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THE CONGRESSIONAL BUDGET OFFICE’S 

BUDGET AND ECONOMIC OUTLOOK 

HEARING 

BEFORE THE

COMMITTEE ON THE BUDGET 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

HEARING HELD IN WASHINGTON, DC, FEBRUARY 10, 2011 

Serial No. 112–3 

Printed for the use of the Committee on the Budget 

( 

Available on the Internet: 

http://www.gpoaccess.gov/congress/house/budget/index.html 
(II) 

COMMITTEE ON THE BUDGET 

PAUL RYAN, Wisconsin, Chairman 

SCOTT GARRETT, New Jersey 

MICHAEL K. SIMPSON, Idaho 

JOHN CAMPBELL, California 

KEN CALVERT, California 

W. TODD AKIN, Missouri 

TOM COLE, Oklahoma 

TOM PRICE, Georgia 

TOM MCCLINTOCK, California 

JASON CHAFFETZ, Utah 

MARLIN A. STUTZMAN, Indiana 

JAMES LANKFORD, Oklahoma 

DIANE BLACK, Tennessee 

REID J. RIBBLE, Wisconsin 

BILL FLORES, Texas 

MICK MULVANEY, South Carolina 

TIM HUELSKAMP, Kansas 

TODD C. YOUNG, Indiana 

JUSTIN AMASH, Michigan 

TODD ROKITA, Indiana 

FRANK C. GUINTA, New Hampshire 

ROB WOODALL, Georgia 

CHRIS VAN HOLLEN, Maryland, 

Ranking Minority Member 

ALLYSON Y. SCHWARTZ, Pennsylvania 

MARCY KAPTUR, Ohio 

LLOYD DOGGETT, Texas 

EARL BLUMENAUER, Oregon 

BETTY MCCOLLUM, Minnesota 

JOHN A. YARMUTH, Kentucky 

BILL PASCRELL, JR., New Jersey 

MICHAEL M. HONDA, California 

TIM RYAN, Ohio 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin 

KATHY CASTOR, Florida 

HEATH SHULER, North Carolina 

PAUL TONKO, New York 

KAREN BASS, California 

PROFESSIONAL STAFF

AUSTIN SMYTHE, Staff Director 

THOMAS S. KAHN, Minority Staff Director 
(III) 

C O N T E N T S 

Page 

Hearing held in Washington, DC, February 10, 2011 .......................................... 1 

Hon. Paul Ryan, Chairman, Committee on the Budget ................................ 1 

Prepared statement of ............................................................................... 3 

Hon. Chris Van Hollen, Ranking Minority Member, Committee on the 

Budget ............................................................................................................ 3 

Prepared statement of ............................................................................... 5 

Douglas W. Elmendorf, Director, Congressional Budget Office .................... 5 

Prepared statement of ............................................................................... 8 

Responses to questions submitted ........................................................... 58 

Hon. Betty McCollum, a Representative in Congress from the State of 

Minnesota, submission for the record: 

February 9, 2011, Budget Committee hearing transcript excerpts ....... 42 

Hon. Michael M. Honda, a Representative in Congress from the State 

of California, questions submitted for the record ....................................... 58 

(1) 

THE CONGRESSIONAL BUDGET OFFICE’S 

BUDGET AND ECONOMIC OUTLOOK 

THURSDAY, FEBRUARY 10, 2011 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The committee met, pursuant to call, at 10:03 a.m., in room 210, 

Cannon House Office Building, Hon. Paul Ryan [chairman of the 

committee] presiding. 

Present: Representatives Ryan of Wisconsin, Campbell, Calvert, 

Akin, McClintock, Stutzman, Ribble, Flores, Mulvaney, Young, 

Amash, Rokita, Van Hollen, Schwartz, Kaptur, Doggett, Blumenauer, McCollum, Honda, Ryan of Ohio, Wasserman Schultz, 

Castor, Tonko, and Bass. 

Chairman RYAN. The hearing will come to order. 

Thank you, Dr. Elmendorf, for coming before the committee 

today. It is nice to have you back and congratulations on your reappointment for a full term. 

I first wanted to start off by saying how tough a job we know 

that the Congressional Budget Office and its employees have. We 

are going to work you pretty hard in the year to come. We appreciate the professionalism, the expertise that you have brought to 

the job. 

Everybody brings to this job a background and a perspective and 

a point of view. And the best CBO Directors, whether it was 

Orszag or Holtz-Eakin, check it at the door, and you have done a 

very good job of doing that, of sticking down the middle of the fairway. And I just want to commend you for that. 

We will have probably differences of opinions on methodology 

and things like that from time to time. But I enjoy the rigor of our 

debate, and I enjoy the fact that we can have a great exchange of 

ideas. And I also just want to simply start by saying I think it is 

great that you do more consulting with outside academics and outside forecasters because we don’t have all the wisdom here, and it 

is important that you do that consultation. So I want to commend 

you for that and welcome you to a full 4-year term. 

With that, I just got your report. We got this the other day. And 

it has deteriorated. Now our baseline is going in the wrong direction. And these problems that we have, let me first start off by saying it is not all the Democratic Party’s fault or the Republican Party’s fault. Both parties are responsible for where we are today. I 

would argue that in the most recent history I think our fiscal policy 

went in the wrong direction. 
2 

But finger pointing doesn’t solve problems. Solutions solve problems. And we will have a difference of opinion on how to solve 

problems. And we do disagree with how to solve problems, but we 

don’t disagree on where we want to go. We want people to have 

jobs in America. We want to have prosperity. We want to have an 

opportunity society. We want to leave our kids and our grandkids 

with a country that is better off, with a higher standard of living. 

And what is interesting about this and previous reports that you 

have been giving us is, we know that without a shadow of doubt, 

we are giving the next generation a lower standard of living. What 

amazes me is when you do your long-run modelling, that your 

model actually ends up shutting down by the time our kids are in 

our age bracket because the CBO can’t conceive a point in which 

the economy can continue because of the debt burdens that are 

being placed upon it. 

So we have a moral imperative in this committee to get this 

right, to stop pointing fingers, to stop turning reforms into political 

weapons to be used in the next campaign and to actually buckle 

down and get this. Now, what is so important right now is the 

economy, is job creation, is prosperity. 

Your latest report reminds us that between June of 2009, when 

the recession technically ended, and last December, payroll employment rose by a mere six one-hundredths of 1 percent, .06 percent. 

You compare that to the same period of time following past recessions, during those recoveries, employment rose by an average of 

4.4 percent. 

Unemployment is too high because job growth is too low. And job 

growth is too low because, in my opinion, contrary to conventional 

wisdom here in Washington, we cannot tax, borrow and spend our 

way to a prosperous future. The deficit is $1.5 trillion. The publicly 

held debt is up to 69 percent of GDP. It was at 40 percent by the 

end of 2008. And if you take a look at the alternative fiscal scenario, which I believe and most people would argue is the more accurate reading of where we are headed, it is down right scary. 

And so we believe that the prosperity plan is real spending controls, spending cuts and reforms along with pro-growth economic 

policies for job creation. We can’t create jobs in Washington. That 

is what the private sector does. And if we try to borrow and spend 

more money to create jobs in Washington, that ends up taking 

money from the private sector, propping up our debt, putting pressure on interest rates because current big deficits are nothing more 

than tomorrow’s big tax increases. That produces more uncertainty 

for businesses. 

So we just respectfully will probably disagree on how to create 

jobs, on how to get to prosperity, but let’s just make sure that we 

all understand we want the same objective. We want our constituents to work. We want our kids and our grandkids to do better off. 

You are going to be overburdened with lots of requests. We really 

appreciate the way in which you respond with speed to all our requests, and we hope you do so as well with other members. But we 

have to get serious about this problem. 

And hopefully we can do a fairly quick turnaround on the President’s budget, which is a little late. That is because Jack Lew was 

appointed late. But hopefully you can get us a pretty good turn-
3 

around on the President’s budget. There is one more thing I would 

simply say is, we will be asking you to do some more runs on interest rate simulations, and on health care assumption simulations. 

And with that, I just want to yield to my friend, the ranking 

member, Mr. Van Hollen. 

[The prepared statement of Chairman Paul Ryan follows:] 

PREPARED STATEMENT OF HON. PAUL RYAN, CHAIRMAN, COMMITTEE ON THE BUDGET

Thank you, Dr. Elmendorf, for coming before our Committee today to talk about 

the CBO’s Budget and Economic Outlook. 

Your testimony and this latest report remind us that, between June of 2009, when 

the recession technically ended, and last December, payroll employment rose by a 

mere 6 one hundredths of one percent (0.06 percent). 

Compare that to the same period of time following past recessions. During those 

recoveries, employment rose by an average of 4.4 percent. 

Unemployment is too high because job growth is too low. And job growth is too 

low because—contrary to the conventional wisdom here in Washington—we cannot 

tax, borrow and spend our way to a prosperous future. 

One of the biggest threats to the economy is the rapid and seemingly relentless 

growth of government spending and debt. CBO is projecting a deficit of $1.5 trillion 

this year with the level of publicly-held debt rising to 69 percent of GDP by the end 

of the year, up from 40 percent at the end of 2008. 

In a few short years, the CBO projects government spending to drive our debt to 

crisis levels, overwhelming the entire economy and drowning the next generation in 

red ink. 

The President has asked us to raise the debt limit to accommodate all of this 

spending and borrowing. But the recent experience of Europe teaches us that we 

cannot keep making unaffordable promises without eventually hitting a real debt 

limit—a limit on our borrowing imposed by credit markets in a state of panic. 

Endless borrowing is not a strategy. Spending restraint must come first. Federal 

Reserve Chairman Bernanke counseled us yesterday that the Congress needs to 

begin taking credible steps to reduce our looming longer-term structural budget deficits in order to grow the economy today. 

We must restore the foundations of economic growth—low taxes, reasonable regulations, sound money, and spending restraint. We must apply our timeless principles to the challenges of the day. 

If we act soon, and if we act responsibly, we can gradually phase in reforms to 

our major entitlement programs to save them from bankruptcy and ensure that people in and near retirement will be protected. 

Federal health care spending is at the heart of our budget problems. Some have 

suggested that I am critical of CBO for its budget score of the new health care legislation. That is not correct. 

The nonpartisan professionals at CBO must score the legislative language that is 

put in front of them. 

This is not in any way a dispute with CBO. It is a dispute with the authors of 

the new health care law—and with their use of budget gimmicks, deceptive accounting, and highly dubious offsets. 

We cannot begin to meet our fiscal challenges unless we have an honest debate 

about health care costs. As Chairman Bernanke reminded us yesterday, federal 

health care spending is driving our unsustainable deficits and debt, and the new 

law has done nothing to significantly reduce the strain that exploding health care 

costs are putting on the nation’s finances. 

Hiding spending to justify the creation of a new unaffordable entitlement doesn’t 

get us any closer to solving the problem. We need to advance fiscally responsible, 

patient-centered reforms that actually reduce costs and expand coverage. 

I look forward to your testimony today, Dr. Elmendorf. I hope we can learn more 

today about the budget and economic outlook and begin to put in place policies that 

lead to a permanent increase in jobs and put America on path of a more prosperous 

future. 

With that, I will yield to Ranking Member Van Hollen for an opening statement. 

Mr. VAN HOLLEN. Thank you, Chairman Ryan. 

And I want to join my friend and colleague Paul Ryan in congratulating you, Dr. Elmendorf, on being reappointed. 
4 

As the chairman indicated, there are some times we like the 

CBO numbers and projections on one side or the other, sometimes 

we don’t. But the reality is I think we agree that you and your 

team have been an incredibly professional organization. You call 

them as you see them. And I do believe, and I think we would 

agree on this, that when it comes to the budget process here in 

Congress, at the end of the day, we have to have some common 

measure of where we are on these different indicators and that if 

we were to throw out the CBO numbers, whether we sometimes 

agree with them or not, it would be a recipe for budget and fiscal 

chaos. 

Let me just talk about some of those numbers because, as the 

chairman indicated, we probably do have different perspectives on 

how exactly we got here, but I think we do share a common interest—I know we share a common interest in trying to find a way 

out towards a fiscally sustainable future for this country. 

But I do think it is important in light of the projections you have 

got just to remind the members of the committee that 2 years ago, 

the economy was in free fall. I mean, that is what the facts state. 

We were losing—we were at a negative 6 percent growth rate, losing 700,000 jobs a month. Yesterday in his testimony, Dr. 

Bernanke indicated that a combination of factors, including the recovery bill, actions by the Federal Reserve and efforts to rescue the 

financial system helped prevent a second great depression. 

And your own CBO numbers confirm that the Recovery Act was 

a key ingredient in stopping the free fall and was responsible by 

your numbers of creating or saving between 1.3 and 3.4 million 

jobs. I think we all recognize that despite the fact that the economy 

has stabilized somewhat, the fact that millions of Americans remain out of work is absolutely unacceptable. 

And what this report makes clear is that we do have to work together on a bipartisan basis to put our country on a fiscally sustainable path. I believe that the President’s bipartisan commission 

that the chairman and others served on provided a lot of ideas that 

we should discuss and debate within this committee. They deserve 

a full vetting, and I would point out that the commission recognized the balance between acting now on a long-term plan and the 

dangers and risks of taking immediate deep cuts and the impact 

that could have on the economy and back—they said and I quote, 

in order to avoid shocking the fragile economy, the commission recommends waiting until 2012 to begin acting programmatic and 

spending cuts. We are going to have that debate. 

And I think we should also recognize, and we do, that focusing 

on just one sliver of the budget, domestic discretionary cuts, will 

not get us out of this hole. That is very clear from your report, and 

we are going to have to look at all of the components of this problem. 

And I hope that we will all come to the table with a sense of seriousness that we do need to look at the full picture going forward. 

Let me just end with this because it has been much discussed in 

the news lately. We are coming up upon some key decision points. 

We have to extend the CR. And then, of course, there is the debt 

ceiling limit. I think it was very clear from the testimony of Dr. 

Bernanke yesterday that we should not be playing political games 
5 

with the full faith and credit of the United States, that we should 

not be, in his words, using that as a, quote, bargaining chip, that 

that would risk putting the economy in a total tailspin and putting 

even more Americans out of work. 

With that, Mr. Chairman, thank you very much. 

[The prepared statement of Chris Van Hollen follows:] 

PREPARED STATEMENT OF HON. CHRIS VAN HOLLEN, RANKING MINORITY MEMBER, COMMITTEE ON THE BUDGET

Thank you, Dr. Elmendorf, for joining us today to discuss CBO’s latest economic 

and budget projections that highlight the very real fiscal challenges we face. 

Before we begin today’s discussion on the CBO’s outlook, it’s important to remember the economic situation that President Obama confronted when he took office in 

2009. Two years ago, we were losing jobs at the rate of over 700,000 a month. We 

have now had a year of continuous private sector job gains, totaling nearly 1.3 million jobs in 2010. 

Yesterday, Federal Reserve Chairman Ben Bernanke testified that President 

Obama’s American Recovery and Reinvestment Act, as well as measures taken to 

prevent the collapse of the financial sector and actions by the Federal Reserve, 

helped save the economy from a total meltdown. 

CBO’s own analysis confirms that the Recovery Act was a key ingredient in stopping the free fall, and that the legislation was responsible for saving and creating 

between 1.3 and 3.4 million jobs. But despite these gains, millions of Americans remain out of work and the unemployment rate is unacceptably high—it is clear there 

is more work to be done. 

