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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 THIRTEENTH CONGRESS 

FIRST SESSION 

HEARING HELD IN WASHINGTON, DC, FEBRUARY 13, 2013 

Serial No. 113–1 

Printed for the use of the Committee on the Budget 

( 

Available on the Internet: 

www.gpo.gov/fdsys/browse/committee.action?chamber=house&committee=budget 
(II) 

COMMITTEE ON THE BUDGET 

PAUL RYAN, Wisconsin, Chairman 

TOM PRICE, Georgia 

SCOTT GARRETT, New Jersey 

JOHN CAMPBELL, California 

KEN CALVERT, California 

TOM COLE, Oklahoma 

TOM MCCLINTOCK, California 

JAMES LANKFORD, Oklahoma 

DIANE BLACK, Tennessee 

REID J. RIBBLE, Wisconsin 

BILL FLORES, Texas 

TODD ROKITA, Indiana 

ROB WOODALL, Georgia 

MARSHA BLACKBURN, Tennessee 

ALAN NUNNELEE, Mississippi 

E. SCOTT RIGELL, Virginia 

VICKY HARTZLER, Missouri 

JACKIE WALORSKI, Indiana 

LUKE MESSER, Indiana 

TOM RICE, South Carolina 

ROGER WILLIAMS, Texas 

SEAN P. DUFFY, Wisconsin 

CHRIS VAN HOLLEN, Maryland, 

Ranking Minority Member 

ALLYSON Y. SCHWARTZ, Pennsylvania 

JOHN A. YARMUTH, Kentucky 

BILL PASCRELL, JR., New Jersey 

TIM RYAN, Ohio 

GWEN MOORE, Wisconsin 

KATHY CASTOR, Florida 

JIM MCDERMOTT, Washington 

BARBARA LEE, California 

DAVID N. CICILLINE, Rhode Island 

HAKEEM S. JEFFRIES, New York 

MARK POCAN, Wisconsin 

MICHELLE LUJAN GRISHAM, New Mexico 

JARED HUFFMAN, California 

TONY CA ́ RDENAS, California 

EARL BLUMENAUER, Oregon 

KURT SCHRADER, Oregon 

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 13, 2013 .......................................... 1 

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

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

Questions submitted for the record ......................................................... 57 

Hon. Chris Van Hollen, ranking member, Committee on the Budget ......... 3 

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

Question submitted for the record ........................................................... 58 

Douglas W. Elmendorf, Director, Congressional Budget Office .................... 6 

Prepared statement of ............................................................................... 9 

Response to questions submitted for the record ..................................... 58 

Hon. Luke Messer, a Representative in Congress from the State of Indiana, questions submitted for the record ..................................................... 58 

(1) 

THE CONGRESSIONAL BUDGET OFFICE’S 

BUDGET AND ECONOMIC OUTLOOK 

WEDNESDAY, FEBRUARY 13, 2013 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON THE BUDGET, 

Washington, DC. 

The committee met, pursuant to call, at 10:17 a.m. in room 210, 

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

committee] presiding. 

Present: Representatives Ryan of Wisconsin, Price, Garrett, 

Campbell, Cole, McClintock, Lankford, Black, Flores, Rokita, 

Woodall, Blackburn, Nunnelee, Renacci, Rigell, Hartzler, Walorski, 

Messer, Rice, Williams, Van Hollen, Schwartz, Pascrell, Ryan of 

Ohio, Moore, Castor, McDermott, Lee, Cicilline, Jeffries, Pocan, 

Lujan Grisham, Huffman, Cardenas, Blumenauer, and Schrader. 

Chairman RYAN. If Dr. Elmendorf could take his usual and customary position. Kind of feels like Groundhog Day sometimes, 

doesn’t it? 

Mr. ELMENDORF. Yes. 

Chairman RYAN. Let me start this hearing, first off, by welcoming our new members. We have got a lot of new members who 

cover a big cross-section of this country, who represent different 

areas, different views, different philosophies, and I just want to 

first start off by saying how much of a pleasure it is to serve on 

this committee. This is the kind of committee where you get to 

bring your ideas to the table and air them out. We have got enormous fiscal challenges ahead of us. We have got a debt problem 

that we all acknowledge must be dealt with. We have got a deficit 

that needs to be brought down. We have got an economy that needs 

growth, and this is one of those areas, one of those committees 

where we need to have this debate. 

We are going to be processing legislation. We are going to be considering alternatives, and I just want to say on behalf of those of 

us here on this side of the aisle, we look forward to engaging our 

friends on the other side of the aisle in the collegial way and comity way we have, and it will be a good, vigorous debate. And this 

is what the country deserves. 

I mean, with that, welcome everybody to today’s hearing. 

Thanks, again, Dr. Elmendorf, Doug, for coming and testifying, and 

I want to thank you for your staff for putting together the latest 

budget and economic outlook. We understand you had a bit of a 

time crunch given the end-of-the-year episodes that occurred, and 

I wanted to say that you didn’t miss much of a deadline, and you 
2 

put out your baseline and outlook in a fairly quick form, given the 

circumstances that you had to contend with. 

I am sorry to say, though, that things don’t look good. The CBO 

says that our economy will grow by only 1.4 percent this year. Unemployment will hover around 8 percent this year, and we will add 

another trillion dollars to our debt. That is the news we just received from the CBO. 

Further down the road, things get worse. The CBO says we will 

add $10 trillion to our total debt by the end of the budget window. 

That debt will weigh down our economy like an anchor. Starting 

in 2019, the economy will grow by a mere 2.2 percent, much, much 

lower than the historical average. And when people can’t find jobs, 

many stop looking altogether for work. In other words, this report 

is a warning of what is to come if we don’t get spending under control. 

Publicly-held debt will hit 76 percent of GDP at the end of this 

year. That is the largest share of debt since 1951. In the 1950s, we 

paid down our debt. And our economy kicked into high gear. These 

days, we still haven’t gotten a handle on spending. Total debt already exceeds 100 percent of gross domestic product. You see, we 

are in the danger zone. 

Economists from the right and left say that if you get your total 

debt at that area, you really go into the danger zone. Investors 

might begin to doubt our ability to pay our obligations. They might 

demand higher interest rates. As we know on this committee, if 

they did that, interest rates across the country would skyrocket, on 

mortgages, on credit cards, on car loans. One estimate says that an 

interest rate increase of a single percentage point will cost the average family $400 more each and every year. 

In short, we could have a debt crisis. And the result of a debt 

crisis would be catastrophic, because unlike during the financial 

crisis, government would be unable to borrow more money. Instead, 

the only way out to be austerity, which we are witnessing in Europe; big tax hikes and big spending cuts. Interest goes up. We literally start losing control of our own fiscal situation. We become 

slaves to interest on the debt. We don’t have to look far for examples of a debt crisis in action. 

We don’t even have to look at Europe. In Central Falls, Rhode 

Island, retirees’ pensions have been slashed by up to 55 percent. 

In Stockton, California, a quarter of the police force has been laid 

off. If a debt crisis hit this country, the social safety net would unravel. The most vulnerable would suffer, and we cannot let that 

happen. This is our obligation here in this committee. And if this 

report shows us anything, it is that, primarily, spending is the 

problem. Spending on Medicare and Social Security is set to double. Spending on interest is set to quadruple. The CBO expects revenue to double in the next 10 years, so taxes are going up. Revenue 

is rising. It is doubling. But even with the President’s tax hikes the 

budget never, ever, ever balances. In fact, it doesn’t even come 

close. 

By 2023, the deficit will be nearly $1 trillion, just like it is today. 

The President says we need a balanced approach to closing the deficit, by which he seems to mean one tax hike after another. But 

the fact is, mathematically, we can’t tax our way out of this prob-
3 

lem. We need to get serious on spending. And unfortunately, the 

President has yet to produce a budget. It was due last week. In violation of the law, it has yet to be received by Congress. And Senate 

Democrats haven’t passed a budget in nearly 4 years. Hopefully 

that will change. 

We will offer our budget here in the House on time, next month, 

in accordance with the law. We will put our plan up against the 

President’s, and we will have a healthy debate in the House over 

the way forward. 

[The prepared statement of Chairman Ryan follows:] 

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

Welcome, everyone, to today’s hearing. Thanks to Dr. Elmendorf for coming to testify. And thanks to your staff for putting together the latest Budget and Economic 

Outlook. 

I’m sorry to say: Things don’t look good. The CBO says our economy will grow 

by only 1.4 percent this year. Unemployment will hover around 8 percent. And we 

will add another trillion dollars to our debt. 

Farther down the road, things get worse. The CBO says we will add $10 trillion 

to our total debt by the end of the budget window. That debt will weigh down our 

economy like an anchor. Starting in 2019, the economy will grow by a mere 2.2 percent—much lower than the historical average. And when people can’t find jobs, 

many will stop looking altogether. 

In other words, this report is a warning of what’s to come—if we don’t get spending under control. 

Publicly held debt will hit 76 percent of GDP at the end of this year—the largest 

share since 1951. In the 1950s, we paid down our debt—and our economy kicked 

into high gear. But these days, we still haven’t gotten a handle on spending. Total 

debt already exceeds 100 percent of GDP. 

We’re in a danger zone. Investors might begin to doubt our ability to pay our obligations. They might demand higher interest rates. If they did, interest rates across 

the country would skyrocket—on mortgages, on credit cards, on car loans. One estimate says an interest-rate increase of a single percentage point would cost the average family $400 more each year. 

In short, we would have a debt crisis. And the results would be catastrophic— 

because unlike during the financial crisis, government would be unable to borrow 

more money. Instead, the only way out would be austerity: big tax hikes and big 

spending cuts. 

We don’t have to look far for examples of a debt crisis in action. In Central Falls, 

Rhode Island, retirees’ pensions have been slashed by up to 55 percent. In Stockton, 

California, a quarter of the police force has been laid off. If a debt crisis hit the 

country, the social-safety net would unravel. And the most vulnerable would suffer. 

We can’t let that happen. 

And if this report shows us anything, it’s that spending is the problem. 

Spending on Medicare and Social Security is set to double. Spending on interest 

is set to quadruple. The CBO expects revenue to double in the next ten years. But 

even with the President’s tax hikes, the budget never balances. In fact, it doesn’t 

come close. By 2023, the deficit will be nearly $1 trillion. 

The President says we need a ‘‘balanced’’ approach to closing the deficit—by which 

he seems to mean one tax hike after another. But the fact is, we can’t tax our way 

out of this problem. We need to get serious about spending. 

Unfortunately, the President has yet to produce a budget—in violation of the law. 

And Senate Democrats haven’t passed a budget in nearly four years. 

House Republicans will offer their budget—on time—next month. We will put our 

plan up against the President’s. And we will have a healthy debate in the House 

over the way forward. 

With that, I yield to the ranking member, Mr. Van Hollen. 

Chairman RYAN. With that, I would like to yield to the ranking 

member for his opening comments. 

Mr. VAN HOLLEN. Thank you, Mr. Chairman. I want to join the 

chairman in welcoming Dr. Elmendorf, and thank you and your 

team at the Congressional Budget Office for the professional work 

that you do. 
4 

Just at the outset, let me say with respect to the timing the 

President’s budget submission. I think all of us who were part of 

the last Congress know that we struggled until January 2nd to 

pass legislation to avoid the fiscal cliff. The result of that legislation was to make sure that we did not see a sharp increase in taxes 

on middle-income Americans, but we asked higher-income individuals to begin to contribute to reducing the debt over the long term. 

As CBO has said, that that action did help strengthen the economy. If we had actually gone over the fiscal cliff, we would be in 

a world of hurt, but it did take us until January 2nd, to do it, and 

we didn’t know how much revenue would be coming in either this 

year or in the next 10 years. So it is understandable that the President needs a little more time on the budget. 

Look, as the Budget Committee, our challenge is to try and come 

up with a blueprint for our country’s decisions on spending and 

taxes. And while we talk a lot about numbers, ultimately it should 

be a reflection of where the American people are in terms of their 

values and their priorities. And I believe, and I hope we share this 

view, that as we approach the budget, our number one priority has 

to be expanding economic growth, making sure we promote job creation, making sure we strengthen the middle class so that we don’t 

have an economy that just works for some folks at the very top, but 

we have an economy that works for everybody in terms of rising 

wages and rising incomes, and a plan that meets the commitments 

we have made to people throughout the country, including our seniors. 

That is the overriding goal. And reducing deficits, especially over 

the long term, has to be important part of that but it has to be seen 

in the context of the overriding goal: Job creation, strengthening 

the middle class. And so I hope as we have these discussions over 

how we reduce our deficits, what is the timing, and pace, and target of doing that, we look at it through the lens of job creation, 

strengthening of the middle class. And that should hold true 

whether we are talking about the short term, the medium term, or 

the long term. 

Over the long term, there is no doubt, we see rising deficits, and 

the challenges we have said before is not whether we reduce those 

deficits, but again, the magnitude of the reduction, the timing of 

the reduction, and how we do it. And as the President said last 

night, we support taking a balanced approach to that, meaning 

cuts, and I would just remind my colleagues that over the last 2 

years, including the Budget Control Act and previous actions, we 

will reduce spending by $1.5 trillion by capping discretionary 

spending. 

As a result of the agreement to avoid the fiscal cliff, we will raise 

$600 billion in revenue from higher income earners. If you add up 

the interest savings on that, that is $2.5 trillion in deficit reduction. 

Yes, we have to do more in outyears, but we believe in order to 

do it the right way and meet our commitments to our citizens and 

preserve economic growth and strength in the middle class, we 

have got to make sure we deal with that in a balanced way. 

Now, let me just say in the short term, that means dealing with 

the sequester, Mr. Chairman. You cited the fact that CBO projects 
5 

1.4 percent growth. None of us want to see growth that slow. A full 

.6 percent of that growth is attributed—of that lack of growth, is 

attributed to the sequester. In other words, if we were to replace 

the sequester in a balanced way, you would add .6 percent to 

growth. And translating that number into actual jobs, and we will 

get testimony from Dr. Elmendorf, but we are talking about hundreds of thousands of jobs lost this year if we don’t replace the sequester. 

