to thank
Director Elmendorf for being with us today, for his wisdom and
his patience. I am charged with asking unanimous consent. The
members have 7 calendar days to submit questions for the
record, and without objection, so ordered. This hearing is
adjourned.
Mr. Elmendorf. Thank you, Congressman.
[Questions submitted for the record and their responses
follow:]
Questions Submitted for the Record by Chairman Ryan
sensitivity of projected deficits and debt to
higher-than-projected interest rates
Please provide how higher-than-expected interest rates would affect
federal budget deficits and debt held by the public over the next
decade. The three interest rate scenarios are as follows: 1) interest
rates rise to their average levels over the 1991-2000 period, 2)
interest rates rise to their average levels over the 1981-1990 period,
and 3) interest rates follow a path that is consistent with the average
of the 10 highest projections shown in the October 2012 and February
2013 releases of Blue Chip Economic Indicators. This is an update of an
analysis that CBO did for Chairman Ryan on February 24, 2011.
additional information on the impact of the sequester
CBO has provided the Budget Committees with estimates of the impact
from the automatic sequester on budget functions 050 (National Defense)
and 570 (Medicare). The sequester's impact on non-defense accounts has
been assigned to function 920 (Allowances), which is a non-specific
classification used for programs and policies that are not easily
classified into a more specific budget function. With publication of
the OMB Report Pursuant to the Sequestration Transparency Act of 2012
(P.L. 112-155), information is now publically available on the impact
of the sequester on an account-by-account basis. With this new
information available, I am requesting that CBO provide an estimate of
the non-defense sequester impact on a function-by-function basis in
order to give the Budget Committee greater precision on understanding
the impact of the sequester on non-defense budget functions.
primary balance and budget sustainability
Based on CBO's recent budget outlook, if the fiscal year 2023
deficit was reduced to the level of net interest projected under the
current law baseline, what is known as primary balance, would that
stabilize the federal government's debt as a share of GDP and put its
fiscal position on a sustainable path?
additional information on macroeconomic feedback
resulting from deficit reduction
CBO's report on Macroeconomic Effects of Alternative Budgetary
Paths provides information on additional deficit impacts resulting from
macroeconomic feedback under various budgetary paths. To better
understand these results, I am requesting CBO to provide information on
the revenue and outlay components of the ``Effects on primary
deficits'' displayed in Table B-2 of the report.
Questions Submitted for the Record by Hon. Luke Messer, a
Representative in Congress From the State of Indiana
As a member of the Committee on Education and the Workforce, and
its Subcommittee on Higher Education and Workforce training, I am
especially interested in slowing the rapidly rising cost of higher
education. College costs too much. Parents are scrimping and saving and
spending their nest eggs to pay for their children's education while
trying to make ends meet in this sluggish economy.
Between 2001 and 2012, federal financial aid in constant dollars
increased 140 percent. However, over the same period, published tuition
and fees for in-state students at public four-year colleges increased
by an average of 5.6 percent faster than the rate of inflation. In last
year's State of the Union address, the President said ``we can't just
keep subsidizing skyrocketing tuition; we'll run out of money.'' Last
night, the President said ``taxpayers cannot continue to subsidize the
soaring cost of higher education.''
I am concerned that well-intentioned Federal education subsidies
are hyper-inflating the cost of higher education, leading to more
borrowing, higher interest payments, less disposable income, and slowed
economic growth, essentially creating an ``education bubble'' not
dissimilar to the housing bubble that nearly crippled the economy
several years ago.
I have several questions on this topic for Dr. Elmendorf:
1. Do you believe the current rate of tuition inflation is driven
in part by federal education subsidies?
2. Might rising college costs be constrained by more carefully
targeting and measuring the effectiveness of federal education
assistance?
3. What role has federal education assistance like Pell Grants
played in subsidizing rising tuitions?
4. CBO's February baseline shows the Pell Grant program facing a
funding cliff in Fiscal Year 2015 and annual shortfalls in subsequent
years through the budget window. Do you believe the current structure
of this important program is sustainable?
Question Submitted for the Record by Mr. Van Hollen
How do today's discretionary funding levels compare with pre-
recession funding levels?
CBO's Responses to Questions Submitted for the Record
ranking member van hollen
Question: How do today's discretionary funding levels compare with
pre-recession funding levels?
Answer: With discretionary appropriations in 2013 based on H.R. 933
as passed by the House (including the effects of the sequestration in
March) and on P.L. 113-2, the Disaster Relief Appropriations Act, 2013,
total discretionary budget authority would be 5.4 percent higher this
year than it was in fiscal year 2007 (the year before the recession
officially began). Total annual discretionary budget authority
increased by $57 billion over that period--from $1,070 billion in 2007
to an estimated $1,127 billion in 2013 (see the table below).