With that in mind, we’re here today to talk about the CBO’s Budget and Economic 

Outlook. This report makes it clear that Democrats and Republicans must work together now to put our nation on a fiscally sustainable path, and we stand ready to 

do that. The President’s Bipartisan Fiscal Commission, which was charged with reducing the deficit, has put many important ideas on the table that we should review. One thing is clear—a strong economy is essential to both putting more Americans back to work and reducing our deficits. That is why the Commission said that 

’in order to avoid shocking the fragile economy, the Commission recommends waiting until 2012 to begin enacting programmatic spending cuts.’ 

Immediate, deep cuts will not create a single job. A broad range of economists, 

including Mark Zandi, have determined that such cuts will actually hurt job growth. 

Additionally, Chairman Bernanke stressed that the most important thing we can do 

as a country is to put together a credible, long-term plan for fiscal sustainability, 

rather than focus on deep cuts in domestic discretionary spending over the next 

eight months. This long-term plan should include a discussion on reforming the tax 

system to make it more efficient—but we should not be extending unpaid-for tax 

cuts for the wealthiest 2 percent of Americans beyond 2012. 

Unfortunately, during its first 30 days, the new Republican majority has passed 

measures that fly in the face of promises to tackle the deficit. First came the vote 

to get rid of the responsible House pay-as-you-go rule and replace it with a one 

sided rule that pretends that tax cuts for the wealthy don’t add to the deficit. Next 

came the vote to eliminate important patient protections by repealing the health 

care reform bill and add a staggering $1.3 trillion to the national debt—as estimated 

by CBO—over the next 20 years. Just yesterday we saw a whole new budget gimmick on the House floor in an effort to eliminate funds that don’t even exist—not 

surprisingly, CBO indicated that it wouldn’t save the taxpayer one dime. And now 

there is talk of gambling with the full faith and credit of the United States government, which Chairman Bernanke yesterday indicated would lead to economic chaos. 

So, Mr. Chairman, we welcome a serious debate about developing a credible, longterm deficit reduction plan that reflects our national values and priorities. We hope 

that our colleagues on the other side of the aisle will join us in a robust discussion 

on the best way to move our nation forward. 

Chairman RYAN. Dr. Elmendorf, the floor is yours. 

STATEMENT OF DOUGLAS W. ELMENDORF, DIRECTOR, 

CONGRESSIONAL BUDGET OFFICE 

Mr. ELMENDORF. Thank you. 

Mr. Chairman and Congressman Van Hollen, I want to start by 

saying I am honored and delighted to have the opportunity to stay 
6 

at CBO for 4 more years. And I appreciate both of your support in 

that. 

And on behalf of myself and all of my colleagues, I want to say 

to you and all the members of the committee that we look forward 

to working with you, providing the information, analysis on the 

country’s economic and budgetary challenges that would help you 

in wrestling with those challenges. 

Indeed, the United States faces daunting economic and budgetary challenges. The economy, as you know, has struggled to recover from the recent recession. The pace of growth and output has 

been anemic compared to that during most other recoveries. The 

unemployment rate has remained quite high. The Federal budget 

deficit and debt have surged in the past 2 years, owing to a combination of a severe drop in economic activity, the policies enacted 

in response to the financial crisis and recession, and an imbalance 

between spending and revenues that predated the recession. 

Unfortunately, it is likely that a return to normal economic conditions will take years. And even after the economy is fully recovered, a return to sustainable budget conditions will require significant changes in tax and spending policies. 

Let me discuss the economic outlook first and then turn to the 

budget outlook. CBO expects that production and employment will 

expand in the coming years, but only at a moderate pace, leaving 

the economy well below its potential for some time. We project that 

real GDP will increase about 3 percent this year and again next 

year, reflecting continued strong growth in business investment, 

improvements in both residential investment and net exports, and 

modest increases in consumer spending. 

But we have a long way to go on the employment front. 

Go to the first slide. 

Payroll employment, which declined by nearly 9 million between 

the end of 2007 and early 2010, has recovered by just a shade over 

1 million since then. The recovery in employment has been slowed 

not only by the slow growth in output, but also by structural 

changes in the labor market, such as a mismatch again the requirements of available jobs and the skills of job seekers. 

We estimate that the economy will add roughly 2.5 million jobs 

per year over the 2011-2016 period, similar to the average pace 

during the late 1990s. But even so, we expect the unemployment 

rate, shown in the next slide, will be just above 9 percent in the 

fourth quarter of this year and still above 8 percent at the end of 

2012. Only by 2016 in our forecast does the unemployment rate 

reach 5.25 percent, close to our estimate of the natural rate. 

CBO projects that inflation will remain very low in 2011 and 

2012, reflecting the large amount of unused resources in the economy. And it will average no more than 2 percent a year between 

2013 and 2016. 

Economic developments and the government’s responses to them 

have, of course, had a big impact on the budget. The next slide 

shows we estimate that if current laws remain unchanged, the 

budget deficit this year, the third column of that table, will be close 

to $1.5 trillion or 9.8 percent of GDP. That will follow deficits of 

10 percent and 8.9 percent of GDP in the past 2 years, representing the three largest deficits since 1945. As a result, debt 
7 

held by the public will probably jump from 40 percent of GDP by 

the end of fiscal year 2008 to nearly 70 percent at the end of this 

fiscal year in September. 

If current laws remain unchanged as we assume for CBO’s baseline projections, budget deficits would drop markedly over the next 

few years as a share of output. The next slide shows the deficits 

would average 3.6 percent of GDP between 2012 and 2021—that is 

the solid line—totaling nearly $7 trillion over the coming decade. 

As a result, the debt held by the public would keep rising, reaching 

77 percent of GDP in 2021. 

However, that projection is based on the assumption that spending and tax policies unfold as specified in current law. Consequently and as the chairman noted, it understates the budget 

deficits that would occur if many policies currently in place were 

continued rather than allowed to expire as scheduled in current 

law. For example, suppose instead that three major aspects of current policy were continued during the coming decade: First, that 

the higher 2011 exemption amount for the alternative minimum 

tax is extended and along with the AMT tax brackets is indexed 

for inflation; second, that the other major provisions in the recently 

enacted tax legislation that affected individual income taxes and 

gift taxes and estate taxes were extended rather than allowed to 

expire in January 2013; and third, that Medicare’s payment rates 

for physician services were held constant rather than dropping 

sharply as scheduled at the end of the year under current law. All 

of those policies have recently been extended for 1 or 2 years. If 

they were extended permanently, deficits from 2012 through 2021 

would average about 6 percent of GDP, the dashed line, rather 

than 3.5 percent under current law. And cumulative deficits over 

the decade would total nearly $12 trillion. 

The next slide shows the debt held by the public in 2021 would, 

under that alternative, rise to almost 100 percent of GDP, the highest levels since 1946. 

Beyond the 10-year projection period, further increases in Federal debt relative to the Nation’s output almost certainly lie ahead 

if current policies remain in place. Spending on Social Security and 

the government’s major mandatory health care programs, including 

Medicare, Medicaid, the children’s health insurance program and 

insurance subsidies to be provided through exchanges, will increase 

from roughly 10 percent of GDP to about 16 percent over the next 

25 years. 

To prevent debt from becoming unsupportable, the Congress will 

have to substantially restrain the growth of spending, raise revenues significantly above their historical share of GDP, or pursue 

some combination of those two approaches. The longer the necessary adjustments are delayed, the greater will be the negative 

consequences of the mounting debt, the more uncertain individuals 

and businesses will be about future government policies, and the 

more drastic the ultimate policy changes will need to be. 

However, changes of the magnitude that will ultimately be required could be disruptive. Therefore, Congress may wish to implement them gradually so as to avoid a sudden negative impact on 

the economy, particularly as it recovers from the severe recession 

and so as to give families, businesses and State and local govern-
8 

ments time to plan and adjust. Allowing for such gradual implementation would mean, however, that remedying the Nation’s fiscal 

imbalance would take longer and therefore that major policy 

changes would need to be enacted sooner to limit the further increase in Federal debt. Thank you. I am happy to take your questions. 

[The prepared statement of Douglas W. Elmendorf follows:] 
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Chairman RYAN. I thought you were going to go through the 

whole PowerPoint. I have about 40 pages here. 

Mr. ELMENDORF. I should say all of the figures from the Outlook 

are in the collection of slides. 

Chairman RYAN. Is your whole PowerPoint that you handed us 

up? 

Jose, can you bring up Page 16 on his PowerPoint, Figure 2-3? 

You have—I am very interested in your comparisons, recovery 

and real gross domestic product and employment, the current cycle 

and the average cycle since 1948, where you look at months before 

the trough, months after the trough. 

That, yes, there. Thank you. 

Give me an explanation as to why you think this is occurring? 

What this is showing us is our economy is not growing nearly as 

fast as it typically does coming out of a deep recession, and jobs 

are not being created anywhere close to what they are typically created coming out of a recession. If you take a look at past recessions, post-World War II, typically—and correct me if I am wrong— 

the deeper the recession, the bigger the bounce coming out of it. 

What is different this time? Why is this happening? What is your 

take on that? 

Mr. ELMENDORF. First, a quick factual point, which is that there 

were revisions to employment data recently released since we completed the outlook that actually make the latest cycle look a little 

worse still on the employment front. We have not yet regained all 

of the jobs that were lost by the time—— 

Chairman RYAN. But this methodology is what we have always 

been using in the past, correct? 

Mr. ELMENDORF. Oh, it is the same methodology. It is just that 

they have updated the data just a bit. 

We think the principal reason why the employment recovery has 

been so weak is that the output recovery has been so weak. Output 

grew much more rapidly following the very severe recession in the 

early 1980s, for example, than it has following this recession. 

This pattern, although unusual for U.S. post-war history, is unfortunately not unusual by the standards of other countries that 

have experienced recessions following financial crises. Those crises 

tend to come from an overbuilding of some aspect of the economy— 

in our case, particularly from housing—and have come when there 

have been excesses in the financial system that have been broken 

down in a way that takes time to rebuild. So we are watching our 

banks try to rebuild their capital. We are watching households and 

businesses try to rebuild their own balance sheets. 

Those kind of recoveries tend to be slow. And we think that is 

the principal reason why this recovery is slow, is the severity but 

also the nature of the—— 

Chairman RYAN. Okay. So you are basically saying it is the kind 

of recession we had, a financial crisis driven recession, is why we 

have such lackluster recovery? 

Mr. ELMENDORF. I think that is the principal reason, yes. 

Chairman RYAN. Let me ask you this, then. Do you agree with 

the general conclusions of the Reinhart-Rogoff study, which more 

or less says financial crashes, recessions result in big debt increases and deficit increases, which gets us in a vicious cycle, 
26 

which once our debt starts hitting these troubled levels, we really 

start tapering off our economy? Would you generally agree with the 

takings of that? 

Mr. ELMENDORF. Yes, I would. Carmen Reinhart is one of the 

members of our Panel of Economic Advisors. Of course, we read 

their work. And I think the point they have highlighted about how 

these crises lead to rapid buildups of debt is exactly what we are 

seeing right now in the United States. 

Chairman RYAN. So their rule of thumb, 90 percent of GDP debt, 

do you agree with that general rule of thumb? Once you start hitting 90 percent of GDP, that is when your economy really starts 

slowing down; would you more or less agree with that? 

Mr. ELMENDORF. I want to be careful not to suggest that we—— 

Chairman RYAN. I know there is not a magic—— 

Mr. ELMENDORF. There is a tipping point. 

Their study looked, first, as you know, at gross debt; for the 

United States, a larger number than debt held by the public. 

Chairman RYAN. We are already up at that number, then, if we 

are looking—— 

Mr. ELMENDORF. I think that is correct. We think for a variety 

of reasons that debt held by the public is a better measure of the 

government’s current fiscal position. 

Also, they just divided countries into buckets if you will. They 

picked a point of 90 percent. 

But we don’t in any sense doubt the conclusion that higher levels 

of debt lead to worse economic performance over the medium and 

long run. 

Chairman RYAN. What is the debt held by the GDP at the end 

of the 10-year window in the alternative fiscal scenario? 

Mr. ELMENDORF. So that particular label we applied to the longrun scenario that we did, but if you take the thing we have done 

in this outlook, where we have extended this particular set of policies that I mentioned, debt is pushing 100 percent of GDP by the 

end of the 10-year window. 

Chairman RYAN. And gross debt, I guess gross debt would be—— 

Mr. ELMENDORF. Would be significantly larger. I don’t know the 

number. 

This is unfamiliar territory for the United States and also for 

other developed countries. If one looks at the set of countries in the 

OECD, developed countries, one does not find a lot of countries 

that have debt at or above 100 percent of GDP for any length of 

time. So we are definitely, especially if those policies are continued, 

moving into territory where we don’t know what will happen exactly. 

Chairman RYAN. I want to be judicious with my time. I think 

that there is a good argument to be made that interest rates are 

not going to be low for a long time. I think there is a good—it is 

worth our while to make different interest rate simulations. 

You have done this for us in the past, and we have asked for this 

from you currently. What we have asked is, give us the blue chip 

average, the average of the 1990s, the average of the 1980s. If 

there are other worthwhile simulations run that we are not thinking of, let us know. 
27 

But also, can you carry this out in your long-run model for us 

as well? You can give us the 10-year numbers I know, and I know 

how difficult this gets, and you do your long report in the summer, 

but I think it would be extremely helpful to know different simulations and how it really carries out beyond the 10-year window. 

The other question is—so that is just a request. Health care 

take-up rates in the exchanges, how many people do you project 

will be in the health care exchange within the 10-year window? 

Mr. ELMENDORF. That is a good question. You might think I 

would remember the answer to that. 

Chairman RYAN. I think 19 million is what I have off the top of 

my head. I am not sure about that. 

Mr. ELMENDORF. There are some people who are in the exchanges because their employers choose to get insurance coverage 

for them through the exchanges. So there are some different numbers depending on exactly what concept one has in mind. But I 

think you are in the right ballpark. 

Chairman RYAN. So other actuaries, private-sector actuaries, 

have made much, much different projections about the amount of 

which employers will drop health insurance for their employees 

and dump them into the exchange. I think it would be worth our 

while to have run some simulations on those projections as well. 

So how about if we shoot you projections from other actuaries who 

believe—I will give you one example. I have met with an employer 

in my district who nationwide employs 7,000 people. It is a privately-held company who has very low-margin business, who has 

two publicly-held traded competitors. Their competitors have basically said, we are putting our people in the exchanges as soon as 

we can. With a $2,000 penalty indexed to inflation per employee 

and they can go get health care there subsidized by the government versus $17,000 rising in health care costs, we are dumping 

them. 

And I know you have a firewall assumption that leads to low 

take-up rates. But from my experience from talking to employers, 

I don’t think that is going to happen. I don’t think that firewall is 

going to hold. And I think tens of millions of people—this is my 

personal opinion, but it is informed by anecdotal conversations with 

employers over the State of Wisconsin and outside expert actuarial 

witnesses that think we are going to have tens and tens of millions 

of people dumped into these exchanges. 

So I think it is worth our effort to run simulations to see what 

kind of fiscal hit we would get under this law with that. 