Now, we, on the Democratic side have in this Congress proposed 

a plan to replace the sequester. That $85 billion in meat-ax cuts, 

with a mix of cuts, which is in your budget as well, dealing with 

ag subsidies, getting rid of the direct payments, but also saying 

that we shouldn’t be providing tax breaks to big oil companies, and 

that we believe we should apply the Buffett Rule to people making 

over $2 million a year. 

We heard a lot of talk during the last election from both candidates and all candidates about all of the tax breaks in the Tax 

Code. Well, we should get rid of some of those, and we should get 

rid of some of those for the purpose of deficit reduction in a balanced way. And that is what our sequester replacement plan does 

in the short term, and frankly, that is what it would do in the long 

term. So we hope we can have an opportunity to have an up-ordown vote, Mr. Chairman, on the plan that we have put forward. 

We put it forward for a vote, at least two or three times now. We 

have going to be in the Rules Committee later today asking for a 

vote on that proposal that will save hundreds of thousands of jobs 

and prevent this disruption. And I hope we can have an opportunity, as you say, just to have a free flow of debate, and ultimately 

a vote and let the chips fall where they may. Thank you, Mr. 

Chairman. 

[The prepared statement of Mr. Van Hollen follows:] 

PREPARED STATEMENT OF HON. CHIS VAN HOLLEN, RANKING MEMBER, 

COMMITTEE ON THE BUDGET

Thank you, Mr. Chairman. I want to join the Chairman in welcoming Dr. Elmendorf, and thank you and your team at the Congressional Budget Office for the professional work that you do. 

Just at the outset, let me say, with respect to the timing of the President’s budget 

submission, I think all of us who were part of the last Congress know that we struggled until January 2nd to pass legislation to avoid the fiscal cliff. The result of that 

legislation was to make sure that we did not see a sharp increase in taxes on middle 

income Americans, but we asked higher income individuals to begin to contribute 

to reducing the debt over the long term. 

As CBO has said, that action did help strengthen the economy. If we had actually 

gone over the fiscal cliff, we’d be in a world of hurt. But it did take us until January 

2nd to do it, and we didn’t know how much revenue would be coming in, either this 

year or in the next ten years. So, it’s understandable that the President needs a 

little more time on the budget. 

Look, as the Budget Committee, our challenge is to try and come up with a blueprint for our country’s decisions on spending and taxes. And, while we talk a lot 

about numbers, ultimately it should be a reflection of where the American people 

are in terms of their values and their priorities. 

And I believe, and I hope we share this view, that as we approach the budget, 

our number one priority has to be expanding economic growth; making sure we promote job creation; making sure we strengthen the middle class, so that we don’t 

have an economy that just works for some folks at the very top, but we have an 

economy that works for everybody in terms of rising wages and rising incomes; and 

a plan that meets the commitments we’ve made to people throughout the country, 

including our seniors. 
6 

That’s the overriding goal. And reducing deficits, especially over the long term, 

has to be an important part of that, but it has to be seen in the context of the overriding goal—job creation, strengthening the middle class. So I hope as we have 

these discussions over how we reduce our deficits, what’s the timing and pace and 

target of doing that, we look at it through the lens of job creation, strengthening 

the middle class. And that should hold true whether we’re talking about the short 

term, the medium term, or the long term. 

Over the long term, there’s no doubt we see rising deficits. And the challenge, as 

we’ve said before, is not whether we reduce those deficits, but, again, the magnitude 

of the reduction, the timing of the reduction, and how we do it. And as the President 

said last night, we support taking a balanced approach to that, meaning cuts—and 

I would just remind my colleagues that over the last two years, including the Budget Control Act and previous actions, we will reduce spending by $1.5 trillion by capping discretionary spending. 

As a result of the agreement to avoid the fiscal cliff, we will raise $600 billion 

in revenue from higher-income earners. If you add up the interest savings on that, 

that’s $2.5 trillion dollars in deficit reduction. 

Yes, we have to do more in the out years, but we believe that in order to do it 

the right way and meet our commitments to our citizens, and preserve economic 

growth, and strengthen the middle class, we’ve got to make sure to deal with that 

in a balanced way. 

Now, let me just say that in the short term, that means dealing with the sequester, Mr. Chairman. You cited the fact that CBO projects 1.4 percent growth. None 

of us want to see growth that slow. 

A full 0.6 percent of that lack of growth is attributed to the sequester. In other 

words, if we were to replace the sequester in a balanced way, you would add 0.6 

percent to growth, and translating that number into actual jobs—and we’ll get testimony from Dr. Elmendorf—but we’re talking about hundreds of thousands of jobs 

lost this year if we don’t replace the sequester. 

Now we on the Democratic side have, in this Congress, proposed a plan to replace 

the sequester—that $85 billion in meat ax cuts—with a mix of cuts, which is in your 

budget as well, dealing with ag subsidies, getting rid of direct payments—but also 

saying that we shouldn’t be providing tax breaks to big oil companies. And we believe that we should apply the Buffett Rule to people making over $2 million a year. 

We heard a lot of talk during the last election from both candidates—and all candidates—about all the tax breaks in the tax code. Well, we should get rid of some 

of those, and we should get rid of some of those for the purpose of deficit reduction 

in a balanced way. And that’s what our sequester replacement plan does in the 

short term, and frankly, that’s what it would do in the long term. 

So, we hope we can have an opportunity to have an up or down vote, Mr. Chairman, on the plan that we’ve put forward. We put it forward for a vote at least two 

or three times now—we’re going to be in the Rules Committee later today asking 

for a vote on that proposal that will save hundreds of thousands of jobs and prevent 

this destruction. And I hope we can have an opportunity, as you say, just to have 

a free flow of debate and ultimately a vote, and let the chips fall where they may. 

Thank you, Mr. Chairman. 

Chairman RYAN. Thank you. I would love to begin the debate 

right now, but we have a hearing to get into. So, Dr. Elmendorf, 

the floor is yours. 

STATEMENT OF DOUGLAS W. ELMENDORF, DIRECTOR, 

CONGRESSIONAL BUDGET OFFICE 

Mr. ELMENDORF. Thank you, Mr. Chairman, Congressman Van 

Hollen, and to all members of the committee. I appreciate the opportunity to be here today, and to discuss with you CBO’s outlook 

for the budget and the economy over the next 10 years. Our analysis shows that the country continues to face very large economic 

and budget challenges. Let me discuss the economy first and then 

I will turn to the budget. 

We anticipate that economic growth will remain slow this year 

because the gradual improvement we see in underlying economic 

factors will be offset by a tightening of Federal fiscal policy scheduled under current law. The good news is that the effects of the fi-
7 

nancial and housing crisis appear to be gradually fading. We expect 

an upswing in housing construction, rising real estate and stock 

prices, and increasing availability of credit will help to spur a virtuous cycle of faster growth in employment, income, consumer 

spending, and business investment over the next few years. 

However, several policies that will help to bring down the budget 

deficit will also represent a drag on economic activity this year. 

The expiration of the 2 percentage point cut in the Social Security 

payroll tax, the increase in tax rates on income above certain 

thresholds, and the cuts in Federal spending scheduled to take effect next month, will mean reduced spending by both households 

and the government. We project an inflation-adjusted GDP will increase by about 1.5 percent in 2013, but it would increase roughly 

1.5 percentage points faster were it not for that fiscal tightening. 

Under current law then, we expect the unemployment rate will 

stay above 7.5 percent through next year. That would make 2014 

the sixth consecutive year with unemployment so high, the longest 

such period since the 1930s. We expect that growth in real GDP 

will pick up after this year to about 3.5 percent per year in 2014, 

and the following few years. But the gap between the Nation’s GDP 

and what it is capable of producing on a sustained basis, the economists refer to as potential GDP, will still not close quickly. Under 

current law, we expect output to remain below its potential level 

until 2017, nearly a decade after the recession started in December 

2007. 

The Nation has paid and will continue to pay a big price for the 

recession and slow recovery. We estimate that the total loss in output relative to the economy’s potential between 2007 and 2017 will 

be nearly equivalent to half of the total output produced in the 

country last year. 

Let me turn then to the budget. Under current laws, the Federal 

budget deficit will shrink in 2013 for the fourth year in a row, and 

an estimated $845 billion, the deficit would be the first in 5 years 

below $1 trillion, and at 5.25 percent of GDP, only about half as 

large relative to the size of the economy as the deficit was in 2009. 

Our projections, based on current law, show deficits continuing to 

fall over the next few years before turning up again in the second 

half of the decade, and totaling nearly $7 trillion over the decade 

as a whole. 

Federal revenues are projected to reach 19 percent of GDP in 

2015 and beyond, because of both the expanding economy and 

schedule changes in tax rules. That 19 percent figure compares on 

average of about 18 percent over the past 40 years. At the same 

time, Federal spending will fall relative to the size of the economy 

over the next several years, and then rise again. The decline can 

be traced to the caps on discretionary funding and a drop-off in 

spending attempts to go up when the economy is weak, like unemployment benefits. But later in the decade, the return of interest 

rates to more normal levels will push up interest payments to nearly their highest share of GDP in 50 years. And throughout the decade, the aging of the population, a significant expansion of Federal 

health care programs, and rising health care costs per person, will 

push up spending on the largest Federal programs. 
8 

By 2023, spending reaches about 23 percent of GDP in our projection compared with the 40-year average of about 21 percent. 

What does this mean for Federal debt? We project the debt held by 

the public will reach 76 percent of GDP this year, the largest percentage since 1950. And under current laws, we project the debt in 

2023 will be 77 percent of GDP, far higher than the 39 percent average of the past 40 years, and it will be on an upward path. Such 

high and rising debt relative to the size of the economy is a significant concern for several reasons: First, high debt means that the 

crowding out of capital investment will be greater, that you will 

have less flexibility to use tax and spending policies to respond to 

unexpected challenges like a recession, or a war, and that there 

will be a heightened risk of a fiscal crisis in which the government 

would be unable to borrow at affordable interest rates. 

Second, debt would be even larger if current laws were modified 

to delay or undo scheduled changes in policies. For example, if lawmakers eliminated the automatic spending cuts scheduled to take 

in effect in March, but left in place the original caps from the 

Budget Control Act, if they prevented the sharp reduction in Medicare’s payment rates for physicians scheduled to occur next January, and extended the tax provisions that are scheduled to expire, 

and if no offsetting changes were made, then budget deficits would 

be substantially larger than our baseline projections, and debt held 

by the public would rise to 87 percent of GDP by 2023, rather than 

77 percent under current law. 

Third, debt might also be larger than in our projections, because 

even the original caps on discretionary funding in the Budget Control Act would reduce such spending to just 5.8 percent of GDP in 

2023, a smaller share than for any year in at least the past 50. Because the allocation of discretionary funding is determined, as you 

know, through annual appropriation acts, you and your colleagues 

have not yet decided which specific government services and benefits will be constrained or cut to meet those caps, and doing so 

might be quite difficult. 

Fourth, projections for the 10-year period covered in this report 

do not fully reflect long-term budget pressures. Because of the retirement of the baby-boom generation and rising health care costs, 

a wide gap exists between the future costs of the benefits and services that people are accustom to receiving from the Federal Government, especially in the form of benefits for older Americans, and 

the tax revenue that people have been sending to the government. 

It is possible to keep tax revenues at their historical average percentage of GDP, but only by making substantial cuts relative to 

current policies in the large benefit programs that aid a broad 

group of people at some point in their lives. Alternatively, it is possible to keep the policies for those large benefit programs unchanged, but only by raising taxes substantially for a broad segment of the population. Deciding now what combination of policy 

changes to make to resolve the budget imbalance would allow for 

gradual implementation of those changes which would give households and businesses time to adjust their behavior. Thank you. 

Chairman RYAN. Thank you, Dr. Elmendorf. 

[The prepared statement of Douglas Elmendorf follows:] 
9 
10 
11 
12 
13 
14 

Chairman RYAN. Let me get into the debt itself. We had the 

State of the Union address last night, and you know, as we all do, 

we go to the microphones and give our play-by-play analysis of 

what we thought of the speech and what we liked and what we 

didn’t like. One thing stood out that gave me a real cause for concern. I heard it just with Mr. Van Hollen’s opening statement, 

which gives me very big cause for concern, which it seems as if 

they think the heavy lifting on debt reduction, deficit reduction is 

behind us, as we have just got a little bit left and then we are 

done. The notion that we have already got $2.5 trillion of deficit re-
15 

duction taking care of, it is in the bank, we are not much farther 

to go to finish the job. This calculation, this $2.5 trillion of debt reduction does not count the spending that took place during that 

time. It doesn’t count the stimulus spending, $831 billion. It doesn’t 

account for the first payroll tax holiday, $111 billion. It doesn’t account for the second payroll tax holiday $89 billion. It doesn’t account for the multiple unemployment extensions. It doesn’t account 

for the 24 percent increase in non-defense discretionary spending 

that occurred in the first 2 years of the administration. It doesn’t 

account for the disaster spending that has taken place annually, or 

the Sandy supplemental. It doesn’t account for the debt servicing 

of all of that additional spending. 

You wash it out, you net it out, it is about $500 billion roughly 

of deficit reduction; not $2.5 trillion. But when you hear such projections which ignore the spending that occurred at the same time, 

I really worry that part of our government here, two-thirds of it, 

you know, the Senate and the White House, and our friends over 

on the other side of the aisle, are deluding themselves into thinking 

this is taken care of. 

Look, you say in your own report here, publicly held debt has 

doubled from 36 percent of GDP at the close of 2007, to 73 percent 

on 2012, on page 3, 77 percent by 2023. I guess this is your new 

alternate fiscal scenario meaning doc fix, all of the other things you 

think Congress will do based on, you know, reasonable assumptions. We could go as high as 87 percent of GDP of publicly-held 

debt. Total debt is already above 100 percent of GDP. If you could 

bring up chart one. 