That difference is affected by a decline in funding for the wars in
Iraq and Afghanistan and the substantial appropriations made in 2013 in
response to Hurricane Sandy (funding in 2007 included some funding in
response to Hurricane Katrina and other hurricanes). War-related
funding dropped from $170 billion for 2007 to $92 billion (including
the effects of sequestration) for 2013, a reduction of $78 billion.
However, the funding for 2013 related to hurricane relief and recovery
was $40 billion higher than the amount provided for similar activities
in 2007.
Excluding appropriations for those purposes, discretionary budget
authority rose from $892 billion in 2007 to $987 in 2013, an increase
of about 11 percent. During that period, prices (as measured by the
consumer price index for urban consumers) rose by 13 percent, and
nominal gross domestic product (GDP) increased by 16 percent. As a
result, discretionary appropriations--based on the House-passed
appropriations for 2013 and excluding funding for overseas contingency
operations and hurricane relief--declined by 2.2 percent in real
(inflation-adjusted) terms between 2007 and 2013 and dropped from 6.4
percent of GDP to 6.2 percent of GDP over that period.
DISCRETIONARY BUDGET AUTHORITY IN FISCAL YEARS 2007 AND 2013
------------------------------------------------------------------------
Billions of dollars
-------------------------- Percentage
Estimated change
Actual 2007 2013
------------------------------------------------------------------------
War-Related Funding.............. 170 92 -46.0
Hurricane Relief Funding......... 7 48 545.5
Other Funding.................... 892 987 10.7
--------------------------
Total...................... 1,070 1,127 5.4
------------------------------------------------------------------------
ecade. The three interest rate scenarios are
as follows: 1) interest rates rise to their average levels over the
1991-2000 period, 2) interest rates rise to their average levels over
the 1981-1990 period, and 3) interest rates follow a path that is
consistent with the average of the 10 highest projections shown in the
October 2012 and February 2013 releases of Blue Chip Economic
Indicators. This is an update of an analysis that CBO did for Chairman
Ryan on February 24, 2011.
Answer: To estimate the effect that higher interest rates would
have on the budget, CBO has updated the analysis it did in February
2011 (that earlier analysis is available on CBO's website at
www.cbo.gov/publication/22039).
For scenarios 1 and 2, we have assumed that by 2017, interest rates
would rise to and then remain at the levels that Treasury interest
rates averaged during the 1990s (scenario 1) or 1980s (scenario 2).
Thus, over the 2018--2023 period, rates for 3-month Treasury bills
would be 4.9 percent under scenario 1 and 8.8 percent under scenario 2,
compared with 4.0 percent in CBO's baseline projections (see Table 1
below). Similarly, rates on 10-year Treasury notes would average 6.7
percent between 2018 and 2023 under scenario 1 and 10.6 percent under
scenario 2, compared with 5.2 percent in the baseline projections.
For scenario 3, we have based the assumed path of rates on the
average of the 10 highest forecasts from the Blue Chip Economic
Indicators: Rates for 2013 and 2014 come from the February 2013 Blue
Chip report, and rates for 2015 through 2023 come from the October 2012
Blue Chip report (the most recent report with longer-term projections).
Following the procedure used in our 2011 analysis, we have adjusted the
Blue Chip forecast upward by 30 basis points to account for significant
interest rate movements since that report was released. Under that
scenario, interest rates for 3-month Treasury bills would be much
higher from 2015 through 2017 than in CBO's baseline projections and
would be 4.5 percent from 2018 through 2023, compared with 4.0 percent
in the baseline projections.
The budgetary effects of those alternative interest rate paths
would be minimal in 2013 but substantial over the coming decade.
Relative to CBO's baseline projections, interest payments between 2014
and 2023 would be $1.4 trillion higher under scenario 1, $6.3 trillion
higher under scenario 2, and $1.1 trillion higher under scenario 3 (see
Table 2 below). Cumulative deficits and debt held by the public at the
end of the 2014--2023 period would be higher by similar amounts.
CBO strives to create baseline budget and economic projections that
are in the middle of the distribution of possible outcomes. As a
consequence, CBO sees an equal risk of interest rates' being higher or
lower than in its baseline projection. Lower interest rates would imply
lower federal interest payments, and the budgetary effects of
differences in interest rates relative to CBO's baseline would be
roughly symmetric.