The last question is this. And that is not a question. That is a 

request. The last question is, it has been argued and was argued 

here yesterday with the chairman, that the new health care law 

will create jobs and increase labor force participation. But if I recall 

from your analysis, it was quite the opposite. Is that not the case? 

Mr. ELMENDORF. Yes. 

Chairman RYAN. Okay. Thank you. 

Again, I could go on and on, but I will turn it over to Mr. Van 

Hollen. 

Mr. ELMENDORF. I am sorry. But could I use just a minute to just 

quickly respond to a few aspects of that, Mr. Chairman? 

Chairman RYAN. Yeah. Sure. 
28 

Mr. ELMENDORF. So one thing to say is that we do show in the 

back of our outlook the effects of alternative economic assumptions 

on budget outcomes. One of the alternatives that we show is the 

effect of interest rates being 1 percentage point higher for the entire next decade. Under that alternative, extra interest costs for the 

Federal Government would be about $1.25 trillion. And if interest 

rates were lower by a percentage point, then they would be $1.25 

trillion less in interest payments. We can certainly look at alternative—— 

Chairman RYAN. Yeah, your average is less than 4 percent for 

the decade, correct? Or what is it? Between 4 and 5? 

Mr. ELMENDORF. I don’t remember the average. But it is worth 

noting that our interest rate projection is above the financial markets’ reading on interest rates. Our own model actually has somewhat higher—predicts somewhat higher interest—— 

Chairman RYAN. And you have just recently revised that upward, right? 

Mr. ELMENDORF. We have moved between—I don’t remember the 

revision exactly. But we put our forecast somewhere between our 

own modelling and what financial market participants are saying. 

But we can look at other scenarios, of course. 

Chairman RYAN. I just think the recent movements of the yield 

curve and some other post-cyclical indicators warrant us looking at 

different simulations and seeing what the fiscal effects of that 

would be. 

Mr. ELMENDORF. On enrollment in insurance exchanges, we 

project that to be 24 million by 2019, which is the last year of our 

original cost estimate. And we predict that only 3 million fewer 

people would have employer-sponsored insurance coverage. 

I understand that you don’t think that is right. There are many 

longer explanations I could give. Let me just say quickly that I 

know four other groups that have built sophisticated models of the 

health insurance system somewhat analogous to ours. Those are 

the Office of the Actuary at CMS; those at RAND; at the Urban 

Institute; and at Lew and Associates. All four of those groups show 

the same or less employer dropping of health insurance coverage 

as a result of that legislation than we show. 

Now, we and they are all operating off of a very limited set of 

evidence, off of the effects of much smaller changes in policy than 

has now been enacted. And so I don’t take huge comfort in their 

having similar answers. I think the range of true uncertainty is 

larger than the range of differences in our estimates. But our estimate is quite consistent—— 

Chairman RYAN. Sure. I understand. 

Mr. ELMENDORF [continuing]. With the bulk of professional analysis of this question. 

Chairman RYAN. I could go on. 

Labor market participation, tightness and looseness of labor market factors into all this stuff, competing for labor based on benefits. 

Mr. ELMENDORF. Yes. Exactly. 

Chairman RYAN. I could go on and on and on. 

Mr. Van Hollen. 

Mr. HONDA. Excuse me. Would the chairman yield for a minute 

for a point of clarification? 
29 

Chairman RYAN. Sure. 

Mr. HONDA. The term that you used, Mr. Chairman, dumping 

their employees into the exchange, is a definition of exchange a series of a group of insurance companies operating there or is it just 

one entity? 

Chairman RYAN. Its employers no longer offering health insurance to their employees and sending them into the exchange. 

Mr. HONDA. The definition of exchanges is—— 

Chairman RYAN. To an employee, they have one exchange. If I 

am in Wisconsin, I am going into the Wisconsin exchange. 

Mr. HONDA. Right. But the exchange has many insurance companies operating within it? 

Chairman RYAN. Yeah. You have gold, silver and bronze. 

Mr. HONDA. Okay. So it is not that they are dumping them into 

something that may be less than. It could be that they give them 

more choices. 

Chairman RYAN. Sure. But the taxpayer is on the hook for it 

now. 

Mr. VAN HOLLEN. Thank you, Mr. Chairman. 

And, Dr. Elmendorf, thank you for your testimony. 

Let me just start out where I know we agree, which is the levels 

of debt that are projected in the CBO report in the outyears are 

unacceptable and unsustainable. Whether you are drawing the line 

at 80 percent or 90 percent or 100 percent and above, the fact remains that we cannot afford as a country to get into that kind of 

territory. 

There is, however, I think a very important debate as you indicate in your testimony about how you get there. And I couldn’t 

agree more with your statement that the sooner we make a decision to put in place a plan to deal with the debt in the outyears, 

the less painful it would be and that if you do too much in the very 

short term, it could be disruptive to the economy. 

And, again, as I indicated in my opening statement, the bipartisan commission that was tasked with the job of identifying ways 

to reduce the deficit and the debt, warned that you don’t want to 

have a negative impact on the economy and growth in the short 

term because we all would agree, would we not, that to the extent 

the economy were to slow down, that would obviously contribute in 

a negative way to our debt, correct? 

Mr. ELMENDORF. Yes, that is right. 

Mr. VAN HOLLEN. Now, it is true, isn’t it, that if you were to 

make immediate deep cuts, that would have a—that would be a 

drag, at least in some measure, on the economy and the jobs in the 

short term; is that right? 

Mr. ELMENDORF. Yes, Congressman. A year or so ago, we analyzed a set of policies being considered as ways to boost output and 

employment. And we looked at a variety of reductions in taxes, including the payroll tax that was enacted. We looked at some increases in government spending. Our analysis then was that under 

the current economic circumstances and the current posture of 

monetary policy, that increases in government spending would in 

the short run increase output in employment. And the logic works 

in reverse, that decreases in spending would decrease output in 

employment in the short run. Of course, as you understand, over 
30 

the median run and long run, the extra debt that is accumulated 

worsens the economic situation. But there is some tradeoff there 

for you and your colleagues in deciding what pace to move in putting fiscal policy on a sustainable path. 

Mr. VAN HOLLEN. Right. And the President indicated in his State 

of the Union address that he will impose in his budget, that will 

arrive Monday, a 5-year freeze on non-security domestic discretionary spending, which, by his account, comes to about $400 billion in savings over a period of time. 

I would just, Mr. Chairman, like to enter into the record an example of the impact of just one of the cuts that was identified by 

the Appropriations Committee yesterday. That is the cut to the 

Drinking Water State Revolving Fund of about—a cut of $1.15 billion. That is a matching fund. So States and localities have to 

match it. And a very respected consulting firm, RTI International 

out of North Carolina, has done an analysis of the impact of that 

cut on the economy. I mean, this is one of those kind of investments that we have talked about; this is a public investment, 

transportation, water infrastructure. And by their account, that cut 

will result in between 36,800 and 50,600 fewer engineering and 

construction jobs. So these decisions to withdraw investments in 

public infrastructure have an immediate impact on jobs in the 

economy. 

Let me just ask you to turn quickly to the question of the different components of the challenge as we approach deficit reduction. Because one of the first actions that was taken in this House 

was to eliminate the PAYGO rule and replace it with a rule that 

was more one-sided. In other words, the rule said, well, yes, we 

have to take into account and pay for cuts, but not with respect to 

certain revenues, spending cuts. Isn’t it the case that if you reduce 

revenues, you increase the deficit? 

Mr. ELMENDORF. Yes, Congressman. That is correct. 

Mr. VAN HOLLEN. Well, no, but the math—I will tell you—I 

thank you, Dr. Elmendorf. I am not referring to the chairman here, 

but there have been a lot of people making statements around here 

suggesting that there is not a correlation there. 

So as we approach this issue, it seems to me we should have 

rules that recognize the deficit is increased not just by actions on 

one side of the equation. 

Let me just turn last to the health care question. And I want to 

ask you about the deficit impact. But before I do that, as I recall, 

one of the reasons you argue that—you said with respect to the 

labor market would have maybe some small impacts, but one of the 

impacts you said was that there would be some individuals who, 

because they can get their health care through the exchange and 

no longer have to get health care through their employer, would 

choose, would now have the freedom to choose to not get a job simply because they needed the health care; isn’t that correct? 

Mr. ELMENDORF. Yes, that is right. But on balance, as you mentioned, we think that the enactment of the legislation reduced by 

a small amount, roughly half a percent, the amount of labor that 

workers would supply and would be demanded and would be used 

in the economy over—by the end of the decade when the law was 

fully phased in. 
31 

Mr. VAN HOLLEN. And finally, Dr. Elmendorf, with respect to the 

CBO projections on the impact of the deficit going forward, as you 

know, one of the first actions taken by the new Congress was to 

repeal the health care reform law. You wrote to the Speaker of the 

House on January 6th of this year indicating that your assessment 

would be that that would add $230 billion to the deficit over the 

next 10 years and approximately $1.4 trillion over 20, based on 

your projections of GDP growth; is that correct? 

Mr. ELMENDORF. So the former number is correct, and we noted 

carefully in the estimate that this was pending our complete evaluation using our new economic and technical assumptions. We also 

emphasized that that number assumed that the law would otherwise have unfolded as enacted without changes. And as we have 

said for a number of years now and as you have seen yourself, important changes in policy are often followed by further changes in 

policy. It is not clear that everything will unfold as enacted, but 

that is our job, is to score legislation as it was—as it is written. 

The second number you did for the 20 years we did not use. We 

have carefully referred to longer-term budgetary effects as shares 

of GDP. It is not just a semantic issue. We think it appropriately 

signals the greater uncertainty that attends to those longer-term 

estimates and also appropriately adjusts for the fact that the economy is growing; there will be some inflation, that pure dollar numbers from 2025 don’t mean very much to most people. 

But we did estimate originally and then repeated in this letter, 

to which you refer, that again if the law had otherwise unfolded as 

enacted, that repealing it would increase deficits in the second 10 

years, as well as in the first decade. 

Mr. VAN HOLLEN. If I could just—one follow up. Thank you, Mr. 

Chairman. 

But just to be clear on the second decade, as you indicated, you 

expressed your estimate in terms of GDP, and you did say that you 

believed that repealing the health care reform law would increase 

Federal deficits in the decade after 2019 by an amount that is in 

a broad range around one-half percent of GDP, correct? 

Mr. ELMENDORF. Yes. That is right. 

Mr. VAN HOLLEN. And CBO has done estimates of what it 

projects GDP to be during that period, right? 

Mr. ELMENDORF. Yes. 

Mr. VAN HOLLEN. And so that is how we got the figure, 1.4, was 

we took CBO’s estimates of what GDP being would be during that 

year and applied the percent savings you indicated. 

Thank you, Mr. Chairman. 

Chairman RYAN. Something tells me this conversation is going to 

continue. 

Mr. CAMPBELL. 

Mr. CAMPBELL. Thank you, Mr. Chairman and Dr. Elmendorf. 

And we will continue this conversation right now. First, on 

health care, before I get to broader issues, you just mentioned that 

you believe or that in your estimates, that the health care law 

would reduce the labor used in the economy by about one-half of 

1 percent. Given that I believe you say there is 160 million fulltime people working in 2021, that means that in your estimation, 
32 

the health care law would reduce employment by 800,000 in 2021; 

is that correct? 

Mr. ELMENDORF. Yes. The way I would put it is that we do estimate, as you said, that the household employment will be about 

160 million by the end of the decade. Half a percent of that is 

800,000. That means that if the reduction in the labor used was 

workers working the average number of hours in the economy and 

earning the average wage, that there would be a reduction of 

800,000 workers. 

In fact, as we mentioned in our analysis last summer, the legislation also creates some incentives that might affect the number of 

hours people work. It might affect the propensity to work of lowerand higher-income people. We haven’t tried to quantify those 

things, but the impact is that the 800,000 might not be exactly the 

number. 

Mr. CAMPBELL. Sure. 

Mr. ELMENDORF. The equivalent of withdrawing 800,000. 

Mr. CAMPBELL. Sure. But that is your best estimate at this point. 

You just pointed out that the health care law also beyond 10 

years increases the deficit. And prior to 10 years, there is this 

whole issue about the cuts and payment rates for providers of services for Medicare programs. Can the same dollar of Medicare savings both improve the long-term solvency of the Medicare program 

and fund a new entitlement? Can the same dollar be used for both 

those functions? 

Mr. ELMENDORF. So, as you understand, Congressman, the way 

the budget works is that if a dollar less is spent out of the Hospital 

Insurance Trust Fund, Part A of Medicare, that is a dollar less of 

overall government outlay; it improves the deficit by a dollar. It 

also means that the Medicare Part A trust fund, the HI Trust 

Fund, ends up with an extra dollar’s worth of government securities that is holds. 

And as we have written before, those bonds in the trust fund for 

Medicare and for Social Security have important legal meaning. 

They are real government debt, backed by the full faith and credit 

of the government, but they don’t have much economic meaning, 

because as you are suggesting, if one saves a dollar by not spending it in someplace and one then spends the dollar in some other 

place, one has not improved the ability of the government to ultimately meet future Medicare or Social Security obligations. And 

thus the total increment to the HI Trust Fund from the health legislation enacted last year was much larger than the increment that 

we estimate to government saving. And that excess is real bonds 

for the trust fund but does not reflect an improvement in the government’s ability to meet those later Medicare objections. 

Mr. CAMPBELL. And if you don’t double count this, it does change 

the numbers or the computations for the first 10 years, does it not? 

Mr. ELMENDORF. I want to be careful. We do not double count. 

We kept track of every piece of legislation and its effect on the 

budget once and only once. But our estimates refer, as all of our 

estimates do, to the effects on the unified—the overall government 

budget. So there is no double counting that we have done. I think 

the issue you are raising is whether—is how many benefits of the 
33 

legislation one can claim credit for at the same time. But that is 

not my end of the business. 

Mr. CAMPBELL. Okay, well, unfortunately, I now have just slightly over a minute to get to what I wanted to get to. 

But, other than this, but suffice it to say on the health care plan, 

you think it is going to reduce employment over 10 years. It certainly increases the deficit after 10 years. And there clearly is debate about what it does within 10 years. So how that is good for 

what we are talking about here in the Budget Committee, I don’t 

know. 

But in my remaining minute, I just wanted to mention real 

quick, first of all, I share the chairman’s accolades as far as CBO 

and yourself and what you all do and that you have a very difficult 

job. You have to predict not only the vicissitudes of interest rates 

and the marketplace and GDP, but the vicissitudes of Congress as 

well and what we are going to do and what we are not going to 

do. 

And when I look at the baseline projection versus your alternative, when the baseline includes tax increases, which nobody currently is advocating, including the President, including Democrats 

in Congress, including Republicans in Congress—what it includes, 

cuts to Medicare—or to the so-called doc-fix providers that none of 

us have as of yet have been willing to do and so forth. I look at 

the alternative scenario as a much more likely scenario based on 

what is going on. And I can go through other things. I mean, your 

interest rate projections, even though you moved them up, still you 

have the 10-year Treasury bond below anything it was at during 

all the 1980s and the 1990s and through much of the 1970s, I believe if I have your figure, 2.7, right. So anyway—now my time is 

up. But the whole point is that this 100 percent of GDP debt in 

2021 is a realistic possibility and not some pie in the sky number? 