Here is the question I have. The green is what you said revenues 

are historically, about 18.3 percent. The blue line are all of the tax 

increases the President has supported, endorsed, the loophole closers Mr. Van Hollen talks about, much of this has already been enacted, but the fiscal cliff deal enacted a good portion of the blue, 

the revenues the President is calling for. The red are your projections on where spending is going. 

So even if we got every tax increase that the President has called 

for, we are not even scratching the surface. We are not even getting 

close to fixing this problem. And so the concern I have is a couple 

of things: What happens if we don’t get this under control? What 

does a debt crisis look like? What happens to families? What happens to a Nation if our debt continues on this burden, if we go to 

where your alternative fiscal scenario goes, or where your baseline 

projection goes, if we don’t actually turn this around, what happens? That is question number one. 

Question number two is, and I am going to ask you this in writing, give me some different interest rates scenarios. What happens 

if interest rates rise faster than you are projecting? What happens 

to our ability to control our fiscal situation? What happens to our 

economy? 

Mr. ELMENDORF. So Mr. Chairman, let me just quickly clarify 

two points on what you said so we can understand. We have not 

yet updated our long-term budget projection. I presume this slide 

is our new projections for the coming decade and your extrapolation 

beyond that, but it certainly is the case in our long-term outlook 

last year, and I presume will be true in our long-term outlook this 
16 

year, that spending, particularly on the large health care programs 

and on Social Security, will continue to rise as a share of the economy over time driven most importantly by the aging of our population, and the rising number of eligible beneficiaries, and also due 

to other factors as well. 

The second point to clarify is that alternative fiscal scenario is 

not meant to be a projection of what actually you and your colleagues will do. As you know, it is a projection of what current policies would cost; in fact, we all presume that you will make some 

changes in policies over the decade, but it is an additional benchmark that many of you have found helpful in the past in addition 

to our standard presentation of what would happen under current 

law. 

Chairman RYAN. Because you have a new AFS baseline, what is 

the basic assumption, because we had some new things that happen that deal with the fiscal cliff. 

Mr. ELMENDORF. So people understand, our basic projections follow current law. That assumes, for example, now, that the tax provision scheduled to expire at the end of this year, many of which 

are routinely extended, our current law projection assumes they 

will expire. In our alternative scenario, we extend all of those expiring tax provisions. Current law includes a cut in Medicare’s payments to doctors at the end of this year. Congress has routinely 

pushed off that cut and made other changes in health care policy 

along the way. 

Our alternative scenario, continues, extrapolates the current payment rates to physicians. And current law includes the sequester, 

and many Members of Congress have argued that they would like 

to do something different instead of that. So our alternative scenario takes away the sequester, but leaves in place the original 

caps that Congress agreed to in August of 2011. So under the alternative scenario, our total debt rises by about $2.5 trillion more over 

the coming decade than under the current law baseline projections. 

Mr. Chairman, you asked what happens if debt rises, stays high 

and rises, and there are some costs that I think are quite predictable, and other risks that are created. Over time, not under the 

current economic conditions, but under the conditions that we expect for later in the decade of nearly full employment in the economy, at that point in time, that large amount of debt will crowd 

out some private investment that would then raise wages and incomes. And the more of that, the higher the debt is, the more of 

that investment is likely to be crowded out, and the greater the depressing effect on wages and incomes. 

Economists have models to capture that and we report those 

sorts of estimates to you. But there are also risks that are involved. 

Some countries that have had very high levels of debt, and have 

not communicated or not persuaded their potential lenders that 

they have a plan for getting that under control, have faced a fiscal 

crisis, which we defined as a point at which the government is unable to borrow at affordable rates. 

Currently, our government is not at all in that position. Currently interest rates, Treasury interest rates are extraordinarily 

low. Our projection calls for a normalization of interest rates as the 

economy strengthens, as the Federal Reserve stops pushing so hard 
17 

to keep interest rates low. We have a normalization of interest 

rates in our basic projections, but with debt high and rising, there 

is a greater risk that potential buyers of government debt will get 

spooked and will be unwilling to do so at the regular level of interest rates. 

If interest rates were a percentage point higher than we project 

over the entire decade, then the Federal Government’s interest 

costs would be about $1.1 trillion higher. If interest rates were a 

percentage point lower than we project, then the Federal Government’s interest payments would be about $1.1 trillion lower. The 

point is, that given the large amount of debt the Federal Government has and will have under current law for the coming decade, 

fairly small movements in interest rates can have fairly large effects on government interest payments. 

Chairman RYAN. What is your normalized rate assumption? I 

don’t recall off the top of my head. 

Mr. ELMENDORF. So we are projecting that short-term interest 

rates rise to about 4 percent and that longer-term, 10-year Treasury note rates rise to 5.25 percent. Those rates, after adjusting for 

inflation, are a little above inflation-adjusted interest rates over the 

past several decades, reflecting, in our view, the effects of a higher 

level of debt relative to what we have experienced in past decades. 

Chairman RYAN. So for the comity of the committee, Mr. Van 

Hollen and I are limiting ourselves to 10 minutes. We don’t always 

do that. We have a lot of people here, so I will be brief only to say 

that it seems we have this window that is beginning to narrow on 

us. As you mentioned, America is right now, with respect to the 

bond markets, the port in the storm, the safe haven. We are the 

world’s reserve currency. That gives us a privilege. That gives us 

time. But if we fritter this time away, if we don’t deal with the core 

problem, which is spending no matter what you try to do on revenues, then we will have lost this opportunity we have to get our 

fiscal house in order while we have low interest rates. 

The other problem, as we see it, is growth. If we keep chasing 

higher spending with higher taxes, we will sacrifice growth. The 

best way is to get people back to work, in good jobs, with good 

wages, paying taxes, and getting spending under control. And so 

when we talk about taxes and tax reform, this is something for the 

Ways and Means Committee, or something we will discuss here, 

loopholes are part of tax reform. Closing loopholes, which is what 

we proposed for years, is a necessary pay-for to get tax rates down, 

to have a globally competitive Tax Code, to help businesses, to create jobs, to get people back to work. And if we used loopholes to 

chase higher spending, then we are foregoing tax reform and missing our opportunity for economic growth. That I just want to make 

very clear for the record because I think we will hear a lot of political rhetoric to the contrary, and with that, I want to yield to Mr. 

Van Hollen for his 10 minutes. 

Mr. VAN HOLLEN. Thank you, Mr. Chairman, and again, welcome, Dr. Elmendorf. First, just a little bit on the math. The chairman pointed out that while we will have $1.5 trillion in cuts over 

the next 10 years as a result of the spending caps. There were 

some other one-time spending measures. Included in those spending measures, actually, the payroll tax cut, which was probably the 
18 

biggest single item in that issue, and there was actually agreement 

that given tough economic times, it was important to provide a 

payroll tax relief. I actually think we should have phased that out 

rather than having gone cold turkey, but the point is, a big chunk 

of that number had to do with lost revenue from a payroll tax cut 

that was supported by a great majority in this body. 

As I said in my opening remarks, I think that our overall objective here in the short, medium, and long term needs to be expanding the economy, growing jobs, and having a strong middle class. 

So it is absolutely true that especially as the economy recovers, if 

you continue to have high deficits, it will squeeze out that private 

investment and put upward pressure on interest rates. So in order 

to make sure we have good long-term economic growth, we have to 

grapple with the deficit, that just brings us back to the question 

of how we deal with the deficit, and as Dr. Elmendorf pointed out, 

you can have sort of two categorical ways. One, you could say, well, 

we are not going to do any revenue. We are going to do it all in 

cuts, and as you pointed out, you can do it all on, you know, revenue and no cuts. 

Both of those lead and argue to bad results. You can’t raise revenue enough realistically to cover all of those costs, but cutting, as 

Dr. Elmendorf said, means undermining important commitments 

that we have made when it comes to retirement, health, and security for our seniors. 

So again, the question is how we deal with those deficits. Now, 

let me get back to the sequester issue because that is looming right 

now. Could you tell me, Dr. Elmendorf, in terms of the negative 

economic impact of the sequester, the .6 percent, what does that 

translate into in terms of lost jobs? 

Mr. ELMENDORF. So our estimate is, as the Congressman says, 

that the sequester alone will reduce GDP growth this year by 0.6 

percentage points, lowering the level of GDP at the end of the year 

by that 0.6 percent. We think that would reduce the level of employment at the end of the year by about 750,000 jobs. 

Mr. VAN HOLLEN. Seven hundred and fifty thousand jobs between now at the end of this fiscal calendar year 2013, right? 

Mr. ELMENDORF. Yes, Congressman. 

Mr. VAN HOLLEN. That is a whole lot of jobs, obviously, and we 

should be working overtime to prevent that kind of job loss. Now, 

if you were to replace the deficit reduction through that austerity 

program, the meat-ax cuts to the sequester, with a plan that accomplished the same amount of deficit reduction, spread over the 

10-year period, you would not have that big hit on jobs, isn’t that 

right? 

Mr. ELMENDORF. That is right, Congressman. 

Mr. VAN HOLLEN. Now, we have also heard a lot about the impact as a result of the defense cuts, and I should point out, this 

is not—it is the Congressional Budget Office’s analysis, our analysis. The Republican leader, Mr. Cantor, had it exactly right last 

September on the floor of the House when he said that if we allowed that sequester to take place, ‘‘unemployment would soar.’’ It 

would set back progress on the economy. And he cited an estimate 

that the sequester would cost 200,000 jobs in the State of Virginia 

alone. That was if the sequester for the full year went over. We 
19 

were able to prevent the sequester for the first 2 months through 

a balanced approach, I should say, a combination of cuts and revenue. That should be the model going forward and that is the 

model that we have applied to prevent the sequester. 

Now, just to be clear, since there has been a lot of attention focused on the jobs lost because of defense cuts, the cuts in the nondefense as a result of the sequester, on a dollar-for-dollar basis, 

does that result in the same amount of jobs lost? 

Mr. ELMENDORF. The effects of cuts in defense spending and nondefense spending will be quite similar dollar for dollar. The precise 

timing of the economic effects depends on a timing in which defense spending and non-defense spending occurs. So in some circumstances, there could be small differences. But basically, Congressman, you are right. If the government is paying people to 

build battle ships, or paying people to build other sorts of equipment, or structures, then those will have comparable effects, dollar 

for dollar, on the economy, on output, and on jobs. 

Mr. VAN HOLLEN. Right. I have never understood the logic as to 

how cuts to defense, meaning you are not building as many tanks 

or battleships somehow costs jobs, but cuts to other government 

spending somehow do not cost jobs. Obviously, when you investment money to build roads and bridges and other transportation 

systems, you are putting people to work doing things that are productive for our economy. 

If it is scientists at NIH or other people around the country, 

those are grants that are being spent to try and find treatments 

and cures for lifesaving diseases. It would be absolutely counterproductive in terms of the long-term competitiveness, let alone the 

health of our people, to have those kind of cuts take place. And on 

top of that, there is long-term negative impacts. You have got the 

job loss, 750,000 jobs between now and the end of the month. 

Let me just say something, Dr. Elmendorf, about the tax reform. 

I don’t know if you have done a recent estimate of the amount of 

tax expenditures in the tax code. What is your most recent estimate, and—— 

Mr. ELMENDORF. So we, in last year’s outlook which was a longer 

document since we had a little more time, we had an extended discussion of tax expenditures. We have not updated that this year, 

but the staff of the Joint Committee on Taxation has released a 

new estimate, I believe, of tax expenditures, or certainly they are 

working on one. And tax expenditures amount to a very large 

amount of money, and I think many economists agree that they are 

really best viewed as a form of government spending because they 

are directed at particular people, or entities, or designed to subsidize particular activities, are very much analogous to the way 

that government spending is often directed at particular people, 

remedies, or designed to subsidize particular activities. 

So it is essentially a large component of spending by the Federal 

Government, even though it is recorded essentially as lost revenue 

on the revenue side of the budget. 

Mr. VAN HOLLEN. That is right. I mean, it is spending through 

the Tax Code by saying to certain interest, sometimes based on 

policies we agree, there is consensus on, sometimes not, that that 

is revenue that will not come into the Treasury to help reduce the 
20 

deficit. And the chairman pointed out that we just, you know, we 

passed the $600 billion tax increase focused on folks at the very 

high end of the income scale, but as the President pointed out in 

the talks with the Speaker, his goal was actually to achieve $1.2 

trillion revenue, which I would point out to our colleagues is less 

revenue imbedded in that plan than in the bipartisan SimpsonBowles plan which said that we should do tax reform, but in addition to reducing the rates, we should have a significant amount go 

to deficit reduction. 

In fact, the bipartisan Simpson-Bowles Commission Report would 

have a lot more revenue coming in than the President has proposed. I just want to make that clear to our colleagues. I would also 

point out that Speaker Boehner, during those discussions with the 

President, said he didn’t want to increase rates, but he could raise 

$800 billion by closing these tax loopholes and breaks and getting 

rid of these tax expenditures. 

Those are all still there. None of the actions we have taken eliminate those tax breaks and tax expenditures that the Speaker was 

talking about, that all of the candidates in the past presidential 

election talked about, and so if we agree, Mr. Chairman, that those 

are just different forms of spending in the Tax Code, it seems to 

me we should be willing to help eliminate some of those tax expenditures for the purpose of reducing the deficit in a balanced 

way. 

And just to be clear, what our colleagues to date have said is, 

they are not willing to do that. They are not willing to eliminate 

any of those tax expenditures, spending in the Tax Code for the 

purpose of reducing the deficit. And we think that is important as 

part of a balanced plan, combined with targeted cuts, reforms, 

going forward. 

A last point I would say, is if you look at the chairman’s chart, 

there is no doubt, there is no doubt, we have to deal with this 

issue. But as you know, you can pass changes to laws in this 10- 

year window that have a very important impact in the outyears, 

which is, of course, what your budget did last time. Arbitrarily, trying to squeeze all of that into the 10-year window, which apparently was what the Speaker had agreed to do as part of extending 

the 3-month debt ceiling, is not good economics. That is politics, 

and so I would hope that as we go through this process, we keep 

an eye on the point I raised at the beginning. What is the impact 

on the economy, short term, middle term, long term? What is the 

impact on middle class and jobs? Thank you, Mr. Chairman. 