It is important to note that the estimates in Table 2 do not
account for the effects on the federal budget of other differences in
economic conditions that would probably accompany higher interest
rates. For example, interest rates could be higher than in CBO's
baseline because inflation could be higher than CBO anticipates.
Indeed, inflation was higher during the 1990s, and much higher during
the 1980s, than CBO projects for the next decade: Inflation as measured
by the consumer price index averaged 5.1 percent annually during the
1980s and is projected by CBO to average 2.2 percent over the coming
decade. If CBO assumed that inflation over the next decade matched the
average seen during the 1980s, to parallel the assumption about
interest rates, projected tax revenues would be much higher than in
CBO's baseline projections, and federal spending would be moderately
higher. On balance, those two effects would reduce deficits.
Not only was inflation higher in the 1980s and 1990s than is
currently projected for the next decade, real interest rates (nominal
rates adjusted for inflation) were also higher during those periods
than in CBO's baseline projections for the coming decade. If real
interest rates over the next decade ended up matching those historical
values, it might be because the economy (and thus demand for credit)
was stronger than in CBO's projections. In that case, revenues would be
greater than the amounts projected in the baseline, offsetting some of
the increase in interest costs.
The causes of higher interest rates would also affect the conduct
of monetary policy by the Federal Reserve. Changes in both interest
rates and the magnitude of the Federal Reserve's purchases and sales of
securities would affect remittances by the Federal Reserve to the
Treasury (which are counted in the budget as revenues). Without knowing
what overall economic conditions would be under those three scenarios,
and thus what actions the Federal Reserve would take, it is not
possible to estimate how the Federal Reserve's remittances to the
Treasury might differ from the amounts in CBO's baseline projections.
TABLE 1.--CBO'S ESTIMATE OF THE TREASURY INTEREST RATE SCENARIOS REQUESTED BY CONGRESSMAN RYAN
[Percent, by fiscal year]
----------------------------------------------------------------------------------------------------------------
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
----------------------------------------------------------------------------------------------------------------
Rates on 3-Month Bills
CBO's Baseline..................... 0.1 0.1 0.2 1.0 2.9 4.0 4.0 4.0 4.0 4.0 4.0
Scenario 1......................... 0.1 0.1 0.2 1.7 4.0 4.9 4.9 4.9 4.9 4.9 4.9
Scenario 2......................... 0.1 0.1 0.4 3.6 7.4 8.8 8.8 8.8 8.8 8.8 8.8
Scenario 3......................... 0.2 0.4 2.6 4.0 4.4 4.5 4.5 4.5 4.5 4.5 4.5
Rates on 10-Year Notes
CBO's Baseline..................... 1.9 2.5 3.2 4.1 4.9 5.2 5.2 5.2 5.2 5.2 5.2
Scenario 1......................... 2.2 3.4 4.5 5.5 6.4 6.7 6.7 6.7 6.7 6.7 6.7
Scenario 2......................... 2.7 4.7 6.7 8.6 10.1 10.6 10.6 10.6 10.6 10.6 10.6
Scenario 3......................... 2.2 2.9 4.7 5.6 5.7 5.7 5.8 5.8 5.8 5.8 5.8
----------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office.
Note: Scenarios 1, 2, and 3 were specified by Congressman Ryan as alternatives to CBO's baseline
projections.14,i1,s30,4,4,4,4,4,4,4,4,4,5,5,5,5
Scenario 1......................... 2 13 32 66 104 136 162 190 218 246 274
Scenario 2......................... 4 33 85 201 355 529 671 833 103 1,185 1,378
Scenario 3......................... 3 11 55 126 138 122 120 129 137 147 157
Source: Congressional Budget Office.
Note: Scenarios 1, 2, and 3 were specified by Congressman Ryan as alternatives to CBO's baseline projections.
Question 2: Additional Information on the Impact of the Sequester--
CBO has provided the Budget Committees with estimates of the impact
from the automatic sequester on budget functions 050 (National Defense)
and 570 (Medicare). The sequester's impact on non-defense accounts has
been assigned to function 920 (Allowances), which is a non-specific
classification used for programs and policies that are not easily
classified into a more specific budget function. With publication of
the OMB Report Pursuant to the Sequestration Transparency Act of 2012
(P.L. 112-155), information is now publically available on the impact
of the sequester on an account-by-account basis. With this new
information available, I am requesting that CBO provide an estimate of
the non-defense sequester impact on a function-by-function basis in
order to give the Budget Committee greater precision on understanding
the impact of the sequester on non-defense budget functions.
Answer: The best information to answer this question is contained
in backup data for the Office of Management and Budget's OMB Report to
the Congress on the Joint Committee Sequestration for Fiscal Year 2013
(March 1, 2013). Those data are not yet available. CBO will provide you
with these functional breakdowns when the data become available.