Mr. ELMENDORF. So, Congressman, we are not trying to predict 

what you and your colleagues will do. We are trying to illustrate 

the effects of alternative policy paths. It is up to you all to judge 

what you think is likely. But we do say in the report that with 

more and more large pieces of policy being set on a explicitly temporary basis, with many Members talking about their interest in 

extending those, we think that the current law baseline is—has become less useful in showing the thrust of current policies and that 

is why we are trying to illustrate some alternatives for you. 

Mr. CAMPBELL. Thank you. 

Chairman RYAN. Ms. Schwartz. 

Ms. SCHWARTZ. Thanks. Ms. Schwartz is hard to say. I recognize 

that. 

I will not ask you to repeat it because you have been absolutely 

very clear in the answers to the previous questions that the health 

law that is law of the land now reduces deficits over 10 years and 

over 20 years? And you have not double counted anything? 

Mr. ELMENDORF. That is correct, Congresswoman. 

Ms. SCHWARTZ. Thank you. 

I am sure we will be saying that over and over again. But you 

keep saying it. Everybody else says it. It is—and we keep hearing 

that it is not understood by the other side. 
34 

What I want to do is try and just focus on a couple of statements 

you have made, but I wanted to just reiterate some of them and 

be clear about where we are on the budget deficit and where we 

are going. 

We all agree that the deficit is a problem and the national debt 

is a problem and that we want to reduce the deficit. Lots of ideas 

out there about how to do it. 

But in the short term, the Republican majority has made—I will 

try to ask the questions in a short way and ask you to answer them 

in a short way. They have changed the rules of the way we count 

spending and what adds to the deficit in this new Congress. We 

went from PAYGO rules to CUTGO. 

Mr. ELMENDORF. The House Rules have changed. We count the 

deficit the same way. We add up all the—— 

Ms. SCHWARTZ. That is what I want to make sure about. That 

is what I wanted you to answer about. The new rules actually say 

that they have to find a way to—if they are going to do spending 

cuts—no, that is going to—they have to offset any spending 

changes, but they don’t have to offset or really count in their 

rules—you will have to do it generally—count any changes in tax 

policy, tax cuts in particular. 

So just to relate this to a family budget, it is like saying, all 

right, if things are tight, we are going to cut back on going out to 

dinner or going to the movies or entertainment for our kids. We 

just can’t afford to do it. But in fact, if you get laid off from work 

and you have no more salary, we are not counting that and maybe 

our checking account won’t notice. Isn’t that kind of what they are 

doing? You can’t do it, but that is what they are saying they are 

going to do? We are not going to notice there is less money coming 

in? 

Mr. ELMENDORF. Well, Congresswoman, we keep track of all the 

changes in spending and revenues. And reductions in revenues increase the deficit, just as increases in spending increase the deficit. 

Ms. SCHWARTZ. So you will help us keep on track? We can go to 

CBO; you will actually be able to tell us that this could and will 

add to the deficit if, in fact, there are tax cuts, for example, that 

they don’t want to pay for. 

Mr. ELMENDORF. The structure of our cost estimates is not altered by this change in the House Rules. 

Ms. SCHWARTZ. We are going to look towards you to actually help 

us with that and help the public understand that that is adding to 

the deficit, not helping us fix the deficit. 

Second, they also are looking at the budget as only cutting—they 

only want to cut spending in one piece of the budget. They are only 

looking at cutting proposals for spending in nondefense discretionary. Now the average American, what does that mean? So I am 

going to ask you, what percentage of the budget is that? They are 

looking for all the spending cuts, particularly the early ones, to 

come out of one part of the budget. Is that the biggest part of the 

budget? What part of the budget is it? 

Mr. ELMENDORF. No, it is not. So, as you know, the government 

spends much more on the mandatory programs, entitlement programs, than it does in discretionary spending. 

Ms. SCHWARTZ. And defense? What about defense? 
35 

Mr. ELMENDORF. So I have in hand in front of me the numbers 

for 2021, if one looks at the end of the decade, at which Social Security would be 21 percent of government spending; the major 

health programs would be 27 percent; defense would be 15 percent; 

net interest payments, 17 percent; and other—all other spending 

20 percent, one-fifth. That is under the assumption that certain 

policies are extended. 

Ms. SCHWARTZ. Can we get to deficit reduction if the only—at 

least for the short term, the only issue on the table is 18 to 20 percent of our budget, and they are going to take all of these cuts, 

pretty dramatic ones in some cases, from one part of that budget? 

Most economists, most advisors have said you have got to look at 

everything. Everything has got to be on the table, both tax revenue, tax policy, spending in all categories, in order to actually get 

to serious deficit reduction. So that between the rules of the way 

they are going to do any of the work they are going to do going forward, ignore the big piece that is tax cuts, and they are also now 

looking for all of the spending cuts to come out of really just one 

piece of the pie, under 20 percent. 

Mr. ELMENDORF. So, Congresswoman, the policy choices are 

yours and your colleagues. It is certainly true that the piece of the 

pie represented by nondefense discretionary spending is not a very 

large piece of the government’s total spending. Trying to—one can 

reduce the deficit with any given piece. But if one wants to achieve 

a goal of stabilizing the debt-to-GDP ratio or a more ambitious goal 

of balancing the budget, then just as a matter of arithmetic, that 

is very hard to do focusing on just one-fifth of the budget. 

Ms. SCHWARTZ. Thank you. 

Chairman RYAN. Thank you. I would just simply say we are here 

in a CR because the majority last year didn’t pass a budget at all, 

nothing. They passed a CR that goes until March 4. So here is 

where we are. Discretionary spending is what is on the table right 

now because the last majority didn’t pass a budget. I just want to 

ask you one quick question. Can you count class-act revenues both 

to go to the CLASS act and to pay for a new entitlement? 

Mr. ELMENDORF. If revenues are collected—— 

Chairman RYAN. Can you use class-act revenues to go to CLASS 

act and a new entitlement? Can you use Social Security revenues 

to go to Social Security and a new entitlement? Can you use Medicare cuts to go to Medicare solvency and pay for a new entitlement? 

Can you use both those dollars for both purposes? 

Mr. ELMENDORF. One can’t use a single dollar to pay a dollar of 

benefits here and a dollar of benefits some other place. 

Chairman RYAN. Thank you. 

Mr. VAN HOLLEN. Mr. Chairman, if I could just briefly on that. 

Chairman RYAN. I indulged, so I will let you indulge. 

Mr. VAN HOLLEN. Let me just say with respect to the point on 

the budget resolution. 

Number one, we did pass the budget enforcement resolution, 

which applied for one year, one year, this current fiscal year 2011, 

I would point out that that budget enforcement resolution was less 

than the budget numbers submitted by the President. We then enacted a continuing resolution. 

Chairman RYAN. So March 4. 
36 

Mr. VAN HOLLEN. Till March 4th, which, of course, was even 

below the budget resolution act that we have had. And now we are 

talking about reducing that further. So the reality is that we did 

have a 1-year budget resolution for this fiscal year. 

Chairman RYAN. Well, we can go back and forth, but I am trying 

to challenge the presumption that we are suggesting we can balance the entire budget on this narrow slice of the budget. No, we 

are not making that assumption. We are in discretionary because 

a CR is expiring March 4. With that, I will go to Mr. Calvert. 

Mr. CALVERT. Thank you, Mr. Chairman. 

Doctor, in your testimony, you say to prevent the debt from becoming unsupportable, policymakers must cut spending, raise taxes 

or adopt some combination of these. But your own report states 

that raising taxes have consequences as well. In part, on page 25, 

it states that if growing interest costs were financed by raising 

taxes, quote, those rates could discourage work and savings and 

further reduce output. Could you describe further how raising taxes 

negatively affects work and saving? 

Mr. ELMENDORF. So the reward that people get from working and 

saving is the amount that they take home from their job or the 

amount that they can take out of their bank account for investments later, and that depends both on what the employer is paying 

or the investment is yielding and also on the tax payments they 

need to make on that to the government. Increases in marginal tax 

rates, which are the rates you pay on the additional dollar of income, will tend to discourage work and saving. 

Mr. CALVERT. It sounds like the old Laffer curve. 

Mr. ELMENDORF. Well, the Laffer curve is a particular extreme 

version of that. I was going to say, there is a lot of debate, a lot 

of research and a lot of debate among economists about how sensitive work and saving are to those tax rates. The Laffer curve, 

which as Professor Laffer noted this morning in an article newspaper, is a concept that predates him by probably centuries, says 

that there is a point at which making tax rates even higher tends 

to reduce revenue, that you lose more than you gain. 

Mr. CALVERT. I think it would be an accurate statement that if 

you tax someone 100 percent of their revenue, there is no inducement to work. 

Mr. ELMENDORF. That is right. I think a very wide spectrum of 

economists think that most tax rates in the United States today 

are not at or beyond that peak of the Laffer curve. But as I said, 

there is disagreement about just where that peak is and how large 

the disincentive effects are. 

Mr. CALVERT. As customary, your baseline revenue estimates are 

based on current law. As such, the figures for 2013 and beyond assume increases in marginal tax rates, expansion of alternative minimum tax; various other tax hikes are scheduled to occur under 

current law, as you know. Based on the table of selective policy alternatives, the scheduled tax law would amount to a total tax increase of about $3.8 trillion through 2021, and revenue would rise 

to about 20 percent of GDP. Even with that significant tax boost— 

if, in fact, that was accurate—would revenues ever even come close 

to catching up with spending with what is going on today? 
37 

Mr. ELMENDORF. Well, revenues get closer, but that is not sufficient. As you say, our baseline projections include the expiration of 

those provisions in the tax law, and we show deficits continuing—— 

Mr. CALVERT. And even looking beyond the 10-year window, isn’t 

it fair to say that spending under the current policy would continue 

to outpace revenue even if the tax revenues were built into the 

baseline projection? 

Mr. ELMENDORF. Yes, that is right, Congressman. 

Mr. CALVERT. Thank you, Mr. Chairman. 

Chairman RYAN. Mr. Doggett. 

Mr. DOGGETT. Thank you very much, Mr. Chairman. 

I want to agree with the expression of concern that Chairman 

Ryan has made concerning the growth of our debt and as well to 

agree with the need for us to ferret out every inefficiency in spending we can find and indeed to make some cuts in spending even 

of programs that are performing well because of the size of that 

debt. 

The concern that I have—and I am not asking you to take sides 

with reference to that concern—is the overly narrow focus of the 

chairman’s approach to our debt problem. And let me ask you if it 

is not true that unpaid-for direct expenditures and unpaid-for tax 

expenditures have the very same effect on the size of our national 

debt. 

Mr. ELMENDORF. Certainly, Congressman, the dollar of extra 

spending and a dollar—— 

Mr. DOGGETT. A dollar of lost revenue? 

Mr. ELMENDORF. Just as a dollar of lost revenue widens the deficit by a dollar. 

Mr. DOGGETT. And indeed, in terms of the size of what has been 

left off the table by the chairman, the size of total tax expenditures 

each year most observers have estimated rival the total amount of 

direct discretionary expenditures; isn’t that correct? 

Mr. ELMENDORF. I think that is right. Estimating the total effect 

of tax expenditures is difficult because of interactions among other 

things. 

Mr. DOGGETT. Exactly. But both are big. 

Mr. ELMENDORF. I have seen it suggested that it is a very large 

number, yes. 

Mr. DOGGETT. So, really, when we make decisions about how we 

are going to deal with this debt, one of the things we can do is to 

cut direct spending. We can say families are just going to have to 

fend for themselves; we are going to cut the budget of law enforcement with regard to the Wall Street banks, with regard to the Wall 

Street security companies, with regard to the health insurance monopolies. We would like to do something about that, a little bit, but 

we just can’t afford to do it any more. And we can’t afford clean 

air and clean water. We don’t want as much environmental law enforcement as we have had. Let’s cut that by $4 billion a year, and 

that might be one way to address the deficit, but can’t we achieve 

the very same thing if we conclude that a provision in our tax laws 

that allows Wall Street financial enterprises to enjoy preferential 

treatment on some of their financing operations abroad and takes 
38 

$4 billion a year by closing that tax loophole, wouldn’t it have the 

same effect on the deficit? 

Mr. ELMENDORF. Dollar per dollar—— 

Mr. DOGGETT. Dollar per dollar. And the same thing with reference to cancer research, with reference to scientific research that 

might spur additional job growth. If we cut that by $500 million 

a year, that will help us solve the deficit but perhaps with some 

very negative effects. 

Or we could eliminate the $500 million a year in what is called 

the look-through rule that advantages some multinationals in their 

interest, rents and royalties that they earn abroad, and it will have 

the same effect on the deficit. It is a choice that we need to make. 

Would we rather continue to advantage these foreign operations, 

some of which may actually encourage the export of American jobs 

overseas, or do we think it is better to cut cancer research and cut 

scientific research? That is really the choice the committee has to 

make rather than you, right? 

Mr. ELMENDORF. Yes, Congressman. 

Mr. DOGGETT. And that is the problem with the narrow focus 

that the chairman and the Republican majority have brought to 

this hearing today. 

They only want to look at half the problem. And I believe we 

need to look at all of the expenditures and especially the many tax 

advantages, tax preferences, exemptions that powerful lobbyists 

with their string of limousines up here have been able to get into 

our Tax Code. 

And that is not being done by this hyper narrow focus that the 

majority has in this budget process. 

Now, let me ask you about another aspect, and that is your estimates on job creation. You analyzed last year what would be the 

most effective ways to encourage job growth in our policies. And 

isn’t it correct that one of the least efficient ways to encourage job 

growth is to extend permanently the Bush-Cheney tax breaks for 

the wealthiest people in our society? 

Mr. ELMENDORF. Congressman, we did estimate that extending 

the across-the-board extension of the 2001/2003 tax cuts would 

have a low bang for the buck, affecting the economy per dollar with 

wider deficits. 

Mr. DOGGETT. Right. Your conclusions were the same as almost 

every expert who has ever come before this committee, Republican 

or Democrat, that those tax cuts won’t pay for themselves, that 

they will add significantly to the deficit, that they are an inefficient 

way to create job growth. If the objective is to encourage more job 

growth than what you have predicted, extending the Bush tax cuts 

permanently for the wealthiest in our society is the wrong way to 

go. 

Thank you. 

Mr. MCCLINTOCK [presiding]. The chair recognizes me. 

Dr. Elmendorf, thank you for coming. My first question is spending. Under George Bush, would you say that spending grew faster 

or slower than it did under Bill Clinton? 

Mr. ELMENDORF. Total Federal spending? 

Mr. MCCLINTOCK. As a percentage of GDP. 
39 

Mr. ELMENDORF. I am sorry, I don’t know the answer to that 

question. So total Federal outlays in fiscal year 2008 were about 

2.5 percentage points of GDP above where they were in 2000. And 

in 2000, they were about 4 percentage points of GDP below where 

they were in 1992. 

Mr. MCCLINTOCK. So spending grew much faster under George 

Bush than it did under Bill Clinton? 

Mr. ELMENDORF. Relative to the growth of the economy, yes, 

Congressman. 

Mr. MCCLINTOCK. How about deficits under George Bush, would 

you say they were bigger or smaller than they were under Bill 

Clinton? 

Mr. ELMENDORF. They were a good deal bigger, Congressman. 

Mr. MCCLINTOCK. Tell us, didn’t we have a big stimulus program 

in February 2008 under George Bush where we all got $600 checks 

to stimulate the economy? 