Chairman RYAN. You bet. I would say balancing the budget is 

good economics, but I guess we just disagree on that. Dr. Price. 

Mr. PRICE. Thank you, Mr. Chairman. Let me follow up quickly 

on that. Mr. Director, welcome back to the committee. We appreciate your insight, your input. Is it better to have a balanced budget than not? 

Mr. ELMENDORF. Well, Congressman, I think that depends on 

what your values are. The reason that CBO doesn’t make recommendations about budget policy, is because the course that you 

and your colleagues choose depends not just on the sort of analysis 

we can provide, but on your judgments. 
21 

Mr. PRICE. The level of debt that you described, 76 percent of 

public debt held right now, 87 percent going under, I guess, your 

alternative fiscal scenario, I suspect you would agree that a level 

of 87 percent is not as wise as a level of 76 percent given the propensity for a fiscal crisis at 87 being higher than 76, is that right? 

Mr. ELMENDORF. Yes, we certainly agree that the higher debt 

has higher expected costs and higher risks than lower debt would 

have. 

Mr. PRICE. And I would concur. I want to touch briefly on the 

fiscal cliff, the $600 billion increase in taxes. Would that—do you 

recall what the spending reductions were in that legislation, the 

net spending reductions? 

Mr. ELMENDORF. Well, so Congressman, remember that the 

way—the cost estimate that we produced and that we produced for 

all bills, is relative to current law. 

Mr. PRICE. Yes. 

Mr. ELMENDORF. So our cost estimate showed that legislation as 

a very large tax cut, not the tax increase that you just described. 

Mr. PRICE. Yes. 

Mr. ELMENDORF. There were only small changes in spending. I 

don’t remember how they netted out. There was an extra, additional spending in Medicare, but cutbacks in other health care 

spending. The sequester was deferred. That was paid for partly, as 

you know, through other spending reduction. 

Mr. PRICE. Minimal spending reductions in the fiscal cliff bill. So 

that this balanced approach that our friends on the other side of 

the aisle talk about is balanced until it isn’t. And that is what we 

saw with the fiscal cliff. 

I want to touch on the whole issue of revenue. Your report cites 

that revenue has returned essentially in 2012 to the 2008 levels, 

or higher than the 10-year average, basically. Is that accurate? 

Mr. ELMENDORF. That may well be right. I am sorry, I don’t have 

all of that history in front of me, Congressman. 

Mr. PRICE. I think that is correct. The revenue of the Federal 

Government now has returned to higher than the 10-year average. 

That being the case, and if we look at the deficit in 2008 at about 

$450 billion, and the deficit in 2012 at $1.3 trillion, with revenue 

returning essentially to 2008 level, then isn’t it true that the thing 

that is driving the deficit to a greater degree at this point is not 

that the revenues are lower than they have been, but the spending 

is higher than it has been. Is that an accurate statement? 

Mr. ELMENDORF. Well, certainly in dollar terms, Congressman, 

you are right that spending is going up very sharply. I think the 

problem that you and your colleagues face is that from the perspective of many Americans who are now starting to retire in the BabyBoom Generation, there are benefits that they are expecting individually. The fact that there are many more of them than there 

were beneficiaries 10 and 20 years ago, doesn’t appear to them as 

an excess of the benefits they are getting, but it turns out, you take 

a given benefit and multiply it by a lot more people—— 

Mr. PRICE. Yes. 

Mr. ELMENDORF [continuing]. That the aggregate spending goes 

up, and that is, I think, the challenge you and your colleagues face 

is how to respond to that. 
22 

Mr. PRICE. Yes, it is indeed, and we look forward to working 

through a budgetary process that will save and strengthen and secure those programs as opposed to moving in the direction of essentially lopping off funding for those programs at the expense of 

those beneficiaries. That is a debate that we will have. 

I want to touch again back on the 76 percent, 87 percent. Your 

alternative fiscal scenario has really been more, in the past has 

really been more accurate compared to reality, is that a true statement? 

Mr. ELMENDORF. I suppose that is true. I mean, the single biggest difference, as you know, between that and the baseline, had 

been the extension of the expiring tax provisions and in fact, the 

Congress chose about a month ago to extend most of those expiring 

tax provisions. In that sense, our current baseline looks more like 

our last alternative scenario, than like our last baseline. 

Mr. PRICE. Right. So if past is prologue, then it is more likely 

that we will be closer to 87 percent public debt held as opposed to 

76 percent? And if that is—— 

Mr. ELMENDORF. I think if you and your colleagues let current 

policy stand, that would be the case. Whether you will or not is the 

issue that you are debating. 

Mr. PRICE. The question I want to get to is, when a fiscal crisis 

occurs, when a debt crisis occurs, what is the triggering mechanism? What happens that results in that, the inability to borrow 

at an affordable rate as you described it? 

Mr. ELMENDORF. I think a loss of confidence in the government’s 

ability to manage its affairs, and to pay the interest on the debt 

makes potential investors more concerned, and makes them expect 

higher-risk premiums. 

Mr. PRICE. Which is not a predictable moment in time, is that 

accurate? 

Mr. ELMENDORF. That is right, Congressman. 

Mr. PRICE. Thank you. 

Chairman RYAN. Ms. Schwartz. 

Ms. SCHWARTZ. Thank you, and welcome to a new budget cycle. 

Pleased to be back. And these are really keen and important debates that we are having for our country and I do want to thank 

you, Dr. Elmendorf, for being here and outlining where we are. You 

did point to some positive news. I appreciate that, the fact that we 

are in recovery, that you are seeing some very positive signs in economic growth in the housing sector, you pointed out. And that, of 

course, you have heard already the disagreement that is making it 

very difficult to find a way to actually reduce the deficit in a fair 

and balanced way that strengthens the middle class, that grows 

jobs, that does not hurt this fragile economic recovery. We have 

seen economic growth. We saw the arguments at the end of last 

year that saw a contraction in the economy for the first time in 3 

years, was it? 

Mr. ELMENDORF. Yes. 

Ms. SCHWARTZ. So you know, that is significant. The debates we 

have here have an effect. And of course, we believe that this is not 

just politics. There are very different economic theories about how 

we grow this economy, how we strengthen the middle class, how 

we actually are economically competitive in a global marketplace, 
23 

and how we meet our obligations, not only to our children and our 

future, but the obligations that you and I have talked a good deal 

about, and we talked about on this committee, and is that our seniors. And that is what I wanted to ask you about. 

One of the things that we have seen again, positive news this 

week, you pointed it out, CBO has pointed it out, the Department 

of Human Services pointed it out, and some private sector institutes have pointed it out, that, in fact, we have seen slower growth 

in the costs of health care, in both the private sector and in the 

public sector—— 

Mr. ELMENDORF. Yes. 

Ms. SCHWARTZ [continuing]. That is quite significant. When we 

came in here, we had double-digit growth in costs in the health 

care sector for a decade, 100 percent increase and more in both the 

private sector, and particularly in the private sector, more so than 

in the public sector, but in Medicare and Medicaid, I think that 

some of us would contend that we have seen these delivery system 

reforms and a very serious commitment that we have made to really push the health care system, both doctors and hospitals, to give 

us better value for our taxpayer dollar, to improve the quality of 

health care for our seniors, to deliver health care in a much more 

cost efficient way, and as a result, save taxpayer dollars and improve the quality of our seniors’ health care. 

So particularly given the demographic problems around Medicare, the baby boomers, 10,000 more seniors a day. It is serious 

business. But could you speak to the fact that you have found, 

again, we have seen other reports, that have said we have seen 

very good reduction. Three percent growth rate is really quite 

something, when we have seen 10 percent a year in Medicare. 

I will ask you to confirm that, but I will also ask that as we 

move, which is the intention, we have legislation to do it as well, 

which is to move the way we pay physicians in this country, not 

just repeal SGR, but actually change the way we reimburse all 

physicians under Medicare, that would require them to pick a 

model that does save money and improve quality, and outcomes for 

our seniors, has the potential, and I hope can you actually document that we have said all physicians in this country move in that 

direction, the potential cost savings and cost containment, not only 

in the public sector, but also in the private sector. 

Mr. ELMENDORF. Yes. Let me first quickly emphasize the point 

you made about the effects of the retirement of the Baby Boom 

generation, because the numbers are really quite striking. We 

think that, by 2023, there will be roughly 40 percent more beneficiaries of Social Security and Medicare than there were last year, 

40 percent more people roughly. And that has a tremendous effect, 

obviously, on the overall cost of those programs. 

Ms. SCHWARTZ. We made a commitment to those seniors that 

many of us expect us to meet. 

Mr. ELMENDORF. Your point, Congresswoman, about health care 

cost growth has been absolutely right. There has been a market 

slowing in Medicare in Part A, that mostly pays for hospital care, 

and Part B, that pays for physicians, and part D, that pays for 

drugs, and in Medicaid, and in the private sector in the rate of 

health cost growth. We and other analysts think that part of that 
24 

is because of the recession and the slow growth of income and loss 

of wealth that has reduced people’s willingness to pay money for 

health care. But we think that a significant part of it is in fact 

structural. The crucial question is whether those structural 

changes are transient or will be enduring. And that is a topic that 

we are giving a lot of thought to and talking with outside experts. 

I think the right way to summarize the consensus is that we don’t 

know. 

Ms. SCHWARTZ. If we were to pass legislation this year, before 

the SGR expires or would go into effect again and see that kind of 

cuts, if we actually passed legislation, which honestly there has 

been really serious and good discussions between Democrats and 

Republicans on, on my bill, on an innovative way to pay physicians 

under Medicare, would that give you the tools to be able to say this 

is actually going to happen, this is the window when it is going to 

happen, this is the direction we are moving in? 

Mr. ELMENDORF. I think there is widespread support, Congresswoman, for the idea that we should be paying health care providers 

in a different way than we are paying them today. And I think 

widespread agreement that a shift in how we pay providers can improve both the quality of care and keep costs down. Exactly what 

changes in Federal law will lead to what particular outcomes is a 

very uncertain business. And we look forward to continuing to 

work with you on that. 

Chairman RYAN. Thank you. 

Mr. Campbell. 

Mr. CAMPBELL. Thank you, Mr. Chairman. 

And good to see you again, Dr. Elmendorf. So large and persistent deficits like we have over the long term are a bad thing for 

economic growth, job creation, and potentially have the debt crisis 

risk that you discussed, right? 

Mr. ELMENDORF. Yes, Congressman. 

Mr. CAMPBELL. Okay. But the solution to that, which is some 

kind of fiscal contraction, be it either through tax increases or 

spending reduction, can cause a reduction in short-term economic 

growth and/or job creation. 

Mr. ELMENDORF. Yes, exactly, Congressman. 

Mr. CAMPBELL. So we are in a bit of a pickle. 

Mr. ELMENDORF. Yes, Congressman. 

Mr. CAMPBELL. So the question is, how do we get out of this 

thing? Now, in Europe, Greeks and Spanish and Italians waited too 

long, and they had to do a substantial fiscal contraction in a very 

short period of time, which resulted in extremely high unemployment and large contraction in their GDP. Is that correct? 

Mr. ELMENDORF. Yes. Other factors have been at work as well, 

Congressman, but yes. We think that the sharp fiscal austerity in 

some countries in Europe have contracted their economies. 

Mr. CAMPBELL. Right. If we were to decide to try and fix this 

whole budget deficit in the next 2 years, or if we were forced to do 

it by debt crisis, that would plunge the country into recession; unemployment would go up worse than it is today; bad things. 

Mr. ELMENDORF. Yes, Congressman. 

Mr. CAMPBELL. Okay. So we don’t want to do that. But if we ignore it, or we only deal with just a little bit of it, and the deficits 
25 

go on as you show in the baseline or even worse in the alternative 

scenario, then we risk never getting to our potential growth and 

potentially have that debt crisis where a few years from now we 

would have to make that kind of overnight contraction. 

Mr. ELMENDORF. Yes, Congressman, that is a risk, absolutely. 

Mr. CAMPBELL. So it makes a whole lot of sense to try and solve 

this thing in not too short a time and not too long a time, which— 

and I don’t know whether you feel comfortable answering this or 

not, but if 2 or 3 years is too short and not dealing with it or looking at 30 years is too long, is somewhere in 8 to 12 years, if it were 

done in an even approach, is that the sort of thing that might be 

able to balance and get us out of this pickle with as little damage 

as possible and as much opportunity for growth? 

Mr. ELMENDORF. I really don’t want to prescribe a particular 

time path, Congressman, as you know. But I think you are absolutely right that the longer—the risk of waiting longer is that by 

running with a high level of debt to GDP, or a rising level of debt 

to GDP, the costs build up and the risks build up. And in 2007, 

debt was 36 percent of GDP. By the end of this year, it will have 

risen by 40 percent of GDP, we project, to 76 percent of GDP because of the financial crisis and the recession and the actions taken 

in response to them. 

If we run at this higher level of debt and encounter another crisis, domestically or internationally, that room to expand the deficit 

will not be there in the way it has been over the last half dozen 

years. 

Mr. CAMPBELL. Right. Okay. Just a couple other things here in 

my final couple of minutes. Mr. Van Hollen talked about the sequester and replacing it, 1-year cuts over something that will be 

over 10 years. If you were to replace the sequester with whatever, 

just a similar amount that matched year for year what the sequester is of other spending cuts and/or tax increases, now I understand 

the composition would have something to do with it, but if you do 

$100 billion in fiscal contraction, there is some negative impact on 

the economy no matter where that fiscal contraction comes from. 

Mr. ELMENDORF. Yes, I think that is right, Congressman. You 

are just right that the timing is critical for the economic effects. 

The composition can also matter depending on just how you and 

your colleagues do it. 

Mr. CAMPBELL. Right. But if we put it off, we are putting off the 

problem that we discussed we have to deal with. One final thing 

on tax expenditures—and I hate that term, but I know you economists like it. Let’s call it tax deductions, credits, whatever. Is not 

the vast majority of those, if you look at home mortgage interest, 

charitable contribution, IRAs, 401(k)s, other retirement plans, and 

health care, isn’t that where—I mean, if you really wanted to make 

a big impact, you would have to go into those things, would you 

not? 