Question 3: Primary Balance and Budget Sustainability--Based on
CBO's recent budget outlook, if the fiscal year 2023 deficit was
reduced to the level of net interest projected under the current law
baseline, what is known as primary balance, would that stabilize the
federal government's debt as a share of GDP and put its fiscal position
on a sustainable path?
Answer: Assuming primary budget balance in 2023 would lower CBO's
deficit projection for that year from $978 billion to $857 billion, or
3.3 percent of GDP (all else being equal). However, that is not enough
information to know whether the federal government's debt as a share of
GDP would be stable in that year. That answer would depend on the ratio
of debt to GDP in the previous year, and on output and interest rates
in 2023, which in turn would depend on the path of deficits in prior
years.
Question 4: Additional Information on Macroeconomic Feedback
Resulting from Deficit Reduction--CBO's report on Macroeconomic Effects
of Alternative Budgetary Paths provides information on additional
deficit impacts resulting from macroeconomic feedback under various
budgetary paths. To better understand these results, I am requesting
CBO to provide information on the revenue and outlay components of the
``Effects on primary deficits'' displayed in Table B-2 of the report.
Answer: Those revenue and outlay components are shown in the table
below. The amounts in the table represent only the macroeconomic
feedbacks; the underlying changes in revenues and outlays that produced
different paths for the deficit, and thus different macroeconomic
conditions, were not specified in the report.
The estimated macroeconomic feedback effects on primary deficits
consist largely of changes in revenues; the estimated changes in
primary outlays are relatively small. Changes in the amount of interest
paid on federal debt held by the public are similar in magnitude to the
changes in revenues.
CBO estimated the additional deficit impacts resulting from
macroeconomic feedbacks for that report using a simplified analysis
that took into account changes in taxable income and interest rates,
among other factors. That analysis did not incorporate a detailed
program-by-program analysis, as do CBO's regular budget projections.
BUDGETARY IMPACT OF ECONOMIC EFFECTS OF ILLUSTRATIVE PATHS, FISCAL YEARS 2014 TO 2023, RELATIVE TO PROJECTIONS UNDER CURRENT LAW
[Billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total,
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014-2023
--------------------------------------------------------------------------------------------------------------------------------------------------------
Increases (-) / Decreases (+) in Deficits
$2 Trillion Increase in Primary Deficits
Effect on primary deficits
Revenues................................................. 7 11 7 2 -5 -9 -13 -18 -23 -28 -70
Noninterest spending..................................... * -1 * * 1 2 1 * * * 3
------------------------------------------------------------------------------------------
Net effect on primary deficits......................... 7 12 8 2 -6 -11 -14 -18 -23 -28 -71
Debt service............................................... * -1 -3 -5 -5 -6 -9 -12 -16 -22 -79
------------------------------------------------------------------------------------------
Effect on Total Deficits................................. 7 11 5 -3 -11 -17 -23 -30 -39 -50 -151
$2 Trillion Reduction in Primary Deficits
Effect on primary deficits
Revenues................................................. -7 -11 -11 -4 4 9 13 17 22 28 61
Noninterest spending..................................... * 1 2 1 * 1 2 2 2 2 13
------------------------------------------------------------------------------------------
Net effect on primary deficits......................... -7 -12 -12 -5 3 8 12 16 20 26 47
Debt service............................................... * * 1 2 3 4 6 9 13 17 57
------------------------------------------------------------------------------------------
Effect on Total Deficits................................. -7 -12 -11 -3 6 12 18 25 33 43 103
$4 Trillion Reduction in Primary Deficits
Effect on primary deficits
Revenues................................................. -14 -23 -23 -13 7 18 26 34 44 55 112
Noninterest spending..................................... * 2 3 2 * 1 2 2 3 4 19
------------------------------------------------------------------------------------------
Net effect on primary deficits......................... -15 -25 -26 -15 6 17 24 32 41 52 92
Debt service............................................... * 2 2 2 3 6 10 16 22 30 94
------------------------------------------------------------------------------------------
Effect on Total Deficits................................. -14 -24 -24 -13 9 23 35 48 63 82 186
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office.
Notes: The illustrative paths are described in detail in Congressional Budget Office, Macroeconomic Effects of Alternative Budgetary Paths (February
2013), at the beginning of the section ``Budget Deficits Under Three Illustrative Paths.''
The primary deficit equals revenues minus noninterest spending. Debt service is the change in the deficit that would result from changes in the amount
of interest paid on the public debt (including the effects of changes in interest rates). The effect on total deficits is the sum of the effect on
primary deficits and debt service.