Mr. ELMENDORF. There was, yes. I don’t remember the total size 

of that legislation, but yes, those checks were issued. 

Mr. MCCLINTOCK. Well, if higher and higher spending and bigger 

and bigger deficits and massive government stimulus spending was 

the root to prosperity, I would have thought that the George Bush 

administration would have ended with a new golden era for the 

American economy. I wonder how that happened. I guess that is 

a rhetorical question. I will move on. 

Mr. Van Hollen warned us earlier today that the deep cuts would 

be a drag on the economy. I was wondering if you could tell us 

about the great depression of 1946. 

Mr. ELMENDORF. Congressman, as you know, there was not a 

great depression of 1946. 

Mr. MCCLINTOCK. There wasn’t a great depression in 1946? Well, 

how could that possibly be? In 1945, Harry Truman abolished the 

excess profits tax. He slashed Federal income tax rates. In 1946, 

Harry Truman cut Federal spending from $85 billion down to $30 

billion in a single year. He fired 10 million Federal employees. It 

was called war demobilization. How would you characterize the 

post-war economy under Harry Truman? 

Mr. ELMENDORF. The economy performed well in the wake of the 

Second World War. It actually was a surprise to macro-economic 

forecasters at the time. It is an interesting episode in the period 

of economic thought. 

Mr. MCCLINTOCK. Yes. The Keynesians at the time, as I recall, 

were predicting a 25 percent unemployment rate, a second great 

depression. And instead, we had the post-war economic boom. That 

is very interesting. Maybe we stumbled upon something here. 

Mr. ELMENDORF. In fact, economists changed their models ever 

since that point to reflect some of the things that they learned during that episode. 

Mr. MCCLINTOCK. Apparently they haven’t changed those models 

enough in the current administration. 

Mr. ELMENDORF. I am not sure what you are suggesting. I think 

that the models that CBO uses for this and other sorts of analysis 

are at the cutting edge of the models that economists in universities and the private sector use for the questions that we analyze. 
40 

Mr. MCCLINTOCK. I am glad to hear that. Are there any other 

periods in our Nation’s history when our debt to GDP was comparable to what it is now? 

Mr. ELMENDORF. Well, during World War II, as you know, the 

debt ran up to a point above 100 percent of GDP and then fell from 

that point during the 1950s, 1960s, and 1970s relative to GDP. 

Mr. MCCLINTOCK. Right. And any other times? 

Mr. ELMENDORF. I wrote a paper once, but I forget, Congressman, the nature of debt in the—— 

Mr. MCCLINTOCK. The Revolutionary War debt, I believe, 

brought us to about that same height, as I recall. 

How were those debts discharged? 

Mr. ELMENDORF. Well, so in the wake of the Second World War, 

what happened was the government’s budget ran small deficits 

mostly, but was close to being in balance, so there was a nominal 

amount of government debt. It didn’t change very much, and the 

economy grew. So, as a burden on the economy, debt fell relatively. 

Mr. MCCLINTOCK. So Harry Truman slashed taxes, slashed 

spending, slashed Federal employees, and the economy grew out of 

a debt comparable to the one we have now? 

Mr. ELMENDORF. That is right, Congressman. 

As you understand, of course, the path of the budget and the 

debt depends not just on the policies that you and your colleagues 

enact, but also on the economic circumstances. And your policies 

have some effect on those, but also there are many other influences 

and economic circumstances. 

One of the things that we take seriously in our—— 

Mr. MCCLINTOCK. If I could, my time is fleeting, so if I can move 

on to a final question here. 

Mr. Van Hollen earlier today said that we must not jeopardize 

the full faith and credit of the United States Government, and we 

all agree with that. 

Tell me, would the full faith and credit of the United States Government be strengthened by requiring first call on revenues to go 

for debt service as most other States already require? 

Mr. ELMENDORF. To be honest, Congressman, I think that is unclear. The government has a range of obligations. It might be the 

case that protecting certain obligations and not others would then 

strengthen confidence in the government’s commitment to paying 

those obligations. 

On the other hand, it might be the case that the government not 

honoring all of its obligations would then cast doubt on its commitment to honoring any of those obligations. 

I think most analysts with whom I have talked, and I have 

talked with a fair number, think that were the government to default on any of its obligations, those to debt holders and also to 

those people with regular contracts with the government and so on, 

that would represent a rolling of the dice about investors’ perception of the safety of U.S. securities. I don’t know any analysts who 

think that the government should roll those dice and see what happens. 

Mr. MCCLINTOCK. Funny, other States do it all the time. 

Ms. McCollum is next. 
41 

Mr. ELMENDORF. Other States pay higher interest rates than the 

U.S. Treasury does, Congressman. 

Mr. MCCLINTOCK. Ms. McCollum. 

Ms. MCCOLLUM. Thank you, Mr. Chairman. 

I would like to start my comments with a reflection on a 

misstatement made during the hearing yesterday. After I left yesterday’s hearing, the gentleman from Missouri, Mr. Akin, referenced my statement, twisted my words into something I neither 

said nor implied, and I am sorry he is not here. He was here earlier. 

I hope the gentleman’s misrepresentation of my comments does 

not reflect the manner in which this committee will conduct itself 

in the future. 

As Mr. Akin is from the Show Me State, I brought the transcript 

of yesterday’s hearing with me, and I would like to enter that in 

the record, but right now I would like to read from the transcript. 

‘‘Mr. Akin. The comment was made earlier I thought which was 

an amazing quotation from Ms. McCollum that the budget deficit 

is not a spending problem. I found that amazing because it seems 

to me that it sure is a big spending problem. So we must be on different planets, I suppose.’’ 

Mr. Chairman, I don’t know what planet Mr. Akin lives on, but 

in the real world, I pride myself in conducting myself with respect 

and civility with my colleagues. 

For the record, I wanted to restate my comments from the hearing transcript. 

‘‘Ms. McCollum. I am going to paraphrase a popular Tea Party 

slogan that goes something like this, quote, the Federal Government doesn’t have a revenue problem, it had as a spending problem.’’ 

I went on to say, ‘‘Chairman Bernanke, it seems clear to me that 

the deficit is not just a spending problem.’’ 

Nowhere in my statement did I say the budget deficit is not a 

spending problem. 

For new Tea Party members here on the committee, this is a 

good moment for a little bit of history. Mr. Akin and I both entered 

Congress in 2001. 

Mr. Elmendorf, am I correct remembering back in 2001, there 

was a projected 10-year budget surplus of $5.6 trillion? 

Mr. ELMENDORF. It was a large positive number, Congresswoman. I am sorry, I don’t remember the exact figure. 

Ms. MCCOLLUM. At the time, Mr. Akin’s party, the Republican 

Party, before the addition of the Tea Party, controlled the House 

here and the White House. The surplus that President Clinton left 

the American people quickly vanished after President Bush and 

Mr. Akin entered Congress, as was pointed out by the gentleman 

in the chair right now. 

Mr. Elmendorf, am I correct, or correct me if I am wrong, that 

in 2001 and 2003, the Bush tax cuts, which I voted against and Mr. 

Akin voted for and favored, contributed to the growth of the deficit 

by trillions of dollars? 

Mr. ELMENDORF. Yes, that is correct, Congresswoman. 
42 

Ms. MCCOLLUM. Again, Mr. Elmendorf, correct me if I am wrong, 

but the war in Iraq, which I opposed and Mr. Akin voted in favor 

for, added to the Federal deficit by nearly a trillion dollars? 

Mr. ELMENDORF. Yes, Congresswoman. It may be over a trillion 

dollars; I am not exactly sure. It is a big number, though, as well. 

Ms. MCCOLLUM. Mr. Elmendorf, I also believe it is correct to say 

that the December vote to extend the Bush tax cuts added $858 billion to the Federal budget deficit; is that not correct? 

Mr. ELMENDORF. Yes, that is correct, Congresswoman. 

Ms. MCCOLLUM. I raise this because this is another example of 

where Mr. Akin and I disagree. He voted to add $858 billion to the 

deficit by voting for tax cuts. Included in that were NASCAR’s 

racetrack owners, tax breaks for Caribbean rum manufacturers, 

along with extra tax cuts for millionaires and billionaires. And I 

voted against the deficit-busting bill. 

So Mr. Akin is very concerned about spending. His record to me 

would indicate that he has voted to add trillions of dollars to the 

national debt. 

Now, Mr. Elmendorf, what would be the effect on future deficits 

if Congress were allowed to let the Bush tax cuts expire in 2012? 

And did not the economic growth we saw under President Clinton 

include a tough vote, in which no Republican helped Democrats’ 

vote, that included a tax increase? 

Mr. ELMENDORF. So, Congresswoman, as you know, our baseline 

projections, which follow current law, assume that the tax cuts now 

scheduled to expire, expire. As we show one of the policy alternatives in the report, if one instead, if you and your colleagues instead voted to extend those expiring tax provisions, that would add 

trillions of dollars to the deficit over the next decade and thus to 

the accumulated level of debt by the end of the decade. 

You are also right, Congresswoman, of course, that in the 1990s, 

a number of votes were taken to change policies in ways that reduced the deficit, and those actions, together with the strong economy, led to budget surpluses at the end of the 1990s. 

Ms. MCCOLLUM. Just to clarify, because the clarification was 

that tax cuts were part of that decision under the Clinton administration, to remove the tax—— 

Mr. ELMENDORF. A change in tax policy is part of what happened, yes. 

[The information follows:] 

FEBRUARY 9, 2011, BUDGET COMMITTEE HEARING TRANSCRIPT

EXCERPTS SUBMITTED BY MS. MCCOLLUM

* * * * * * * 

[REMARKS BY REP. MCCOLLUM]

Ms. MCCOLLUM. Thank you, Mr. Chairman. Chairman Bernanke, thank you for 

being here. I believe that we have a lot of work ahead of us, and I want to thank 

you for the work that you did in stabilizing our economy in the past, and I look 

forward to hearing some of your advice, suggestions, and ideas on how we move forward with getting out of the Great Recession. And I want to be part of the solution, 

and we hear a lot of talk here in Congress about spending, but I’m also concerned 

about a lot of the tax perks that lobbyists have been very successful in getting for 

special interests in our tax code, and I think that we need to put everything on the 

table. 
43 

But having said that, today, we’ve focused on spending quite a bit, as some of the 

questions have come through. And in fact, I’m going to paraphrase a popular Tea 

Party slogan; it goes something like, quote, ‘‘The federal government doesn’t have 

a revenue problem, it has a spending problem.’’ 

Now last week, Chairman Ryan put forward his best effort to reduce the deficit 

with spending target cuts, that is $41 billion from the fiscal year 2011 budget. The 

Republican target reduces the fiscal year 2011 projected deficit by about 2.5 percent. 

That leaves 97.5 percent of the deficit intact. 

Now, in an extreme scenario, if all 176 Republican Study Committee members 

were able to have their way and take control, they would be allowed to cut four 

times what Chairman Ryan’s best effort is. But that would only then still only represent 10 percent of the federal budget deficit for fiscal year 2011, still leaving more 

than 1.3 trillion. 

Chairman Bernanke, it seems clear to me that the deficit is not just a spending 

problem. Is it possible to reduce the federal deficit to responsible levels without capping or cutting defense spending and without looking at the tax perks that many 

corporations and lobbyists have been successful in getting? 

And my second question is: With the type of cuts that are being discussed, do you 

think that we need to be insightful when making these spending decisions on what 

to cut, on the impact of jobs as well as U.S. competitiveness, and the global economy? I think we need to be careful of gutting domestic investments in education, 

infrastructure, and R&D in the next decade, because we might see reverses that 

would put us at a competitive disadvantage. 

Mr. BERNANKE. Well, on your second question, I’m hoping to, obviously, it is very 

important that the deficits be brought under control, but it is not just a matter of 

total spending and total revenues, it is also how smart is the spending and how are 

we using it? And the tax code, are we doing it in a way that is constructive for 

growth and for competitiveness? 

So, I would urge the Congress not only to talk about total budget numbers, but 

also to think hard about the various programs and tax provisions to make sure that 

they are growth friendly, and that is a very important part of your job. 

In particular, you mentioned perks, et cetera. I think one direction that at least 

should be considered would be, in the corporate tax code, for example, to reduce a 

lot of loopholes, to broaden the base, and therefore be able to lower the tax rate, 

which is now soon going to be the highest in the industrial world so that the decisions made by corporations are based, you know, not on tax distortions, but rather 

on the economics of where, for example, they should locate their plants, and so on. 

So, I do think that growth friendliness is a very important part of this and that 

lower rates and broader base is something that most economists would agree is a 

good direction to go in the tax code. 

On short-run versus long-run, I, again, I understand there’s a lot of focus on this 

year’s budget. Without commenting directly on that, I do think that in order to be 

credible, given that the budgetary problems get worse over time, that is as the baby 

boomers retire, as health care costs rise, and so on, given that the prospective deficits are rising over a long period of time, I would hope that a good bit of your discussion will be about the long-term over the 10, 15, 20 year horizon and to the extent 

that you can change programs that will have long-term effects on spending and revenues. That will be a more effective and credible program than one that focuses only 

on the current fiscal year. 

Ms. MCCOLLUM. Thank you, Mr. Chairman. As you know, we are setting the 

budget. We’re setting the spending and Ways and Means does its issues with the 

tax code and addressing what I hope will be any tax perks. But I can’t make a decision in isolation, so I look to all of us to put everything on the table so that we 

make a well-rounded decision as we move forward with the budget. So, Mr. Chairman, I’ll be looking to see what your comment is. 

Chairman RYAN. Thank you, Ms. McCollum, and I can only say what we are doing 

right now is our best; it is our first effort at getting fiscal control under this place. 

Mr. Ribble. 

* * * * * * * 

[REMARKS BY REP. AKIN]

Mr. AKIN. Thank you, Mr. Chairman. It seems like when we talk about dealing 

with the budget deficit, it reminds me a little bit about these all kinds of imaginative weight-loss programs, you know? It seems like when you get down to the bottom line, you can either eat less or you can exercise more. You’re only given two 

alternatives. It seems like we are in the same way, we can try and sugar-coat it, 
44 

but the problem is that either we are spending too much or we’ve got to tax a whole 

lot more. The comment was made earlier, which I thought was an amazing 

quotation from Ms. McCollum, ‘‘The budget deficit is not a spending problem.’’ I 

found that amazing, because it seemed like to me it sure is a big spending problems. 

We’re just on different planets, I suppose, but let’s just assume, instead of you are 

going to cut spending, that you are going to try to increase taxes. 

Now, my understanding is, I take a look at historic data, our tax revenues run 

somewhere in that 18 percent range. My understanding is if we were to double the 

tax rate on everything across the board, we couldn’t assume that we are going to 

get double in revenue, federal revenue. 

In fact, we may well do what you are saying, crash the economy and get even 

less. I do recall, we did dividends, capital gains, and death text in May 2003, and 

the Congressional Budget Office said, ‘‘Well, now you are going to have less revenue,’’ but in fact, there was more revenue because the economy kind of got going. 

So, my question is, when I take a look at this overall problem that we are, you 

know, too heavy, in terms of like a weight loss thing, it is pretty spooky to me because you add all of the entitlements, the main ones, Medicare, Medicaid, Social Security, and then the other kinds of entitlements, and add debt service to that, and 

it seems, when I looked at the numbers, it was looking like about 2.3, roughly, trillion. And our revenue is about the same thing. So that says you get zero defense, 

zero discretionary non-defense, and you are right now just a parody. So, I don’t understand. I guess my question to you is, first of all, don’t we have to, essentially, 

deal with the entitlements, just by definition, or can you actually make it up by just 

doubling taxes and hope there’s going to be a ton more revenue? 