Mr. ELMENDORF. Congressman, you are absolutely right, those 

are the largest components. How big an impact one could make 

dealing with other pieces we haven’t quite assessed. But in this 

nice chart we had last year, the single largest tax expenditure relates to health care, principally the exclusion of health insurance 
26 

from taxable income. The second largest involves pensions. And the 

third largest involves mortgage interest. 

Mr. CAMPBELL. Okay. All right. Well, thank you very much, Dr. 

Elmendorf. 

Mr. ELMENDORF. Thank you, Congressman. 

Chairman RYAN. Mr. Pascrell. 

Mr. PASCRELL. Thank you, Mr. Chairman. 

Dr. Elmendorf, thank you for coming before us again and opening up a pleasant season for the next 2 years. I think that I want 

to respond to my brother from Georgia, what he said before, about 

how we have increased spending since 2008, beginning January 

2009, when President Obama raised his hand. I think we are all 

here to roll up our sleeves and find a long-term solution to the 

debt. 

But just as we know that increased revenue is not going to solve 

the entire problem by any stretch, neither—we can’t cut our way 

out of our budget difficulties either. So when you look at what has 

happened in terms of budgets since 2009, January 2009 and now, 

when there was an increase in spending—we can’t just talk about 

that out of context. Why was there an increase in spending? Are 

we spending just to spend? Or was this the government’s response, 

our response, whether you voted for it or not, to a very serious 

problem in the United States of America? People out of work, 

health care costs going through the roof. So how do we do it? No 

one else is spending. If we don’t have private capital invested, and 

that started before the end of 2008, then how do you try to provide 

an atmosphere so that there is investment into the economy? 

And we want private investment. We know the government can’t 

solve every problem. We understand that very, very well. But when 

you talk about a balanced budget, of course, it is preferable. But 

are we to think that because we have this tremendous deficit problem going into 2009, that all that we needed to do was cut across 

the board in view of the social and cultural things that were going 

on in this country and, by the way, much of the world? Are we to 

think that if we simply cut and slashed that everything would be 

fine? 

You have created a nemesis. You have created a situation where 

folks, you want folks to think that you want to protect their tax 

dollar when you know very, very well that in 2009, we had tremendous unemployment, and if the government didn’t do anything, if 

there was no recovery—and we could point out chapter and verse 

where recovery helped in creating jobs, and not what happened in 

the last quarter of last year. Very interesting comparisons. So we 

had to come out of two wars; we never paid for them. We had to 

come out of two major tax cuts in 2001 and 2003; we never paid 

for that either. We didn’t even pay for the prescription drug plan 

that we passed 8 years ago. 

There is a reason why we had to spend that money. And if anyone is trying to imply here that if we simply stopped spending the 

money—isn’t that wonderful? And it is our money. It is the taxpayers’ money—that we would be in better economic shape, well, 

the American people didn’t buy that in the last election. They just 

simply did not buy it. Because they are a lot smarter than we think 

they are, all of us included, both sides of the aisle, both sides of 
27 

the aisle. So instead of a trickle-down economics, which you had for 

8 years—and we will go into how many jobs were created then and 

how many jobs have been created over the last 4 years—instead of 

going to trickle down, we got a trickle up. I prefer trickle up. I prefer that the little guy have a shot at prosperity and not wait for 

the big guys to drive this economy, because they certainly flopped 

on their face in 2007 and 2008, when capital was not invested in 

this country. 

Director Elmendorf, it seems to me that the most important way 

to achieve long-term deficit reduction is a balanced approach of revenue and spending cuts. That is what we keep on talking about. 

And in fact, according to your report this month, the CBO expects 

the deficit to shrink from 8.7 percent of GDP—because we don’t 

want to quote these things because it doesn’t fit into our script— 

that that will shrink to 5.3 percent. Is that correct? 

Chairman RYAN. Thank you. Time has expired. 

Mr. ELMENDORF. Yes, Congressman. 

Mr. PASCRELL. Can he at least answer the question? 

Chairman RYAN. You know, we got a lot of people here. He said 

yes. But if we wait until the clock is at zero to ask our question, 

we are not going to get to these other members who are waiting 

patiently for their turn. 

Mr. PASCRELL. Your point is well taken, Mr. Chairman. 

Chairman RYAN. Mr. McClintock. 

Mr. MCCLINTOCK. Thank you, Mr. Chairman. 

Dr. Elmendorf, let’s get to some basics here first. In order to pay 

for spending, we either tax it now or we borrow it now and tax it 

later. Are there any other ways of spending, I mean other than 

monetary policy, which is itself simply a tax on existing capital? 

Mr. ELMENDORF. Well, the amount by which you raise taxes later 

depends on the level of debt that you are willing to support the 

country. 

Mr. MCCLINTOCK. But you either borrow it or you tax it if you 

are going to spend it. 

Mr. ELMENDORF. Yes, Congressman. 

Mr. MCCLINTOCK. All right. So government really cannot inject 

a dollar into the economy that is not first taken out of the same 

economy either by taxing now or borrowing now and taxing to 

repay it in the future. 

Mr. ELMENDORF. I think, Congressman, under our current economic conditions, if the government borrows money, it is not taking 

a dollar out that would otherwise be invested. It can in fact increase the total demand for goods and services in the economy, and 

thereby boost employment and output. 

Mr. MCCLINTOCK. If the dollar is being borrowed by the government, presumably it is not there then to be borrowed by a consumer seeking to make consumer purchases, or a home buyer seeking to reenter the housing market, or a small business seeking to 

expand jobs. 

Mr. ELMENDORF. That logic is exactly right, Congressman, at a 

point where the economy is at full employment. But that is not the 

current economic circumstances. 

Mr. MCCLINTOCK. Now, would you explain the economic impact 

of debt? 
28 

Mr. ELMENDORF. So, in a fully employed economy, of the sort 

that we project for the second half of the coming decade, then higher debt, as I mentioned, crowds out private investment and reduces 

incomes relative to what they would otherwise be. 

And in an economy like the one we have today, the effects are 

starkly different. And in an economy like we have today, we think 

that additional borrowing to support higher spending or tax cuts 

would provide a boost to the economy in the short term. 

Certainly if that extra borrowing is not paid down later, it will 

weigh on the economy later. But in the short term, it would provide 

a boost to the economy. 

Mr. MCCLINTOCK. But you are borrowing a dollar from the same 

capital market that would otherwise be funding loans to consumers 

or to businesses or to home buyers, for example. So it is the same 

dollar. The only question is whether it is borrowed by the government to spend or is borrowed by somebody in the productive sector 

to spend. 

Mr. ELMENDORF. But under current conditions, Congressman, 

the demand for private borrowing is very low. There isn’t a conflict 

in the credit markets. That is why the Federal Government’s interest rates are so low right now. Under other conditions, there would 

be more of a competition for funds of the sort you are describing. 

But these conditions are unusual. 

Mr. MCCLINTOCK. I would suggest you talk to some small business people who are desperately trying to get loans or home buyers 

who are desperately trying to get loans, and they are telling us 

they can’t get them. Now, tell us about the economic impact of 

spending—or pardon me, of taxes rather. 

Mr. ELMENDORF. So taxes have two kinds of effects. One is they 

just take money that households would otherwise have to spend. 

The other is they can affect the incentives for people to work and 

to save. And in our macroeconomic modeling, we try to capture 

both of those sorts of effects. 

Mr. MCCLINTOCK. In fact, didn’t your office estimate that the tax 

increases back to the Clinton era rates on those earning $200,000 

as individuals, $250,000 as couples, would cost about 200,000 jobs? 

Mr. ELMENDORF. That sounds roughly right, Congressman. I 

don’t remember the specifics. You are referring to our report I 

think on the fiscal cliff from last fall. I don’t remember the precise 

numbers. 

Mr. MCCLINTOCK. Now, we are also told by your office that the 

sequester reductions in spending would affect about 0.6 percent of 

growth, you said about 750,000 jobs, because government would 

not be spending that money on creating government jobs. But as 

we just established, government doesn’t inject a dollar into the 

economy that is not first taken out of the economy. So I am afraid 

we are getting to a situation where we are being told that tax increases are bad for the economy, too much borrowing is bad for the 

economy, particularly in the future that you are projecting, and 

spending cuts are bad for the economy. And that doesn’t leave us 

with many options. 

Mr. ELMENDORF. So, Congressman, I think the effects of fiscal 

policy on the economy are different under different economic circumstances. That is a widely held, not universally held, but a wide-
29 

ly held view among economists. And that is the perspective that we 

take. So under current economic circumstances, when private demand for goods and services is low, additional government demand 

through higher spending or the government spurring additional 

private demand through lower taxes can both increase the overall 

demand for goods and services and thus encourage businesses to 

hire more. 

Under different economic circumstances, of the sort that we usually have in this country and we expect that we will have again 5 

and 10 years from now, then this competition you are describing 

between the government’s use of funds and the private sector’s use 

of funds can become acute. And that is why under those economic 

circumstances smaller government deficits are good for the economy. 

Chairman RYAN. Thank you. 

Mr. McDermott. 

Mr. MCDERMOTT. Thank you, Mr. Chairman. 

I have asked they put up a chart on the screen so that you can— 

a picture is always worth a thousand words. 

And it is good to see you, Mr. Elmendorf. Your budget analysis 

is very interesting. For years we have had to listen to the Republicans lighting their hair on fire on cable TV about the temporary 

large deficits we have. We were told if Simpson-Bowles was not enacted, it would be the end of the year as we know it. Two years 

later, we are going right along. And in fact, if you notice on that 

chart, the jobs are going up. We have had 35 months of people increasing. And the only places you see dips, if you check them out, 

are when the Republicans began to play roulette with the budget, 

when they created chaos about whether we were going to pay our 

bills internationally, or we have these big fights we have on the 

floor; the unemployment goes up because business doesn’t have any 

confidence. They are not going to hire anybody. 

And it seems to me that what you said is that the long-term 

problems in this country really are about health care costs, as Ms. 

Schwartz has already pointed out. When I came to Congress in 

1988, we were talking about the big problem that was going to 

come in 2011. Well, it is here. The Baby Boomers are now enrolling 

in Medicare, and it is going to go from 40 million to 60 million. And 

that has been absolutely predictable, and nobody wanted to deal 

with it until it is now. It is nothing new. It is not we are suddenly 

having massive spending, except we are honoring our commitments 

to the people in this country. 

And it seems to me that the issue really here is whether we are 

going to tear the safety net out, say to seniors, we are not going 

to cover you. You are on your own. You and your family go find 

out whatever you want. 

But what is interesting is I think we have a triumph to talk 

about. And I want to talk a little bit about that. Medicare spending, as I understand it, is flat per person. Is that correct? 

Mr. ELMENDORF. I don’t have those precise numbers in front of 

me, but you are certainly right, Congressman. It has slowed very 

sharply in the past few years from what it was before. 
30 

Mr. MCDERMOTT. And in my reading of your analysis, at least 

you give some credit, if not a good bit of credit, to the fact that we 

enacted the Affordable Care Act. Is that correct? 

Mr. ELMENDORF. So, Congressman, we have not attributed the 

slow down to any particular factors, like the Affordable Care Act. 

What we have said is that we think part of it is related to the recession; part of it is structural. The structural part can have a 

number of possible causes. One could be providers thinking about 

the current and incipient effects of the Affordable Care Act. But 

they are also driven by pressures from private insurers. I think 

providers are driven by their own sense that they are not providing 

care in as efficient a way as possible. And we have not tried at this 

point to—well, we tried to think through, but we have not said anything, because we don’t know about what factors are driving those 

structural changes. If we understood better what factors were driving them, we would understand better what the prognosis was as 

well. 

Mr. MCDERMOTT. That is my point. If you pass a law, even the 

threat of passing the law, under the Clinton administration, suddenly health care costs kind of leveled off. And again, we see it 

when the Congress acts, that we basically see the flattening of 

costs. 

Now you can’t directly tie it, point A to point B, but you know 

that the whole United States is watching what the Congress is 

doing. And when we don’t pay our debts, they stop hiring. That is 

clear. I mean, you can look right at the graph and trace it down 

to the time when it happened, and you can see how it happened. 

I think that the thing that is most amazing about this is that the 

industry, the medical-industrial complex is actually responding because they know it is not sustainable. And my question to you is 

the effect of throwing people off of Medicare, or raising—let’s raise 

the age to 67 or 70 before you can get on. What would that effect, 

how would that affect the economy? Do you have an idea? 

Mr. ELMENDORF. Congressman, it depends a lot on what else is 

going on and exactly how that provision would be structured. We 

wrote a report early last year about the effects of raising the eligibility age for Social Security and for Medicare. And we talked 

about the consequences. Certainly some people who aren’t on Medicare would end up on other Federal health care programs. Some 

people we think would end up without insurance. Some people 

would choose to work longer to maintain their employer-sponsored 

health insurance. There is a whole combination of responses that 

we think would occur. 

Mr. MCDERMOTT. So the real issue here is how do we control 

health care costs. 

Mr. ELMENDORF. That is a very important question, obviously, 

Congressman. 

Chairman RYAN. Mr. Garrett. 

Mr. GARRETT. Greetings. And this will follow up on our private 

conversation initially, and maybe some of the points when I was 

out of the room with regard to interest rates. And so one number 

that I heard, maybe somebody threw this out to you, because you 

were saying that we are at here now, basically zero, right, projection over the 10-year, going up around three. And so the interest 
31 

payment on the debt is going to increase during that period of time. 

I think the one number that you threw out to us is $1.1 trillion for 

a 1 percent increase in interest. You base that—you basically factor 

that in to your projections over the 10-year, going from zero up 

to—— 

Mr. ELMENDORF. Right. So the increase in interest rates that we 

show is the underlying feature of our projection of Federal interest 

payments. 