Negative numbers indicate that deficits under the path are larger than those under CBO's baseline, which incorporates an assumption that current laws
generally remain unchanged; positive amounts indicate that deficits are smaller.
* = between -1 and 1.
congressman messer
Question 1: Do you believe the current rate of tuition inflation is
driven in part by federal education subsidies?
Answer: CBO has not studied the extent to which federal education
subsidies affect tuition inflation. In fiscal year 2012, the federal
government provided about $106 billion in direct student loans, $33
billion for Pell grants, and $9 billion for education benefits for
veterans. That federal assistance probably has contributed to increases
in listed tuition rates, at least in some cases. The potential for
federal subsidies to contribute to higher tuition rates probably
depends on the share of students receiving aid at different types of
educational institutions--such as public, private nonprofit, and for-
profit schools--as well as the institutions' financial objectives and
constraints. For-profit schools have the largest share of students
receiving federal subsidies (64 percent in 2007--2008), and one study
found that for-profit schools where students can use federal aid charge
tuition 75 percent higher than similar schools where they cannot use
federal grants.\1\ However, some unknown portion of that 75 percent
difference may represent higher costs that schools incur to meet the
Department of Education's requirements for participation in federal
student financial aid programs.
---------------------------------------------------------------------------
\1\ Stephanie Reigg Cellini and Claudia Goldin, Does Federal
Student Aid Raise Tuition? New Evidence on For-Profit Colleges, Working
Paper 17827 (National Bureau of Economic Research, February 2012),
www.nber.org/papers/w17827.
Question 2: Might rising college costs be constrained by more
carefully targeting and measuring the effectiveness of federal
---------------------------------------------------------------------------
education assistance?
Answer: To the extent that federal aid has an effect on tuition
rates, reducing the amount of such aid could reduce the effect. If the
same total volume of aid was targeted so that more of it went to
students who would not otherwise attend college, it would be more
effective in stimulating demand for postsecondary education but, as a
result, would tend to increase any effect on tuition rates. CBO does
not expect that increased monitoring or measurement of the
effectiveness of federal assistance would have a significant impact on
tuition rates.
Question 3: What role has federal education assistance like Pell
Grants played in subsidizing rising tuitions?
Answer: CBO has not studied the effect that Pell grants or other
federal aid has had on rising tuition. However, there is some evidence
that federal assistance has been a factor in tuition rates at for-
profit schools. The evidence for an impact of federal subsidies on
tuition rates listed by other types of institutions is weaker, perhaps
in part because such subsidies make up much lower shares of their total
revenues. Data from a recent study of the Pell Grant program indicate
that the grants account for 14 percent of revenues at for-profit
schools eligible to distribute federal aid, 7 percent at nonselective
public schools, 4 percent at nonselective nonprofit private schools, 2
percent at selective public schools, and 1 percent at selective private
schools.\2\
---------------------------------------------------------------------------
\2\ Lesley J. Turner, ``The Incidence of Student Financial Aid:
Evidence from the Pell Grant Program'' (draft, Department of Economics,
Columbia University, April 2012), www.columbia.edu/?ljt2110/LTurner--
JMP.pdf (1 MB).
---------------------------------------------------------------------------
A related question is the impact of federal education subsidies on
the ``net tuition'' rates students face after subtracting their
schools' own financial aid from the listed tuition rates. The study on
Pell grants estimated that institutions capture 16 percent of the value
of the grants by reducing their own aid to recipients.\3\ However, the
estimated capture rates varied widely, from essentially zero for public
institutions to close to 80 percent for selective private schools.
---------------------------------------------------------------------------
\3\ Ibid.
Question 4: CBO's February baseline shows the Pell Grant program
facing a funding cliff in fiscal year 2015 and annual shortfalls in
subsequent years through the budget window. Do you believe the current
---------------------------------------------------------------------------
structure of this important program is sustainable?
Answer: Under current law, funding for the Pell Grant program comes
from both discretionary and mandatory sources. In 2009, the Congress
began supplementing the discretionary portion of the program with
funding provided outside the regular appropriation process. The
combination of supplemental funds and the budget authority provided in
the regular appropriation process allowed the discretionary portion of
the program to support a maximum award level of $4,860. In the future,
maintaining the award level at $4,860 would require either large
increases in the regular appropriations (which would have to be
accommodated under the annual caps on discretionary spending enacted as
part of the Budget Control Act of 2011) or significant additional
supplemental funding.
[Whereupon, at 12:44 p.m., the committee was adjourned.]