Mr. BERNANKE. Well, I think that, as you point out, I mean, that in the long run, 

the way we are going, entitlements plus interest would basically be the entire government budget, and so, unless you raise taxes considerably. Now it is up to Congress to find the right balance between taxes, and cuts, and so on, of course. But 

I think you need to look seriously, particularly at the health care costs, which is 

of course, part of what has been going on the last couple of years here in Congress, 

but I think a focus on the cost side is important. 

And, it would be difficult, I think. I’m very loath to prescribe exactly how to address these issues; I do think that it would be very difficult to leave health care 

programs untouched and still achieve budgetary balance in the next 15 years. 

Mr. AKIN. Thank you. I think what I heard you saying is, is you really got a deal 

with that rate of spending, and particularly, in the entitlement, the health care 

piece is such a big part of that, that has to be dealt with. And that raising taxes, 

just to finish the question. 

Mr. MCCLINTOCK. I am sorry, we are out of time. 

Mr. AKIN. Thank you. 

* * * * * * * 

Mr. MCCLINTOCK. Mr. Stutzman. 

Mr. STUTZMAN. Thank you, Mr. Chairman. 

Thank you, Doctor, for being here today. 

I want to go back to what Mr. Calvert was talking about a little 

earlier with the tax rates and where we are at with our current 

tax rates and specifically the corporate tax rate. 

The President in his State of the Union Address: closing loopholes and lowering the corporate tax rate. My question is, would 

you agree with that, and how might that be accomplished? We 

have seen that other countries around the world are starting to adjust. Is the corporate tax rate maybe over the crest of a good Laffer 

curve, and are we starting to see job loss because of higher taxes 

and, obviously, I would say, more regulation? 

Mr. ELMENDORF. So we have not done analysis to identify the 

peak of the corporate Laffer—tax Laffer curve. But I think there 

is widespread agreement among analysts that lower tax rates applied to broader bases are a much more efficient way to raise any 

given amount of revenue that the Congress wants to raise. 

And we have some work underway that we hope to release soon 

that looks at our treatment of international aspects of the corporate 
45 

business and how that is taxed and compared with the way other 

countries address those issues, and we hope that will be helpful to 

you and your colleagues in thinking about this question. 

Mr. STUTZMAN. So you will be taking a look at other countries 

around the world that have adjusted their corporate tax rates? 

Mr. ELMENDORF. It is a comparison. The study looks at how 

adopting different sorts of systems or the sorts of that exist in some 

other countries might affect incentives for U.S. companies to engage in various kinds of behavior. 

Mr. STUTZMAN. Okay. We all talk about simplicity and simplifying the Tax Code, and would you agree that we have a very complex Tax Code and that it and should be simplified? 

Mr. ELMENDORF. No doubt. Again, I think it is a very widespread 

view that a simpler Tax Code would be more efficient in terms of 

people and companies spending less time filling out forms and 

would also be perceived probably as being fairer than the complicated tax system that we have now. 

Mr. STUTZMAN. I think that the American people obviously want 

both sides to fix the problems in Washington. And you know, we 

can sit here and point fingers at each other all day long, but that 

is not going to fix the problems. I think they want simplicity. I 

think they want fairness and equitable taxation. The proposal has 

been thrown out with a flat tax or the fair tax. Could you comment 

on one of those? I mean, is that part of a solution? 

Mr. ELMENDORF. So we haven’t studied those proposals specifically. You know, in order to reduce the deficit, one has to either 

spend less or raise more revenue. It is, again, I think a widespread 

view among analysts that if one wants to raise more revenue than 

some benchmark, that it is more efficient to do so if one has a better tax system in the sense of having a broader base and lower tax 

rates. 

The discouraging effect on work and savings, as I discussed earlier with one of your colleagues, come really from the level of tax 

rates. One can, as we did as a country in 1986, restructure the tax 

system in a way that can bring down tax rates while broadening 

the base. But again, if one wants to reduce the deficit through this 

action, one has to ultimately raise more revenue than under some 

alternative. 

Mr. STUTZMAN. But raising more revenue is obviously through 

growing the economy, not just raising taxes? 

Mr. ELMENDORF. That is right. But as Chairman Bernanke said 

yesterday, and as many people have said, the size of the current 

imbalance between spending and revenue in the United States is 

not something that can be closed through any conceivable feasible 

growth rate. 

Mr. STUTZMAN. Do you have any idea, how do we compare, as far 

as our regulatory measures in this country, compared to around 

the world? We know some countries are already adjusting corporate 

tax rates. Are they also adjusting and correcting their regulatory 

systems as well? 

Mr. ELMENDORF. So there are certainly changes going on in lots 

of places. In a lot of other developed countries, in Europe, where 

they are feeling fiscal stress, there are changes, important changes 
46 

in policy, that are meant to help those economies grow faster, as 

you said, and to make other changes in budget. 

We need to remember, of course, that most other developed countries are starting from levels of revenue relative to GDP that are 

a good deal higher than the levels in the United States. So if they 

bring those down, they are bringing them towards us, for the most 

part, not beyond where we are. 

And, of course, a number of countries are raising tax rates. The 

government in Britain, for example, is raising taxes as well as cutting spending. They are working on both sides of the ledger in an 

effort to reduce very large budget deficits. 

So different countries are doing different things, hopefully an appropriate response in their situations, but that is not always clear. 

Mr. MCCLINTOCK. Mr. Honda. 

Mr. HONDA. Thank you, Mr. Chairman. 

Good morning, Dr. Elmendorf. 

We all agree that the trajectories of our national deficit and debt 

are unsustainable and that they place our Nation’s future in great 

peril, and that it is this committee’s responsibility to make this 

right for the American people. 

Relative to Afghanistan and other things, the only way we can 

make it right is if we are honest about what has placed us in this 

predicament. Republicans have placed the blame entirely on Social 

Security, Medicare, discretionary spending, which provides for our 

working families and our parents in their old age. They want us 

to ignore that two policies of the Republican Party, the Bush tax 

cuts and the wars in Iraq and Afghanistan, accounted for over $500 

billion of the 2009 deficit and, including interest, will account for 

almost $7 trillion over the next decade. 

So my question to you is this, would the savings that resulted 

from ending combat operations in Iraq and Afghanistan and allowing the Bush tax cuts for the wealthy to expire reduce projected 

deficits? 

Mr. ELMENDORF. Yes, Congressman. Relative to the alternatives, 

yes. 

But I want to emphasize that our baseline projections include the 

expiration of the Bush tax cuts. So the baseline projection of deficits of $7 trillion include that expiration. They do not include a 

more rapid drawdown of troops overseas. We offer an alternative 

in our outlook that picks a particular scenario in which that reduction would reduce deficits by an additional $1.25 trillion. It still 

leaves deficits in excess of $5 trillion over the coming decade. 

Mr. HONDA. And the technique that we use with a war on terror 

or Afghanistan and Iraq, if you will, the supplemental, is that 

something that is directly attributable to the deficits that we are 

experiencing and a growing national debt, in the way it is being 

done now? 

Mr. ELMENDORF. Any form of spending, additional spending, or 

tax reduction, will widen the deficit. So whether you enact that 

spending through a regular appropriation or supplemental—— 

Mr. HONDA. Is that a ‘‘yes’’ to that question? 

Mr. ELMENDORF. Well, I am not sure that I understand you. It 

doesn’t matter for the ultimate effect on the deficit whether you 

enact something in a supplemental appropriation or a regular ap-
47 

propriation. It is just a matter of your authorizing the government 

to spend money. 

Mr. HONDA. And obligate. 

Mr. ELMENDORF. Yes. 

Mr. HONDA. And create a deficit that is not balancing the budget 

that would be financed from somebody that would be added to our 

national debt. 

Mr. ELMENDORF. Yes, that is right, Congressman. 

Mr. HONDA. Thank you. 

The other one is investing in education and infrastructure. In 

your testimony, you highlighted the jobs crisis that continues to 

confront working and middle-class families. You cited two culprits, 

the anemic growth rate and structural changes in the labor market. 

In regards to growth, past CBO reports have recommended investments in transportation and infrastructure, while your observations regarding the changing labor market and the need to equip 

our workforce with 21st century skills, and to do this implies a 

need for investment in education. So can you explain to this committee how public investments in education, transportation, and infrastructure promotes economic growth? 

Mr. ELMENDORF. Yes, first, to clarify, we have not recommended 

any policies. That is not in our charter. We have analyzed the effects of policies. 

Mr. HONDA. Right. 

Mr. ELMENDORF. And we have said that—for example, we released a report at the end of last year about the transportation and 

water infrastructure of the United States. We in this case cited 

analysis by other people, other organizations, that there are additional highway spending, if used on the projects with greatest economic return, would have economic return that exceeded their 

costs. That doesn’t—and other sorts of investments, like education, 

can again, if effective, can enhance future economic output. 

I think the key, and this is a big issue as you know in the infrastructure discussion, is how to direct the money to a place, to certain sorts of projects that have high returns. 

Mr. HONDA. One of the high returns is not only job creation but 

public safety, and we can see what happened in Minnesota when 

we don’t keep up with our obligations. 

So it appears to me that the return on our investment is high 

and would be positive to our economic growth. 

Thank you. 

Mr. MCCLINTOCK. Mr. Flores. 

Mr. FLORES. Thank you, Mr. Chairman. 

Dr. Elmendorf, thank you for joining us today. You and your 

team have the unenviable task of taking the projected policy impact on human behavior and organizational behavior and trying to 

convert that to numbers. So I appreciate your efforts to try to do 

that. 

But with that said, I think we can all agree that it is somewhat, 

even though you do your best, it can be somewhat subjective. 

And with that, one of the things that I am going to ask you to 

keep in mind as we go forward is that we are marching off in uncharted territory as a country with high debt levels, and so the old 
48 

models may not apply as we go forward. I am sure there will be 

times when we will talk about that as we go forward. 

My first question, how much has the Federal debt grown in the 

last three fiscal year? It is over $4 trillion, right? 

Mr. ELMENDORF. Yes. 

Mr. FLORES. There has been some commentary during this hearing extolling the virtues of PAYGO. In my view, growing our debt 

by $4 trillion while PAYGO was in operation would indicate that 

PAYGO has been an abject failure. 

The next thing I want to talk about is, you said earlier in your 

testimony, not only today but earlier, that you don’t get a good 

bang for the buck in terms of reducing taxes on the economy. 

Where do you get the bang for the buck? 

Mr. ELMENDORF. Actually, I don’t think that is a fair characterization of what we said. 

Mr. FLORES. Maybe I heard it wrong. I want to make sure I 

heard it correctly. 

Mr. ELMENDORF. The short term stimulative effect on the economy in a weak economy, like ours is today, depends very importantly on the nature of a spending or tax change. So, in fact, in our 

analysis, the highest bang for the buck was increasing aid to the 

unemployed. But the next three options ranked on our list were different ways of reducing employers’ payroll taxes. 

So the methodology that we use does not have an intrinsic taxversus-spending hierarchy. It is the nature of the policy. The payroll tax we think would be more effective than an across-the-board 

tax cut of the sort I was asked about earlier because more of the 

money is directed at people who have less savings and are likely 

to spend the larger share of the extra income that they receive. 

Mr. FLORES. Okay, well, that is helpful, because the way I heard 

it originally, it was in contravention with what Christina Romer, 

who is the former chair of the President’s economic team, who said 

at one time that the best economic—the best bang in terms of economic—the best bang for the buck in terms of increased economic 

activity was due to reducing taxes. 

How many jobs did the CBO estimate were created under stimulus spending? 

Mr. ELMENDORF. So we estimated—I have it here. Our latest estimate is that employment in 2010 was between 1and a quarter 

and 3 and a quarter million higher than it would have been in the 

absence of that legislation. 

Mr. FLORES. So that would indicate we spent, for every job created, you assume we spend $800 billion, that it cost $6 billion a 

job; is that correct? 

Mr. ELMENDORF. No, no. The mid point in this range I describe 

was 2 and a quarter million jobs. 

Mr. FLORES. So a little less than $4 million a job is what it cost? 

Did I do my math right; $400,000 a job? 

Mr. ELMENDORF. I am sorry, I don’t know that number. 

Mr. FLORES. We ought to calculate it. I think the bottom line is 

that stimulus spending is not a very efficient way to create jobs. 

If we run the math, whether it is $400,000 or $4 million, and I may 

have my math wrong, too, but that is a very inefficient way to create jobs. I think that the economic models will show that changes 
49 

in tax policy have a much bigger impact on economic growth than 

do changes in Federal spending. 

Thank you. 

Mr. MCCLINTOCK. Ms. Wasserman Schultz. 

Ms. WASSERMAN SCHULTZ. Thank you so much. 

Mr. Elmendorf, I want to ask you some questions. It actually is 

a perfect counterpoint to Mr. Flores’s comments because I think he 

is exactly wrong in terms of both his explanation related to the Recovery Act and its impact as well as what are the policies that provide us with the biggest bang for our buck. 

Tax cuts certainly provide a certain bang for the buck, but my 

understanding in just reading a lot about how to recover from the 

recession and the best economic policies is that among the biggest 

bang for our buck is not so much tax cuts but providing additional 

funds directly into the hands of low-income households; things like 

that, like unemployment compensation and other policies that put 

money directly into the hands of people who really need to use that 

money and can’t really afford to sit on it. Am I right? 

Mr. ELMENDORF. You are right, Congresswoman. In terms of the 

short-term stimulative effect of a policy, what matters most is 

whether the money gets spent. And giving it to lower-income people tends to lead to a larger share of the money being spent. 

Whether that is done on the spending side or the tax side is less 

important than who the money goes to. 

Ms. WASSERMAN SCHULTZ. Just by way of comparison, would you 

say that unemployment compensation, a payroll tax holiday, other 

kinds of policies that put money directly into the hands of lowerincome individuals, would provide more bang for the buck for the 

economy than let’s say tax cuts for the wealthiest individuals? 

Mr. ELMENDORF. In terms of the short-run economic stimulus, 

yes, Congresswoman. 

Ms. WASSERMAN SCHULTZ. Thank you. 

And just on the Recovery Act itself, according to CBO’s models, 

my understanding is that the Recovery Act increased employment 

in 2010 by somewhere between—and I think this is CBO’s estimate—1.3 million and 3.3 million people. Is that right? 

Mr. ELMENDORF. That is right. 

Ms. WASSERMAN SCHULTZ. Yesterday, Chairman Bernanke was 

here, and he testified on the state of the economy. He has previously observed that with the remainder of the Recovery Act funds 

set to expire—or not expire but to be spent this year and then no 

longer be available to State and local governments, the expiration, 

for lack of a better term, of the stimulus funds is obviously going 

to worsen the outlook—my State is facing a $3.6 billion deficit, will 

no longer have the stimulus funds available after the end of this 

year—and that would present a headwinds for the overall economy. 

Can you give us a sense of whether you agree with his assessment? 

Mr. ELMENDORF. Yes, I think that is right, that the waning effects of the Recovery Act represent a drag on economic growth over 

the next year or so. 