Mr. GARRETT. Right. So one of the other uncertainties is the maturation dates that the Fed has on the securities going out, that it 

is inverted, right, between long and short. Do you take that into 

consideration as well? In other words, one of the numbers I heard 

was that you could look at a 3 percent increase—3 percent, you 

would look at around $140 billion increase in year one, and that 

would only last for 2 to 3 years as the maturation date changes for 

the securities. Are you with me on that? 

Mr. ELMENDORF. So you are right, Congressman, that our projections of government’s interest payments depend not just on the 

level of interest rates at that moment in time in the financial markets, but what the Federal Government has issued when, and when 

it is rolling over those maturing securities into new securities. 

Mr. GARRETT. And so I guess one of the multiple bottom lines of 

this is we are going through the whole sequester issue trying to 

save roughly a hundred billion dollars, maybe $86 billion with interest payments, and that basically pales in comparison if interest 

rates go up just 1 percent. 

Mr. ELMENDORF. Yes, that is right, Congressman. Now, a 1 percentage point higher level of interest rates in an entire decade 

would be a sizable change. 

Mr. GARRETT. Well, we could do everything—well, a sizable 

change and a historically accurate change. In other words, we are 

at historically low numbers right now. 

Mr. ELMENDORF. Yeah, I mean above and beyond the increase, 

I was suggesting that we have built into our projection, which is 

a return of interest rates to slightly above their historical average 

level. Further increases are certainly possible. But I am just noting 

a percentage point difference for the entire decade is a fairly large 

difference. 

Mr. GARRETT. Let me turn real quick over to the FHA. The FHA 

revealed in their housing industry report that cash reserves are 

down 45 percent from last year, and chances of future losses on the 

current outstanding portfolio could exceed 50 percent is not out of 

the norm, which would require potentially that the taxpayers 

would have to bail out the FHA going forward. Further, the report 

shows from the FHA that they are overleveraged right now. They 

are at a leverage ratio of 400 to 1, which sort of makes Bear 

Stearns, Lehman Brothers, and the rest sort of—and the GSEs 

even—pale in comparison. Have you examined the FHA’s report 

and the budgetary implications on that in your projections? 

Mr. ELMENDORF. Let me say two things, Congressman, quickly. 

First, as you know, when you refer to a government bailout, there 

is no explicit action by the Congress that would be required. It is 

simply the case that if people don’t pay back their mortgages and 

the FHA is on the hook, that taxpayers will suffer those losses. 
32 

Mr. GARRETT. They have a line of credit due the Treasury. They 

don’t have to come to Congress, but the Treasury can basically give 

them the money without us authorizing. Did you take that into 

consideration? 

Mr. ELMENDORF. Yes. The second thing I would say is that as 

you know, again to explain to others, there is a few years of FHA 

lending that has turned out particularly poorly in terms of delinquency and default rates. And we have not done a separate projection of what the draw on the Treasury might ultimately be. If there 

is a change, it would turn up, as you know, as a credit reestimate 

in the budget. But we don’t have a specific projection that I am 

aware of, of what the FHA—— 

Mr. GARRETT. Would that be something that you could do and 

take a look at? 

Mr. ELMENDORF. I think we could take a closer look at it, yes. 

We have to talk with you more specifically. And I don’t know about 

the data that we can get. But yes, we could try. 

Mr. GARRETT. That would be very helpful to us over in Financial 

Services and Approps as well. 

So last question is with regard to Medicare. As you well know, 

there is a law in place that says when costs exceed revenues by 45 

percent, something has to happen, right? That the President has to 

issue a report on how to solve the problem, correct? 

Mr. ELMENDORF. Yes. 

Mr. GARRETT. Okay. So has that ever been triggered? 

Mr. ELMENDORF. So that threshold has been exceeded for a number of years, I think, Congressman. 

Mr. GARRETT. Was that triggered in 2009? 

Mr. ELMENDORF. I don’t know the precise years, Congressman, 

but I would take your word for it. 

Mr. GARRETT. Would you believe 2009, 2010, 2011, 2012? 

Mr. ELMENDORF. I would believe it, Congressman. 

Mr. GARRETT. Have you scored the President’s proposal in response to that? 

Mr. ELMENDORF. We have never scored a specific response to 

that. We have estimated the President’s—— 

Mr. GARRETT. Has the President ever, as required by law, provided a report as required in the law? 

Mr. ELMENDORF. I am not aware of any, Congressman. 

Mr. GARRETT. So he has violated the law in that sense? 

Mr. ELMENDORF. I am not a lawyer, Congressman. 

Mr. GARRETT. But he was required to do so. 

Mr. ELMENDORF. There is a requirement for a proposal to be 

made. I am not aware of any proposals having been made. I may 

be unaware, and I am not in a position of speaking to the legalities. 

Mr. GARRETT. You would have scored it had he done it, would 

you not? 

Mr. PRICE [presiding]. The gentleman’s time has expired. 

Mr. ELMENDORF. Well, it depends. As you know, we estimate the 

President’s budget once a year. Otherwise, we estimate things that 

you and your colleagues bring to us, not the administration directly. 

Mr. PRICE. Thank you, Dr. Elmendorf. 

The gentlelady from California, Ms. Lee. 
33 

Ms. LEE. Thank you very much, Mr. Chairman. 

First of all, let me just say it is an honor to serve on this committee. And I hope to work with this committee to create a useful 

road map for the American people, one that will create jobs, lift 

people out of poverty and into the middle class, grow our economy 

for everyone, and reduce the deficit. 

And let me thank you, Mr. Director, for your testimony and for 

being here. 

Our budget is not only a road map to fiscal responsibility, but it 

is also a moral document. It shines a light on what the priorities 

are of our government and who we are as a country. Our Nation’s 

budget must reflect our values, and it must raise enough revenue 

so that we can invest in our people and meet our Nation’s challenges head on. 

While our economy continues to slowly recover, I believe we also 

must focus on lifting the millions of Americans who are living in 

poverty up the economic ladder and into the middle class. And so, 

in addition to looking at policies that strengthen the middle class, 

I will continue, as a member of this committee, to remind this committee that nearly 50 million people live in poverty; 16 million are 

children. And this is unacceptable. 

Now, unless Congress acts by March 1, the sequester will slash 

thousands of jobs, which we have heard earlier, and economic security of the middle class, but it will also push the poor and low-income individuals really over the edge. It will eviscerate any gains 

our recovering economy has made in recent years. 

So there is no question that we need to prevent these cuts from 

taking place, and we must do so in a way that protects investments 

that create and continue this economic growth. So I think we need 

to take a hard look at the loopholes and tax expenditures in our 

Tax Code that allow some of the wealthiest individuals and businesses to not pay their fair share. 

But also we need to look at the ongoing waste, fraud, and abuse 

going on over at the Pentagon. And so, you know, I can’t for the 

life of me figure out how we can budget when the single largest discretionary item on our budget cannot be audited. We need the Pentagon to pass an audit so we can get to know where the money and 

where our tax dollars are going, and adequately set priorities. 

Now let me just ask you about the CBO report on the American 

Recovery and Reinvestment Act. I would just like to ask you, Mr. 

Director, can you explain how our government’s targeted investment in the American people and in our Nation’s critical infrastructure, how that created jobs and how it helped to begin to grow the 

economy? 

And also, if we invested in a program that provided coordinated 

benefits in social services that lifted the long-term economic stability and incomes, let’s say half the families living in poverty, 

what impact would that be and what impact would that have overall in terms of our economic growth? 

Mr. ELMENDORF. So, Congresswoman, as you know, we have estimated consistently for the past 4 years that the Recovery Act, taking effect at the time it did with the economic circumstances the 

country faced, increased output and jobs relative to what would 

have happened in the absence of the Recovery Act. 
34 

And we think it did that by some additional direct government 

purchases, by giving money to State and local governments that 

they then used to purchase goods and services, or to provide benefits, and by cutting taxes to Americans that let them then spend 

more money themselves. And that additional demand for goods and 

services filled in part, only part, but part of the great shortfall in 

demand that had come about in the wake of the bursting of the 

housing bubble and the financial crisis. So we think the path of 

output and employment has been higher than it would have been 

otherwise because of that act. And we think that this year, with 

an economy stronger but not that strong yet, that easing of fiscal 

policy, such as a deferral of the sequester, would boost output and 

employment this year relative to what would occur under current 

law. 

You also asked about longer-term effects of policy. I think those 

effects are ones that we worry about, but are harder to know for 

sure. So if the government can strengthen the economic—can 

strengthen people’s skills, help them have better education and 

more training, that should make them more productive over time. 

But the overall economic effects will also depend on how the government does that and where the money comes from to do it. So 

spending a dollar in a certain place can be good for the economy, 

but in the longer run, it does come out of something else. And you 

think of the overall economic effects, we need to think about what 

it is coming out of in addition to what it is going into. 

Mr. PRICE. The gentlelady’s time has expired. 

The gentleman from Oklahoma, Mr. Lankford. 

Mr. LANKFORD. Thank you, Mr. Chairman. 

Thank you. I want to be able to continue on that same line of 

conversation about the long-term impact. Is there an economic benefit to balancing our budget? Not adding to additional, let’s say, 

principal year after year. Is there a benefit to our economic development as a Nation? 

Mr. ELMENDORF. Well, I think, yes, Congressman, a smaller deficit, all the way down to zero, can be better for the economy in the 

medium and long run than a large deficit. But what the economic 

effect is ultimately depends on how you do that. 

Mr. LANKFORD. How you get it. Right. I understand that, is the 

how you get there to the balance point also matters. 

Mr. ELMENDORF. Yes. 

Mr. LANKFORD. And that has to be done in a way that is judicious and that makes sense for the economy itself. 

I interact with a lot of families that have a challenge of understanding this as they walk through the document. And they want 

to know how this applies to their individual family. So can you help 

bring that down to the individual family? What is the effect of a 

$16.5 trillion debt on a family? And what is the effect on how that 

grows, let’s say as you mentioned, $7 trillion over the next 10 

years? What effect does that have on an individual family? Now, 

I know you can’t name the family and the address and say this 

family will lose their job, this family will benefit. I get that. But 

the overall impact on a family. 

Mr. ELMENDORF. I think, Congressman, over the next few years, 

with a weak economy, the government borrowing in order to keep 
35 

taxes lower and spending higher helps the average family by producing more demand for goods in the economy and thus increasing 

the chance they will be employed and get paid more. 

But as you go into the second half of the coming decade, when 

we think people will mostly be back at work, then the government’s 

borrowing is competing with the borrowing that households want 

to do for their mortgage borrowing. It competes with the borrowing 

that the businesses they work for may be trying to do. And at that 

point, that competition for borrowing makes it harder for businesses to invest. That will tend to limit the extra equipment that 

workers have to work with. And because of that, it will tend to 

lower their wages and their family incomes relative to what would 

have happened if instead the government had not been borrowing 

so much in the credit markets. 

Mr. LANKFORD. Right. And that is not something you can just 

shut off and say, for the next 5 years, we are going to have the 

sugar high, and then once we get 5 years out, we are going to balance immediately, and then we will correct that. That is something 

that has to be corrected when? 

Mr. ELMENDORF. Well, so balancing immediately would have the 

consequences we have been discussing. 

Mr. LANKFORD. Right. I understand. That would be too risky. 

Mr. ELMENDORF. The exact timing is a matter of trade-offs. And 

we have written about this before. The sooner that the Congress 

acts, the lower the level of debt is likely to be 5 and 10 years from 

now. On the other hand, the sooner the Congress acts, the greater 

the contraction would be in the short term. 

Mr. LANKFORD. Short term and long term. This is, do you like 

it right now, or do you like it 5 years from now or 6 years from 

now? 

Mr. ELMENDORF. Yes, that is right. 

Mr. LANKFORD. Basically have to be able to deal with the consequences and the issues. So you are saying on the current path, 

we can postpone the pain for 5 years, but it is coming. 

Mr. ELMENDORF. I think it is coming, yes, Congressman. 

Mr. LANKFORD. Okay. Let me ask you a question about the size 

of the interest. We talk a lot about the interest rates and such. 

Project out. I mean you talk about another $7 trillion being added 

to the debt. What are we talking about of the actual dollar size of 

an interest payment based on your projection? Right now, we are 

paying around, give or take a few billion, around dollar $300 billion 

a year in interest payments. What is your best guess on getting out 

to the end of the 10-year window what we are paying in interest 

in a single year? 

Mr. ELMENDORF. So, Congressman, our projection for this year, 

fiscal year 2013, is the government would spend $224 billion on interest payments. We project that would grow to $857 billion in 

2023. That is an increase as a share of GDP from about 1.4 percent 

to 3.3 percent, or almost 2 extra percent of GDP devoted to net interest payments. 

Mr. LANKFORD. All right. So current path, that is with the SGR 

cuts, that is with everything else—— 

Mr. ELMENDORF. Yes. 
36 

Mr. LANKFORD [continuing]. Current path by the end of the next 

decade, we are paying $857 billion just in interest. 

Mr. ELMENDORF. Yes. Just in that single year. 

Mr. LANKFORD. How many things do we have in our budget that 

are $857 billion? 

Mr. ELMENDORF. Not very many, Congressman. It would be one 

of—there is a nice picture in our outlook—this would be one of the 

largest components of Federal spending. Those who have the outlook in front of you, figure 1-3, you can see that by 2023 the major 

health care programs as a group and Social Security as a group 

would be more than net interest payments, but the net interest 

payments would be higher than defense spending. It would be 

higher than all nondefense discretionary spending. And it would be 

higher than all mandatory spending, all the benefit programs apart 

from Social Security and the major health care programs. 

Mr. LANKFORD. Thank you. 

I yield back. 

Mr. PRICE. Thank you. 

The gentleman from Rhode Island, Mr. Cicilline. 

Mr. CICILLINE. Thank you, Mr. Chairman. 

I want to thank Chairman Ryan and our Ranking Member Van 

Hollen for the warm welcome, and look forward to serving on this 

committee. 

And thank you, Dr. Elmendorf. 