Ms. WASSERMAN SCHULTZ. So that fact, coupled with draconian 

cuts proposed, for example, in Chairman Ryan’s plan, which is like 

an anti-Recovery Act, would you give us a sense whether you think 

large spending cuts like that right away would be an additional 
50 

drain on economic growth, especially when compounded with the 

expiration of the Recovery Act funds? 

Mr. ELMENDORF. So our analysis, yes, implies that cutbacks in 

government spending under current economic conditions tend to reduce output employment in the short term. And the issue that you 

and your colleagues face is how to balance that against the other 

problems that arise from the burgeoning national debt. 

Ms. WASSERMAN SCHULTZ. So potentially if we cut too much too 

quick and we have the expiration of the Recovery Act funds, with 

the State and local governments facing significant deficits to start 

with, couldn’t we endanger the recovery? 

Mr. ELMENDORF. Well, it could slow the recovery. Endangering I 

think depends on the overall scale of the activity. 

Ms. WASSERMAN SCHULTZ. Let me rephrase. Obviously, the recovery has not been as quick as we would like. Isn’t it likely that 

the combination of all of those things would result in the recovery 

slowing as opposed to quickening? 

Mr. ELMENDORF. Yes. I mean, our forecast, of course, builds in 

the things that are in current law. And additional cuts in spending 

in the near term we think would have some dampening effect on 

output and employment, and the magnitude depends on the magnitude of the cuts. 

Ms. WASSERMAN SCHULTZ. Thank you very much. 

Chairman RYAN [presiding]. Mr. Mulvaney. 

Mr. MULVANEY. Thank you, Mr. Chairman. 

Dr. Elmendorf, I apologize. I am going to move very quickly because I have an additional topic I want to talk to you about. If I 

could bring the first draft up, that would be fantastic. 

A quick question, can you have a deficit without spending? You 

can’t, can you? 

Mr. ELMENDORF. No, Congressman. You can’t. 

Mr. MULVANEY. This is a graph of the historical revenues and 

spending levels as a percent of GDP going back to 1960. I have 

heard some discussion today that suggests that we don’t have a 

spending problem, that we have a spending problem and a revenue 

problem. It looks like historical revenues have averaged about 18 

percent of GDP over the course of the last 40 years, and spending 

has been about 20. 

Take a look, Doctor, back in the 1960s, it looks like we were taking in about 18 percent in terms of revenues, percent of GDP. Do 

you remember what the top marginal rate was back then? 

Mr. ELMENDORF. It was quite high. 

Mr. MULVANEY. So even then, and I think it was above 90 at that 

point, even then we weren’t able to squeeze more than 18 percent 

of GDP out in terms of revenue. So we are were soaking it to the 

rich pretty good. But we couldn’t get much above 18. In fact, the 

only time we have gone above 20 was during the dot-com boom of 

the late 1990s, early 2000s. 

Now it looks like, according to your projections, because these are 

your projections, we do get revenues back at historically high levels 

in the next 10 years, that we get revenues back to 20 percent of 

GDP, and we still have a dramatic deficit in those years, don’t we, 

sir? 

Mr. ELMENDORF. Yes. That is right, Congressman. 
51 

Mr. MULVANEY. And that is because our spending is way above 

our historical average of 20 percent, correct? 

Mr. ELMENDORF. That is right, Congressman. 

Mr. MULVANEY. If I can bring up the second graph. 

I asked my staff to come up with something that has been bugging me since I have been here. This is my own personal idea of 

what a tipping point is. I asked them to graph the projections using 

your numbers of the total revenues that the government expects to 

take in versus the interest payment obligations. Now the top graph 

is I think what you call your extended baseline, but the bottom one 

is the alternative fiscal that I think folks around here tell me is 

what we use traditionally. Do you see what I see, Doctor? 

Mr. ELMENDORF. I am not sure what you see, Congressman. 

Mr. MULVANEY. In 2055, more than 100 percent of the expected 

revenues, using CBO numbers, will go to only interest payments. 

Now, I will tell you that we put this together using your staff, and 

I would ask you to the extent that a freshman has the opportunity 

to ask you to do this kind of stuff, to make sure those numbers are 

right. We worked very closely using your assumptions, and I am 

confident that they are, but I would be curious if you folks would 

also take a look at them as well. 

This comes back to the original point that I made yesterday with 

Chairman Bernanke regarding your assumptions on interest rates. 

If you take a look at the baseline, your all’s assumptions for this 

year on the 10-year treasury, for example, just so we get apples to 

apples, is 3.4 percent. Last week it traded at 3.5. Yesterday, while 

Mr. Bernanke was testifying, it traded at 3.7. At what point, sir, 

would you think it is reasonable for you to go back in and readjust 

your numbers to take in some more real world considerations on 

interest rates? 

Mr. ELMENDORF. We update our forecasts several times a year, 

Congressman. 

I would emphasize the time that we set this path for interest 

rates, we set a path that was above the path in financial markets. 

And we did that because our own modeling suggested that rates 

seemed to us that they should be higher. 

On the other hand, there are a lot of people betting very large 

sums of money on what is happening in the financial markets, and 

we thought it was appropriate for us to give weight exactly to the 

real world considerations that you are highlighting. 

Mr. MULVANEY. Clearly, I am not suggesting that your methodology was wrong. I don’t think anybody expected a 100 basis point 

rise in the 10-year Treasury since October, but it certainly is the 

real world. And I suggest to you, Doctor, am I wrong when I say 

that higher interest rates will move that red line in the bottom 

curve further to the left, bringing closer the date at which our debt 

obligations will exceed our revenues? 

Mr. ELMENDORF. That is right, Congressman, and we do show in 

the appendix to the outlook the effect of alternative assumptions 

about interest rates, as well as GDP growth and inflation and so 

on, on the Federal budget. 

Mr. MULVANEY. I appreciate that. That was one of the best pieces 

of the thing that I read, where you all actually went down section 

by section and said, look, here are our assumptions on GDP; here 
52 

are our assumptions on interest rates; if they are off by a percent 

or a 10th of a percent, here is the output. 

By the way, the result, if we have an interest rate that is 1 percentage point higher than your assumptions, we are looking at an 

additional $1.3 trillion in debt over the course of the next decade. 

I am going to ask you to do one last thing. Do you have your report in front of you, sir? 

Mr. ELMENDORF. Yes, I do. 

Mr. MULVANEY. Would you turn to page 118, please? 

Mr. ELMENDORF. Okay. 

Mr. MULVANEY. I ask you to read the last sentence beginning ‘‘in 

January,’’ above the title that begins ‘‘higher inflation.’’ So it is the 

last section of the previous section. 

Mr. ELMENDORF. ‘‘In January 2008, under the laws in effect at 

that time, CBO projected that debt held by the public would total 

about $5 trillion by the end of 2018. In CBO’s current projections, 

debt held by the public is close to $16 trillion by the end of 2018 

and exceeds $18 trillion by the end of 2021.’’ 

Mr. MULVANEY. Thank you, Doctor. 

Thank you, Mr. Chairman. 

Chairman RYAN. Mr. Tonko. 

Mr. TONKO. Thank you, Mr. Chairman. 

Dr. Elmendorf, thank you for providing your insights to the committee. I appreciate it. 

In January of 2010, did you write a letter to Chairman Ryan concerning the analysis of Chairman Ryan’s roadmap? 

Mr. ELMENDORF. Yes, we did, Congressman. 

Mr. TONKO. And was that letter a formal cost estimate? 

Mr. ELMENDORF. No, it was not. 

Mr. TONKO. Now with the Ryan roadmap, in addition to restructuring several spending programs, it also puts forward a plan to 

dramatically restructure our tax system. As I understand it, according to a widely cited analysis by the nonpartisan Tax Policy 

Center, this plan would cut in half taxes on the richest 1 percent 

of Americans. 

We all know that tax cuts don’t pay for themselves, so under this 

plan, the burden of this high-income tax cuts is then shifted to lowand middle-income families. In fact, according to the Tax Policy 

Center’s analysis, about three-quarters of Americans would see 

their taxes increase. 

I find that drastic middle class tax hike would be insufficient to 

put the Federal budget on a sustainable path in the next several 

decades and, in addition, is accompanied by provisions that threaten the health care for seniors and the health care for our most vulnerable populations and plans to gamble Social Security checks on 

a stock market that we know has not been a friend to retirement 

accounts in the last few years. 

So did your letter do a specific analysis of the tax provisions of 

this roadmap? 

Mr. ELMENDORF. No, Congressman. Because the Joint Tax Committee staff does the estimates in the 10-year window for changes 

in the Internal Revenue Code, our longer-term modeling focuses on 

the spending side of the budget. We haven’t built the tax side of 
53 

the budget. So we were unable to analyze the tax provisions. That 

is why you don’t find that in our letter. 

Mr. TONKO. So you did nothing on the tax provisions. So, for the 

purposes of your analysis, you used an assumption that the overall 

level of revenues collected would remain the same as they are 

under current policies through 2030 and would equal some 19 percent of GDP in the later years. Who provided you with that assumption? 

Mr. ELMENDORF. We followed the specification from Chairman 

Ryan and his staff. 

Mr. TONKO. So was it the Joint Committee on Taxation that provided that information? 

Mr. ELMENDORF. No, they didn’t do that analysis. 

Mr. TONKO. So all of that assumption and all the guidelines were 

done by the Chairman? 

Chairman RYAN. Would the gentleman yield? 

Mr. Tonko, I can answer your question if you would like. You are 

asking the wrong guy. 

Mr. ELMENDORF. So, Congressman, we didn’t have the capacity 

to model that part of the roadmap. 

In order to take the parts that we could model on the spending 

side and show how the pieces fit together, we followed and were 

very explicit in the letter that we just followed the policy as it was 

described to us by the Chairman. 

Chairman RYAN. If the gentleman would yield, where we got our 

revenue estimates from were the Office of Tax Analysis at the 

Treasury Department. Joint Tax could not give us estimates, so we 

went to the next best source using the same model that Joint Tax 

uses to try and hit our revenue targets, which were to get to historic revenue levels. 

So our tax reform levels were set at what Joint Tax—at what 

OTA told us would hit us at revenue target levels. And that is how 

we got that level. 

Mr. TONKO. And it is why Dr. Elmendorf then said that it was 

you, Mr. Chairman, and your staff that provided that information? 

Chairman RYAN. Yes. 

Mr. TONKO. Now, the Tax Policy Center analysis, unsurprisingly, 

finds that with a radical restructuring of our tax system comes a 

radical change in the amount of revenues collected. 

We have heard many claims circulating this year that the bottom 

50 percent of Americans don’t pay their fair share of taxes under 

our current system. 

Well, as of 2007, the bottom 50 percent of households in America, 

I am informed, hold just 2.5 percent of this Nation’s wealth. And 

according to the claims of my Republican colleagues, they pay 3 

percent of the taxes. That sounds to me like they are paying more 

than their fair share. And I would like your response to that. 

Mr. ELMENDORF. I don’t have wealth numbers at hand. 

We did testimony before the Senate Finance Committee in December that presented information on the evolution of marginal tax 

rates over time, as was mentioned earlier, and on the distribution 

of the tax burden. 

The Federal tax burden is higher as a share of income on higherincome people. Thus, the after-tax distribution of income is slightly 
54 

less unequal than the before-tax distribution of income, but it is 

still—— 

Mr. TONKO. A burden. 

Mr. ELMENDORF. Quite unequal. If it is the right burden is up 

to you and your colleagues. 

Mr. TONKO. Thank you very much. 

Chairman RYAN. Mr. Ribble. 

Mr. RIBBLE. Dr. Elmendorf, thank you for being here today. I 

have enjoyed listening to the conversation quite a bit, and I have 

especially enjoyed your testimony today. 

Mr. ELMENDORF. Thank you. 

Mr. RIBBLE. I can tell you, I have only been here a little over a 

month, and I have heard quite a bit just this morning that the 

Democrats did this and the Republicans did that, and it is their 

fault, and it is our fault, and it is everybody’s fault. I have to tell 

you something, my grandkids don’t care much about that. They 

care about what the future looks like. 

Do you believe when my grandson hits 20 in 2021, that $18 trillion debt makes his future more bright or less bright than a debt 

that would be lower than that? 

Mr. ELMENDORF. It makes his future less bright, Congressman. 

Mr. RIBBLE. Okay, that is what I thought. That is why I am here. 

I have also heard that our debt and our deficit and our spending 

is on an unsustainable trajectory. I have heard that probably a 

hundred times since I have been here. You used the word 

‘‘unsupportable.’’ What level of debt and deficit spending would you 

consider supportable? 

Mr. ELMENDORF. Well, as we have said in this report and other 

places, we don’t know if there is a tipping point. And we don’t 

know where that tipping point might be. It depends not just on the 

level of outstanding debt but also on people’s perceptions of where 

the debt is heading, what current policies will lead to in the future, 

and on the willingness of you and your colleagues to make changes 

in policy. So I don’t want to pick a particular number. 

One criterion, though, for sustainable policy is that debt cannot 

continue to increase relative to the size of the economy. So the upward trajectory that we show, especially under this continuation of 

current policy scenario, is not sustainable because debt cannot continue to rise indefinitely relative to GDP. 

Mr. RIBBLE. So, your words, I think these were your words, 

maybe I am paraphrasing here, that delaying our efforts to fix this 

problem would be bad? 

Mr. ELMENDORF. Delaying—we don’t make policy recommendations, Congressman. 

What we have said very clearly is that delay increases the costs 

of the burgeoning debt, and it increases the drain on the future incomes, like your grandchildren. 

It increases the ultimate spending cuts or tax increases that will 

be needed to put the budget on a sustainable path. It reduces the 

flexibility that you and your colleagues have in dealing with unexpected problems in this country or overseas, and it raises the risk 

of a fiscal crisis. 
55 

Mr. RIBBLE. So the longer we wait, the more difficult the fix is 

going to become in terms of how harshly we must cut or draw 

back? 

Mr. ELMENDORF. That is right, Congressman. 

We have a study we released in the fall about the cost of waiting, 

the impact of delaying efforts to address the fiscal imbalance. 

Mr. RIBBLE. And then, along with that, and I realize you don’t 

make policy suggestions here, but I am assuming that at some 

point, this Congress, I would hope it would be this Congress or 

some very soon future Congress, is going to have to address the 

issue of entitlement spending, aren’t we, that we can’t find a place 

without that? 

Mr. ELMENDORF. ‘‘Can’t’’ is a strong word for me, Congressman. 

There are countries—there are functioning economies with fairly 

high standards of living that have government programs much 

more expansive than ours and tax burdens that are higher. They 

give something up through having made that set of choices. But I 

don’t want to presume, as the Chairman noted, it is not my place 

to invoke my policy preferences. That is for you and your colleagues. 

Mr. RIBBLE. Sure. 

Very good. Thank you, Doctor. 

Mr. ELMENDORF. Thank you, Congressman. 

Chairman RYAN. Ms. Bass. 

Ms. BASS. Thank you, Mr. Chairman. 

You might have addressed this while I was running to another 

hearing, but just in case you didn’t, if you could talk about the implications with States, especially if we don’t raise the debt ceiling, 

what is the forecast as to what would happen there, and then how 

would the States be able to meet their obligations? Would we still 

be able to send States monies? How would we be able to deal with 

that? 

Mr. ELMENDORF. So if the debt ceiling is not raised before the 

government runs out of money, then not all of the government’s obligations would get paid. I don’t know which ones might or might 

not get paid. 

Ms. BASS. You don’t know how it would be prioritized? 

Mr. ELMENDORF. I don’t know how it would be prioritized. Naturally, whoever it is who would not be receiving the checks they 

would otherwise be receiving will feel that effect. And that could 

be bondholders. It could be State and local governments. It could 

be households waiting for benefits, depending on what checks go 

out and what checks don’t. For all of the people who are waiting, 

it will be a burden. And for some governments or businesses or 

people perhaps an unsupportable problem. 

But it is hard for us to analyze that not knowing what the priorities would be and also not ever having seen this event occur in 

modern U.S. history. 

Ms. BASS. In terms of the cuts and knowing that we do have to 

cut back spending and knowing that we also have to figure out 

what we do with raising the debt ceiling, where are ways that we 

can cut that won’t hurt the economy and especially hurt jobs? 
56 

Mr. ELMENDORF. So, I think, Congresswoman, there aren’t a lot 

of easy ways for you to do this or you and your colleagues who 

worry about the rising debt would have done those things already. 

I think from an economic point of view, what is beneficial for the 

economy is lower debt accumulation over time, and what can be 

beneficial now is greater confidence that policies are being changed 

in ways that will reduce the growth and level of debt. 

At the same time, cutting back spending now, raising taxes now 

will by itself, as I said in response to a number of questions, tend 

to slow the economy. 

So you and your colleagues face a difficult trade-off there, and 

that is one of the major problems that we and others have discussed in connection with rising debt is that it reduces the flexibility that you have to make policy adjustments that you want. 

Countries that get forced—end up in fiscal crises have to make 

often very stark changes in spending and revenues, often under 

bad economic circumstances. 

Early action by you and your colleagues can help to forestall that 

possibility in this country. But again, the immediate direct effect 

of cuts in spending or increases in taxes would be to slow the economy, in our estimation. 

Ms. BASS. Thank you. 

Chairman RYAN. Ms. Castor. 

Ms. CASTOR. Thank you, Mr. Chairman. 

And welcome, Director Elmendorf. 

You can see policymakers and budget writers have a real balancing act. We have a real balancing act on our hands, and I think 

both sides of the aisle agree that we have to have a very bold plan 

on reducing the debt and deficit. We agree that government must 

live within its means. 

Then, on the other hand, I think we all agree that we have got 

to continue to foster job growth. And when you look at the public 

surveys, any public survey from across the country, job growth and 

jobs continues to be the number one priority from the American 

people. It certainly is in my home State of Florida, in my community, where we still have a double digit unemployment rate. 

So I appreciate your expert analysis and guidance on how we 

walk that tightrope and effect a balancing act, but it appears that 

a consensus is building for our way forward here. I want to see if 

you agree with some of the statements that have made by a number of groups that have studied the issue of debt reduction and job 

creation as well. 

The President’s bipartisan fiscal commission has recommended 

that when we are developing our debt reduction plan, that budget 

cuts should start gradually so they don’t interfere with the ongoing 

economic recovery because growth is essential to restoring fiscal 

strength and balance. Do you agree with that general approach? 

Mr. ELMENDORF. So, Congresswoman, as you know, we don’t 

make recommendations. So sentences that involved the word 

‘‘should’’ are sentences that we stay away from, for a good reason. 

As you say, you and your colleagues face a trade-off here. Delay 

in changing the path of fiscal policy has a collection of very serious 

negative consequences for the economy. At the same time, sharp 

changes in policy, as I said in my opening remarks, could be dis-
57 

ruptive, and there is a case for giving households and businesses 

and State and local governments time to plan and adjust. And 

those sets of ideas are in some conflict, that they push desirable 

policy in different directions, and we are just not in a position to 

judge those trade-offs. 

I think one thing to emphasize, though, is I don’t think there is 

much of a case for delaying the enactment of policy changes. 

Ms. CASTOR. Right. Clearly, we have to get started. 

Mr. ELMENDORF. The issue here is the actual collection of more 

revenue and reduction in spending. 

Enactment of changes doesn’t cause a near-term contractionary 

effect and can be supportive of spending if households and businesses gain confidence in seeing the Federal budget on a more sustainable trajectory. 

There is really no case that I know of, an economic case, for waiting for you and your colleagues to make decisions. There is an economic case with trade-offs for the pace at which those decisions affect policy. 

Ms. CASTOR. I think we agree. I think too often in Washington 

we focus on where we differ. But I think there is great consensus 

building that we have got to act now. We have to focus on debt reduction and job creation, and we are going to have this very robust 

debate about how we get there. 

Now yesterday, Chairman Bernanke said the largest drivers of 

the debt and deficit are health care costs of government and the 

aging population. Do you agree with that? 

Mr. ELMENDORF. Yes, that is right. 

Ms. CASTOR. Well, what I hope is, we are starting to see some 

appropriations cuts coming out from the other side, and I would 

just caution my colleagues that if the biggest drivers of the debt 

and deficit are health care costs of government and the aging population, some of the cuts that I am seeing coming out from the Appropriations Committee are not targeted toward the real drivers of 

the debt and deficit. We have got to work together to get to that 

point where we are tackling the real problem and not harming job 

growth. 

Another well known economist has said, has recommended to us 

that you can’t do it all right up front. You can’t—that it really 

would push unemployment back to double digits if you try to have 

trillion dollar cuts in your first 2 years when the better approach 

is to have a long-term deficit and debt reduction plan. What is your 

opinion on that? 

Mr. ELMENDORF. Again, I think from an economic perspective, 

the crucial factor for building confidence among American households and businesses and among purchasers of our debt is to have 

a plan in place, to have a set of policies enacted by the Congress 

and signed by the President that put the country on a sustainable 

fiscal trajectory. So I can come up with a report like this that 

doesn’t show debt rising relative to GDP as far as the eye can see. 

And again, the pace at which those changes are put in place in 

terms of the unfolding of the policies involves a more complicated 

trade-off. 

Ms. CASTOR. Thank you very much. 
58 

Chairman RYAN. Dr. Elmendorf, thank you for spending your 

morning with us. We appreciate it. We look forward to many more 

times with you. Thank you. 

This hearing is adjourned. 

Mr. ELMENDORF. Thank you, Mr. Chairman. 

[Questions submitted for the record and their responses follow:] 

QUESTIONS SUBMITTED FOR THE RECORD BY MR. HONDA

FRAMING THE QUESTIONS

We all agree that the trajectories of our national deficit and debt are 

unsustainable, that they place our nation’s future in grave peril and that it is this 

committee’s responsibility to make this right for the American people. 

1. AFGHANISTAN & TAX CUTS

The only way we can do this is if we are honest about what has placed us in this 

predicament. Republicans place the blame entirely on Social Security, Medicare and 

discretionary spending which provide for our working families and their parents in 

their old age. 

They want us to ignore that two policies of the Republican Party—the Bush Tax 

Cuts and the wars in Iraq and Afghanistan—accounted for over 500 billion dollars 

of the 2009 deficit and including interest will account for almost 7 trillion dollar 

over the next decade. 

So my question for you is this: 

Would the savings that resulted from ending combat operations in Iraq and Afghanistan and allowing the Bush Tax Cuts for the wealthy to expire reduce projected deficits? 

2. INVESTING IN EDUCATION AND INFRASTRUCTURE

In your testimony you highlighted the jobs crisis that continues to confront working and middle class families. You cited two culprits: the anemic growth rate and 

structural changes in the labor market. 

In regards to growth, past CBO reports have recommended investments in transportation and infrastructure; while your observations regarding the changing labor 

market, and the need to equip our workforce with 21st century skills, implies the 

need for investment in education. 

Can you explain for the Committee how public investments in education, transportation and infrastructure promote economic growth? 

DR. ELMENDORF’S RESPONSES TO MR. HONDA’S QUESTIONS

This is the response of the Congressional Budget Office to questions for the record 

asked by the Honorable Michael Honda after a hearing by the House Budget Committee on February 10, 2011. 

Q: Would the savings that resulted from ending combat operations in Iraq and Afghanistan and allowing the Bush Tax Cuts for the wealthy to expire reduce projected 

deficits? 

A: SPENDING FOR OPERATIONS IN AFGHANISTAN AND IRAQ

The Congressional Budget Office’s (CBO) projections of discretionary spending for 

the next 10 years include outlays for operations in Afghanistan and Iraq and other 

potential overseas contingency operations. Specifically, the outlays projected in the 

baseline come from budget authority provided for those purposes in 2010 and earlier 

years; the budget authority provided for 2011 under the Continuing Appropriations 

and Surface Transportation Extensions Act, 2011 (P.L. 111-322) at an annual rate 

of $159 billion; and the $1.8 trillion in appropriations projected for the 2012-2021 

period (under the assumption that annual funding is set at $159 billion plus adjustments for anticipated inflation, in accordance with the rules that govern CBO’s 

baseline projections). 

In coming years, the funding required for war-related activities could be smaller 

than the amounts in the baseline if the number of deployed troops and the pace of 

operations diminish. To illustrate the potential impact on discretionary outlays that 

would result from such a decline, CBO formulated a budget scenario that assumes 

a reduction in the deployment of U.S. forces abroad for military actions. In 2010, 

CBO estimates, the number of U.S. active-duty, reserve, and National Guard per-
59 

sonnel deployed for war-related activities averaged about 215,000. Under the alternative scenario, the average number of military personnel deployed for war-related 

purposes would decline over five years: from 180,000 in 2011 to 130,000 in 2012, 

100,000 in 2013, 65,000 in 2014, and 45,000 in 2015 and thereafter. (Those numbers 

could represent various allocations among Afghanistan, Iraq, and other countries.) 

Under that scenario, total discretionary budget authority for the period from 2012 

through 2021 would be $1.3 trillion less than the amount in CBO’s current baseline. 

Assuming that funding is not spent for other purposes, outlays would be lower by 

$1.1 trillion over that same period. 

Many other scenarios and estimated savings in discretionary spending are possible depending on the pace of decline in the number of military personnel deployed 

for war-related purposes. 

REVENUE IMPLICATIONS OF EXTENDING TAX CUTS

CBO’s projection of revenues for the next 10 years is intended to show what would 

happen to revenues if current law remains unchanged. Thus, under the rules that 

govern CBO’s baseline, all provisions of the Tax Relief, Unemployment Insurance 

Reauthorization, and Job Creation Act of 2010 (the 2010 tax act) are assumed to 

expire as scheduled over the next two years. 

If the tax provisions of the 2010 tax act that were originally enacted in 2001, 2003, and 2009, were extended, total revenues would be $2.5 trillion lower than 

total revenues in CBO’s baseline projection over the 2012-2021 period, according to 

preliminary estimates by CBO and the staff of the Joint Committee on Taxation. 

That estimates includes increases in outlays for refundable tax credits. 

If only the tax provisions of the 2010 tax act that were originally enacted in 2001, 2003, and 2009, and that applied to married couples with income below $250,000 

and singles with income below $200,000 were extended—as the President has proposed—the revenue reduction would be smaller. While neither the Joint Committee 

nor CBO has estimated the cost of partial extension (for all but high-income taxpayers) of those tax provisions of the 2010 tax act over the 2012-2021 period, past 

estimates of that option suggest that it would reduce revenues by about $700 billion 

less over ten years than full extension. 

Q: Can you explain for the Committee how public investments in education, transportation and infrastructure promote economic growth? 

A: Spending by the federal government and state and local governments on education, transportation, and other infrastructure can promote economic growth by increasing the amount of productive physical and human capital in the economy. Public spending on education promotes growth when it raises the skill level of the nation’s workforce because workers with higher skills are better able to perform their 

tasks, to solve problems, and to embrace the latest production techniques. Public 

spending on transportation and other infrastructure can increase economic output 

by raising the stock of physical capital in the economy, thereby increasing the productivity of labor and other factors of production in the private sector. For example, 

increasing the amount of transportation infrastructure makes it easier to get materials and labor to production facilities and finished goods to consumers. Consequently, workers can produce and deliver more in a given time and at a given 

transportation cost. Even so, funds spent for those purposes cannot be spent elsewhere in the economy; leaving more money in the hands of the private sector by 

instead reducing borrowing or lowering taxes can also promote growth. 

The roles of the federal government and state and local governments vary widely 

in spending for education, transportation, and other types of infrastructure. In particular: 

• In federal fiscal year 2007, the most recent year for which data on combined 

spending by the federal government and by state and local governments are available, total public spending for education was approximately $852 billion (in 2009 

dollars). (That figure excludes spending for formal and informal training programs 

that are not school-based.) Spending by state and local governments accounts for 

over 90 percent of that total; the $63 billion spent by the federal government accounts for the remaining share of public spending. In addition to that public total, 

the private sector spends hundreds of billions of dollars per year on private colleges 

and universities and on private primary and secondary education. 

• In federal fiscal year 2007, the most recent year for which data on combined 

spending by the federal government and by state and local governments are available, total public spending for transportation infrastructure was approximately $247 

billion (in 2009 dollars). (The private sector plays a small role in the provision of 

transportation infrastructure and those expenditures are essentially confined to 

spending on freight rail and aviation.) The federal government accounts for over 
60 

one-quarter of public spending on transportation infrastructure with state and local 

governments accounting for the rest. Spending on highways amounted to almost 

two-thirds of public spending on transportation infrastructure; virtually all federal 

outlays went to highway construction while state and local expenditures went to 

both construction and maintenance. 

• Total public spending on water infrastructure, defined as water resources (such 

as dams and levees), water supply systems, and wastewater treatment plants, was 

$110 billion in 2007. Spending for water supply and wastewater treatment was $101 

billion, or over nine-tenths of public spending on water infrastructure. State and 

local governments accounted for almost all of that spending; about one-third of the 

expenditures by those governments was for building new infrastructure and twothirds was for the operation and maintenance of that existing infrastructure. Data 

on spending by state and local governments for water resources are not available. 

The effect of spending for education, transportation, and other infrastructure on 

economic growth is imprecisely measured and is not easily generalized. The impact 

of public investments in education on economic growth depends both on the nature 

of those investments and on the production technologies and levels of capital (both 

physical and human) that currently exist in the economy. For example, investments 

aimed at helping young adults complete college may produce returns fairly quickly, 

but which are ultimately less than the longer-term benefits from investments to improve the learning abilities of pre-school or elementary-school aged children. Further, raising the skills of the least able workers may have different effects on economic growth than raising the skills of more skilled workers, and those effects may 

depend on the technology and physical capital in use at the time (i.e., training 

skilled workers to use sophisticated equipment will have only a small payoff if there 

are only few such machines available). Finally, it is difficult to accurately measure 

the level of and changes in the productive skill-level of the workforce—the most 

common measure, years of schooling, is useful but only an approximate measure of 

skill. Ultimately, public investments in education that raise the skills of the workforce should contribute to economic growth, but the returns to those investments 

cannot be forecast with any confidence. The economic research on the payoff to 

transportation and other infrastructure spending generally shows that such investment yields positive returns; however, there is significant variation in the average 

return both across different periods of time (especially for highways) and across individual projects at a given moment in time. As a result, identifying economically 

justifiable projects—those with benefits to society that are expected to outweigh 

costs—is crucial for realizing the potential gains from public spending for infrastructure. 

[Whereupon, at 11:58 a.m., the committee was adjourned.] 

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