I think I have not heard from an economist or read the thinking 

of an economist who has not said that we have to approach this 

serious economic challenge by a balance of reducing spending and 

generating new revenues. And I think there is really no question 

that the President’s articulation of that model is something that we 

have to do so that we both do it in a way that is properly timed 

but also which is at the same time making the investments that 

are necessary to grow our economy. But clearly we have to reduce 

spending, and so we are going to have to make choices about what 

we invest in. And so I am wondering if you would share some 

thoughts with us in terms of getting the most bang for our buck. 

What are the kinds of policies that, when we are engaging in 

spending, we are likely to produce the greatest economic growth 

and the greatest help to our economy? Because not all spending is 

the same. So, in that regard, in particular, I am interested to know 

your thoughts about infrastructure spending, really rebuilding the 

crumbling infrastructure of our country in sort of the old-fashioned 

WPA way, which leaves behind an asset which contributes to economic growth and our ability to move goods and services and information to compete in the global economy and, at the same time, 

puts people to work immediately but leaves behind a valuable 

asset. How does infrastructure in particular relate to economic 

growth when we are making choices about how to do spending? 

And secondly, if you would speak to a proposal the President spoke 

about last night, which is a proposal to allow millions of American 

homeowners to refinance their homes at a lower interest rate, the 

market rates today, which I suspect, not being an economist, would 

produce, on average, I think they said $1,200 a year in new spending opportunities for families, provide substantial economic relief, 

help stabilize the housing market. But I also expect it would be a 
37 

huge economic generator in terms of job creation. So if you could 

speak to those two issues. 

Mr. ELMENDORF. Yes, Congressman. So when we talk about bang 

for the buck, sometimes we talk about that in the short-term context and sometimes in the medium- or long-term context. And the 

interests can be different. In the short term, what matters most is 

how much of the extra dollar of government spending or how much 

of the lost dollar of taxes is spent and how quickly it is spent. Giving more money to spending increases or tax cuts to lower-income 

people tend to be more effective than doing the same for higherincome people because they tend to spend a larger share of the difference. 

In infrastructure spending, a lot of that gets spent, but depending on the project, it may get spent somewhat slowly. So, in that 

sense, infrastructure can have a high bang for the buck ultimately, 

but it may not have as large a bang for the buck right now. Because certain projects just take a while to get started on. 

In the medium term and long term, infrastructure investment, if 

devoted to high-return projects, can in fact have a big effect on the 

state of the economy. About half of nondefense discretionary spending can be viewed as investment either in physical structures or in 

people in the form of education and training. Not all that money 

is spent well, but some of it is clearly spent for things that the private sector would not otherwise provide. And some of those projects 

then can have high rates of return and can boost the economy in 

significant ways over time. 

I think the one concern that people have raised about the cutbacks in discretionary spending as a share of GDP that are in place 

under the sequester, but even under the original caps, people have 

expressed concern that that can end up limiting the investment 

that the Federal Government does. Of course, it is hard to know 

for sure because you and your colleagues haven’t made those specific choices yet. 

On helping households to refinance in the way the President discussed last night, I don’t know precisely what his proposal is. We 

will see that when he releases his budget. But we have in the past 

done analysis of different ways of encouraging more refinancing. 

We think that can have a positive effect on the economy in addition 

to helping those households. The overall effect depends crucially on 

how many households end up refinancing. So it depends crucially 

on how a program is designed, who is eligible, what the incentives 

are to households and to the lenders to do something differently 

than they are doing under current law. So the effects in the aggregate can vary a lot across different ways of doing that. But dollar 

for dollar, it can be effective, as we reported in a report about a 

year or so ago. 

Mr. CICILLINE. When you say it depends on the amount, obviously the more Americans who are able to take advantage of it. If 

it is an easy program to administer, lots of eligible Americans, it 

will have a greater and more positive impact. 

Mr. ELMENDORF. Yes. Exactly, Congressman. 

Mr. CICILLINE. Thank you. 

Mr. PRICE. The gentlelady from Tennessee, Mrs. Black. 

Mrs. BLACK. Thank you, Mr. Chairman. 
38 

And thank you, Dr. Elmendorf, for being today. I think I can 

thank you for the this budget outlook, although it does, as you read 

through it, certainly bring up a lot of concerns about where we are 

going and the huge challenges that we will expect going down the 

road. And as I was reading through here, I made some notes where 

I see a lot of things are unsustainable. Social Security is 

unsustainable, and without reform, it will go bankrupt in 2033. 

Medicare is unsustainable. Hospital insurance trust funds end in 

2023. Social Security Disability Insurance, which we don’t talk very 

much about, and I think that is really an important topic that I 

would love to see either this committee or some other committee 

take a look at, because I got concerned about this last year when 

I started reading about it, it will go bankrupt in 2016. A big concern. 

And then, on the education side, Pell Grants, $1 billion shortfall 

in fiscal year 2015, and then annual shortfalls of $5 billion or more 

from fiscal year 2016 through 2023. All of these programs, as we 

are looking at them, it is very, very scary to see that they are going 

to go bankrupt unless we have some form of reform. 

But let me now turn to look at the health care issue, because 

CBO cites that rising health care costs as a leading driver of our 

debts and our deficits. And the Federal Exchange Subsidies alone 

are expected to cost $1.2 trillion, while the Medicaid expansions are 

expected to reach $638 billion. In knowing all this, will this increase in spending—well, first of all, the Affordable Care Act, or 

the ObamaCare, adds another trillion dollars in new health care 

entitlement spending. So here we go again, more health care entitlement spending. But will this increase in spending, with the Medicaid expansions and the new exchange subsidies, reduce health 

care cost growth as we look at the growth down the road? 

Mr. ELMENDORF. Well, Congresswoman, the Affordable Care Act, 

as you know, had a number of different pieces with different sorts 

of effects. The expansion of insurance coverage we now estimate 

will cost $1.3 trillion over the 2013 to 2023 period, those 11 years. 

Mrs. BLACK. And Dr. Elmendorf, let me just interrupt you there 

to make sure that I understand, this is $1.3 trillion more than 

what was anticipated in previous outlooks of the program. Is that 

correct? 

Mr. ELMENDORF. No, no, Congresswoman. I am saying that the 

costs of the coverage expansion relative to a world that did not 

have that coverage expansion. 

Mrs. BLACK. Okay. 

Mr. ELMENDORF. There will be extra costs to the Federal budget 

of $1.3 trillion. 

Mrs. BLACK. But extra costs. 

Mr. ELMENDORF. We have made many, many changes to our projections of the costs of the Affordable Care Act coverage expansion, 

but they have netted out to actually very little change on balance 

for any given period of years. Our estimates through 2019 are now 

actually slightly below what they were when we first estimated the 

effects of that expansion 3 years ago. As one moves the budget window further along, though, then of course one ends up with larger 

numbers for this expansion, and for all, really almost all, existing 

Federal programs, and for tax revenue, because the economy is 
39 

growing over time. So this particular part of the law raises Federal 

costs in order to subsidize health insurance for people in particular 

ways. The law also included changes to Medicare that have the effect of bringing down the growth rate of Medicare spending over 

time. Taking those pieces together, we think the law has increased 

the Federal Government’s budgetary commitment to health care in 

the long run. Because ultimately those coverage expansions outweigh the Medicare savings, the law as a whole—in addition included changes in tax provisions—and as a whole we think it is a 

small deficit reducer. But the government’s commitment to health 

care is increased because of the Affordable Care Act. 

How those Medicare changes will affect the growth of Medicare 

spending we made our best estimate of, but it is an uncertain business. And whether those changes in Medicare would spill over to 

the private sector we don’t know either. So we have not offered a 

view about whether the—and we don’t do estimates of total national health expenditures. So we really tried to focus what we 

have done what we have said to the Federal budgetary effects. 

Mrs. BLACK. And yet all of this, and I brought the chart up that 

you were actually referencing, this figure, to show that the major 

health care programs are the greatest amount of money that is 

spent in any one particular category. And we are showing that it 

does grow. 

Mr. ELMENDORF. Yes. 

Mrs. BLACK. It doesn’t come down, it doesn’t curve down and 

level out. 

Mr. ELMENDORF. Yes. 

Mrs. BLACK. It continues to grow. And yet despite this, and this 

is the point I want to make at the end of the day, is yet despite 

this, we know that there are going to be people out there, more 

people that will be uninsured than previously expected, because 

there are a lot of dynamics that are also occurring here that are 

going to cause that reaction that we will have more people uninsured. 

Mr. PRICE. The gentlelady’s time has expired. 

Mr. ELMENDORF. I am sorry, Mr. Chairman, but we project that 

the law will greatly reduce the number of uninsured Americans relative to what would be the case without that law in force. 

Mr. PRICE. The gentlelady’s time has expired. 

With apologies to the gentlelady from Florida for not recognizing 

her in order, Ms. Castor is recognized for 5 minutes. 

Ms. CASTOR. Thank you, Mr. Chairman. 

And thank you, Dr. Elmendorf, for being here today and sharing 

your economic budget outlook. 

I think there are positive signs that should not be overlooked 

that our economy is growing and we are adding jobs. That is consistent with what I see back home in Florida. There is greater construction work and more cranes popping up across town. Housing 

prices are up. So if you are a seller, I guess that is pretty good 

news. We have a seen a significant drop in unemployment. 

The tourism industry has rebounded quite strongly after the BP 

disaster. And if you are fortunate to have money in the stock market in the past few years, you have done very well. 
40 

Last year I asked you if you we had more people working across 

America, would our debt and deficit situation be largely improved? 

You said, yes. And I assume you still believe this is the case. 

Mr. ELMENDORF. Yes. 

Ms. CASTOR. Correct? 

Mr. ELMENDORF. Yes. 

Ms. CASTOR. But it seems like we still have significant 

headwinds to getting past that 7.5 percent unemployment rate. 

And in your outlook, in your early testimony, you said that you 

don’t see great improvement there in the near term. So talk about 

the headwinds to greater employment across the economy, especially what is in the control of the Congress? What are the current 

policies that are in place that prevent us from lowering that unemployment rate? 

Mr. ELMENDORF. So, Congresswoman, I think you described well 

a number of the factors that we see, underlying factors that are 

leading to economic growth. But as we have said, we think that the 

remaining parts of what had been the fiscal cliff of a few months 

ago, the remaining parts are still a substantial damper to economic 

growth this year. And one of the things that Congress might do to 

boost economic growth this year is to not let that fiscal tightening 

take effect. Of course, as you know—— 

Ms. CASTOR. Is this the sequester? 

Mr. ELMENDORF. Yes. So there are a number of pieces of that, 

but one crucial piece is the sequester. And we think that if the 

Congress were to not have the sequester, then that would strengthen output this year and would lead to about 750,000 more jobs in 

the fourth quarter. At the same time, of course, as you know, that 

if there aren’t offsetting changes made later, then that extra debt 

would become a drag on the economy in the medium term and long 

term. 

Ms. CASTOR. That is what I am hearing from folks at home, our 

major employers. For example, we have a large port. If we reduce 

infrastructure spending, they anticipate cutbacks, and private businesses especially. Our large research university, they rely a lot on 

innovation and science and medical research. They are also telling 

me, along with the Cancer Research Institute, very significant 

damage to what they are doing, but a loss of jobs. Our large school 

district, the ninth largest school district in the country, and a large 

Air Force base, the MacDill Air Force Base, civilian workforce projection. 

So, colleagues, we really—time is short. And I think what we are 

hearing today, if we want to address the debt and deficit, let’s not 

do this to ourselves. Let’s not self-inflict a wound that will set us 

back further, put us back, dig us in deeper on long term deficit and 

debt reduction. I think this is a warning sign, and Dr. Elmendorf 

is being very clear with us that we have got to work together and 

replace the sequester. That doesn’t mean we are going to shirk our 

responsibility to address the long-term debt, the medium-term 

debt. 

But if we are going to be stuck with this 7.5 percent unemployment rate, that is not sustainable, to borrow a word that has been 

used this morning quite a lot. 
41 

Dr. Elmendorf, are there other policies that could help us that 

are within the control of the Congress to create more jobs? 

Mr. ELMENDORF. So, Congresswoman, you can think of them in 

a few categories. I think there are a number of changes in fiscal 

policy, higher spending, or lower taxes than are under current law. 

And we have done, as you know, a few reports in the past few 

years of trying to evaluate the bang for the buck of different sorts 

of changes in tax and spending policy. Turning off the sequester 

would be one item on that list, but there are other items as well. 

Ms. CASTOR. Did you also mention immigration in your outlook? 

Mr. ELMENDORF. So we don’t talk about it in the outlook. Of 

course, we have done other work on immigration. I think immigration can be a very positive force—more immigration can be a very 

positive force for the economy in the medium term and long term, 

depending on exactly what the reforms were that Congress might 

consider. Those reforms wouldn’t take effect quickly enough to provide a big boost to the economy this year and next year. 

In terms of the short-term boosts, in addition to changes in fiscal 

policy, there are possible changes—I think just greater certainty 

about the course of fiscal policy would help. And maybe other 

changes that could be made as well. 

Mr. PRICE. The gentlelady’s time has expired. 

The gentleman from Texas, Mr. Flores. 

Mr. FLORES. Thank you, Mr. Chairman. 

Dr. Elmendorf, thank you for joining us again. Let’s talk about 

a different subject for a minute. When you looked at the President’s 

budget from last year, can you tell me when that budget balanced? 

Mr. ELMENDORF. In our estimate of it, Congressman, it never 

reached a balanced budget. 

Mr. FLORES. Okay. And what would—would you say that the 

spending and revenue profile in that budget was one that would 

help create a sustainable economy? 

Mr. ELMENDORF. Well, Congressman, we did think the economy 

would be sustained, yes. So we did an analysis of the economic effects of that budget. I don’t remember the precise numbers. We still 

think the economy would be growing. But as I have said on many 

occasions, a path that had less government debt would by later in 

the decade and beyond lead to a stronger economy all else equal. 

And it depends on what else is occurring. 

Mr. FLORES. Even the OMB by its own admission said that debt 

beyond the 10-year window was going to reach unsustainable levels, and the economy would suffer as a result of that. 

What would the economic impact be if we were to raise taxes by 

$85 billion for the rest of this fiscal year starting on March 1 visa-vis having a $85 billion cut due to the sequester that also starts 

on March 1? 

Mr. ELMENDORF. Well, Congressman, that would depend on the 

nature of the tax increase. 

Mr. FLORES. Let’s assume for a minute it is done through tax 

rates, tax rate increases. 

Mr. ELMENDORF. I don’t want to be difficult, it would still depend, as you know, on whose tax rates were cut. But in general, 

we think that—— 
42 

Mr. FLORES. Let’s just say we raised it on the top 1 percent 

again, include small business owners and—— 

Mr. ELMENDORF. So if the sequester were replaced by an equivalent dollar amount of increase in tax rates on high-income people, 

we would think that would be an improvement for the economy because we think that the propensity to spend of those high-income 

people would be smaller, dollar for dollar, than would be the spending that would arise from the sequester. 

Mr. FLORES. So the lady on the corner that owns the dry cleaning 

store, when she has her taxes increased dramatically, is going to 

hire as many people and invest as much in the economy and continue with her expansion plans that she had prior to that tax increase? 

Mr. ELMENDORF. Well, so I think, Congressman, that the lady on 

the corner would find that more people would come in with dry 

cleaning if they were the people who were working for the government or working on government contracts of the sort that would be 

increased by taking away the sequester. And I am not trying to 

play a game here, but I think that is the effect we have in mind, 

which is that what businesses are most concerned about now is 

weak demand for their products. 

Mr. FLORES. So, I mean, under that line of thinking, what you 

do is you raise the taxes to 100 percent on high-income people, and 

then spend all their money on government contracts. 

Mr. ELMENDORF. So, Congressman, you posed a particular question. We do try to be careful about extrapolating out. 

Mr. FLORES. It was more rhetorical than anything. 

How do you gauge the strength of this recovery over the last 4 

years versus other economic recoveries post-World War II? 

Mr. ELMENDORF. This has been a markedly weaker recovery. 

Mr. FLORES. Okay. How does it compare to the recovery that we 

had during the 1981-1988 time frame? Or even you can go through 

1993 if you would like to. 

Mr. ELMENDORF. This has been a much weaker recovery than we 

had in the early 1980s. 

Mr. FLORES. Okay. All right. The next thing, what was the 10- 

year cost of the Affordable Care Act when it was enacted? Do you 

remember that? Your cost estimates? Gross costs, not the deficit 

impact. 

Mr. ELMENDORF. Yes, right. As you know, the deficit impact we 

thought was a slight deficit reduction. 

Mr. FLORES. Right. 

Mr. ELMENDORF. The cost of the coverage expansion may be 

what you are referring to over the 10-year window at the time. I 

don’t know that number offhand. As I mentioned a little earlier, 

the number of the cost of the coverage expansion over that 10 years 

we now think would be smaller by a little bit than we thought at 

the time. But as you know, the budget window, the 10 years that 

we now provide projections for has moved out in time through 

2023. And that increases the 10-year—the current 10-year cost defined in that way is higher. 

Mr. FLORES. Okay. And again switching subjects for a minute, 

does the CBO look at unfunded obligations like what the actuarial 
43 

obligations are of Social Security, of Medicare, Medicaid? Does CBO 

look at those? 

Mr. ELMENDORF. Yes, Congressman. So, in our long-term budget 

outlook, we include the cost of those programs, and we include comments on the Social Security Trust Fund and the Medicare Hospital Insurance Trust Fund. 

Mr. FLORES. But do you discount those back and say, this is 

what the net unfunded obligation is for Social Security today? 

Mr. ELMENDORF. Yes, we do, Congressman. 

Mr. FLORES. Okay. Do you have those numbers off the top of 

your head? 

Mr. ELMENDORF. I am sorry, I don’t. It is substantial, Congressman. 

Mr. FLORES. It is tens of trillions of dollars between Social Security and Medicare. Correct? 

Mr. ELMENDORF. I think that is right. We talk about this usually 

as a share of GDP, because we think that is a useful way to measure the burden on the economy. 

Mr. PRICE. The gentleman’s time has expired. 

The gentleman from New York, Mr. Jeffries, is recognized for 5 

minutes. 

Mr. JEFFRIES. Thank you, Mr. Chairman. 

You were just asked whether this has been a more robust or a 

weaker recovery than the ones I guess post-World War II, including 

the ones in the 1980s. And I think you testified that this was a 

weaker recovery. Is that correct? 

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

Mr. JEFFRIES. Would it also be fair to say that in 2008 this country confronted the worse economic crisis and collapse that we have 

experienced in the history of the republic with the exception of the 

Great Depression? 

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

Mr. JEFFRIES. Okay, and the economy, since 2009 under this administration, is moving in the right direction based on any reasonable objective economic measure, wouldn’t that be correct? 

Mr. ELMENDORF. So the GDP has been growing since the summer of that year, yes, Congressman. 

Mr. JEFFRIES. Let’s take a look at some other numbers. So 6 million private-sector jobs have been created over the last several 

years, is that correct? 

Mr. ELMENDORF. Yes, I think so, Congressman. It depends on the 

point at which you start that tally. 

Mr. JEFFRIES. Okay, and I believe about 500,000 manufacturing 

job have been created in America over the last few years, is that 

right? 

Mr. ELMENDORF. That may be. I don’t know that offhand. 

Mr. JEFFRIES. Okay, I think unemployment, the unemployment 

rate is at or near its lowest level in the last 4 years, is that right? 

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

Mr. JEFFRIES. Okay, and home prices are rising at the fastest 

rate in the last 6 years, is that correct? 

Mr. ELMENDORF. Yes, Congressman. 

Mr. JEFFRIES. And I think home purchases are up approximately 

50 percent at this point in time? 
44 

Mr. ELMENDORF. They are rising a good deal. I don’t know the 

exact number. 

Mr. JEFFRIES. And I think we have also reduced the deficit by 

about $2.5 trillion in the last several years, is that correct? 

Mr. ELMENDORF. Sir, we have not tried to do a calculation like 

that. How much has been accomplished so far depends very much 

on the point in time at which one starts counting, and the benchmark one is comparing to, so we have not done that calculation 

ourselves. 

Mr. JEFFRIES. Okay, so it seems though, based on, you know, any 

reasonable economic measure, the economy is clearly moving in the 

right direction. 

The question has been asked a few times today, is there any economic benefit to balancing the budget? I would like to ask a different question. Is there any economic benefit to simulating economic growth in the country at this moment in time? 

Mr. ELMENDORF. Yes, Congressman, there is. 

Mr. JEFFRIES. And what would be the best way, in your estimation, as you have examined this question, to stimulate economic 

growth? 

Mr. ELMENDORF. Well, so the ultimate choices depend on people’s 

judgments, your judgments, on behalf of your constituents as to 

what you think the government should or shouldn’t be doing. But 

we have said that we think cuts in taxes or increases in spending 

that put money into people’s hands where it is spent quickly, can 

provide a crucial boost to the demand for business services and encourage businesses to hire workers, which then gives them income, 

which allows them to spend more, and so on. 

Mr. JEFFRIES. And you have indicated that the best way perhaps 

to increase consumer demand is to make sure that we increase the 

amount of money that is placed into the hands of low income or 

modest Americans, is that right? 

Mr. ELMENDORF. I think in terms of the bang for the buck, lower 

income Americans tend to spend a larger share of extra money they 

get, or reduction in taxes that they enjoy. 

Mr. JEFFRIES. And do you think it would be reasonable to conclude that an increase in the minimum wage, that was proposed recently by the President, and has been advocated by others, which 

would therefore place a greater degree of money in the hands of 

low income or modest income workers would lead to an increase in 

consumer demand, and therefore be good for the economy? 

Mr. ELMENDORF. We have not studied a particular increase in 

the minimum wage carefully, Congressman. I think there are various specs at work. I think you are right, some people would get 

paid more, which they could then spend and would presumably 

spend. It is also true, though the evidence is mixed, we think there 

would probably be a small reduction in employment because the 

cost of workers would go up. 

We have not tried to work through those effects or others. It also, 

of course, depends on how much the minimum wage is increased, 

and how the increase compares with what is the current minimum 

wage in many States, and in many States, of course, there is different minimum wage, a higher minimum wage than the Federal 

minimum. 
45 

Mr. JEFFRIES. I think the greatest reduction in employment at 

least that we could possibly face in the short term would be to 

allow the sequestration to take place, is that correct, we would loss 

about 750,000 jobs in your estimation? 

Mr. ELMENDORF. I think, again, the Congress could examine a 

range of fiscal policy options, but of the things that are about to 

happen under current law that you all talk about a lot, the sequester, taking away the sequester would have a noticeable effect, in 

our judgment, on output and jobs over the rest of this year. 

Mr. JEFFRIES. Now, you mentioned that a loss in confidence in 

the government’s ability to manage its affairs could trigger the fiscal crisis where our ability to borrow at affordable rates is reduced, 

is that right? 

Mr. ELMENDORF. Yes. 

Mr. JEFFRIES. And would it be reasonable that confronting a fiscal cliff in January, a potential debt ceiling default, in March sequestration, debt ceiling default in February, sequestration in 

March, government shutdown in April, another potential debt ceiling default in May, could perhaps shake the confidence of some investors in our ability to deal with our responsibilities? 

Mr. ELMENDORF. Yes, Congressman. We think that perennial crisis mode of fiscal policy over the past few years is reducing people’s 

confidence. How big an effect that is, we don’t know. 

Mr. PRICE. The gentleman’s time is expired. The gentleman from 

Indiana, Mr. Rokita. 

Mr. ROKITA. Thank you, Mr. Chairman. And thank you, Doctor, 

for being back with us. I think by anyone’s objective measure in 

this town or country, we would consider you a smart man, an intelligent man, a good economist, right? 

Mr. ELMENDORF. I can’t comment on that. 

Mr. ROKITA. That is why it befuddles me, although it is certainly 

the member’s privilege and prerogative, it strikes me that some of 

us want to speechify rather than use this precious time to engage 

you in conversation through some questioning. And that is, for the 

record, I would like to say, I really appreciate Mr. Jeffries’ line of 

questioning. I will try to continue on in that regard. 

Speaking of speechifying, we have heard that it is impossible to 

get ourselves out of this debt situation through spending cuts 

alone. And I just want to understand if I am correct that the CBO 

projects that revenue will double from 2012, the 2012 level at $2.4 

trillion to $5.0 trillion by 2023? 

Mr. ELMENDORF. Yes, Congressman. 

Mr. ROKITA. Okay, and that this year alone, revenues will grow 

my $259 billion from the previous fiscal year level? 

Mr. ELMENDORF. Yes, Congressman. 

Mr. ROKITA. Yes. According to your report, revenues have averaged just under 18 percent of the economy in recent history. Am 

I correct that you project under current law that revenues will rise 

to over 19 percent? 

Mr. ELMENDORF. Yes, Congressman. 

Mr. ROKITA. And isn’t that above the historic average since 

World War II? 

Mr. ELMENDORF. Yes, Congressman. 
46 

Mr. ROKITA. Am I correct that in a letter you wrote to Mr. Boehner last year, you estimated that the President’s Affordable Care 

Act, or Obamacare will increase revenues. I would say ‘‘taxes,’’ but 

increase revenues by a trillion dollars? 

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

Mr. ROKITA. Yeah, and that is because why? 

Mr. ELMENDORF. That is because the law included a number of 

changes in tax rules that collect more money. 

Mr. ROKITA. Increase taxes, in other words. 

Mr. ELMENDORF. Yes, yes, exactly. 

Mr. ROKITA. I think most people are focused on the tax increases 

that hit higher income tax payers. But am I correct that the payroll 

tax holiday expired as part of the fiscal cliff deal or not being included in the fiscal cliff deal? 

Mr. ELMENDORF. Yes, yes. 

Mr. ROKITA. Okay, great, thank you. Now, when you talked in 

your opening remarks to the public debt, I think, interject if I have 

these numbers wrong. You said that the public debt was 76 percent 

of our gross domestic product, the value of goods and services this 

whole country, man, woman, and child generates in a year? 

Mr. ELMENDORF. That is the projection for end of this year, yes, 

Congressman. 

Mr. ROKITA. Seventy-six percent. But going back to Mr. Flores’ 

line of questioning, that is not the whole picture, right? I mean, go 

through the definition of public debt and why I think it might be 

higher that if you include what is missing from the Social Security 

Trust Fund, et cetera. 

Mr. ELMENDORF. So in addition to the debt that is held by private citizens here and abroad, and by the Federal Reserve system, 

there is also a substantial amount of government debt that is held 

by other government accounts, the most prominent of which, the 

largest of which is the Social Security Trust Fund. That debt is 

honest-to-goodness government debt, backed by the full faith and 

credit of the government. We don’t include it in the debt measure 

that we focus on, nor do most analysts, because we and most analysts look at the government as a unified whole, and when we do 

projections of future spending, we take account of future Social Security and Medicare, other components of spending, so we capture 

the future obligations of those programs under current law in the 

way we do our projections of spending. 

Mr. ROKITA. So we—— 

Mr. ELMENDORF. So when we look at the debt, we look at the 

debt the government owes to outside the government. 

Mr. ROKITA. So you don’t calculate that debt until that debt becomes due, so when the Social Security Trust Fund has an IOU 

and gives it to the other hand of government to pay that IOU, that 

is when you count it, at that time, right? 

Mr. ELMENDORF. Yes, and as you know, we actually produce projections of this larger—of gross debt. We report them in this outlook, but we don’t focus on them. 

Mr. ROKITA. If I wanted to include the Social Security Trust 

Fund in my remarks to constituents, and trying to educate America 

to what is really happening here, what would be the debt-to-GDP 

ratio if you included the trust fund and any other significant debt? 
47 

Mr. ELMENDORF. I am sorry, Congressman, I actually don’t know 

that. I don’t know that number. 

Mr. ROKITA. Do you think it would be over 100 percent? 

Mr. ELMENDORF. That seems plausible, yes, Congressman. 

Mr. ROKITA. Okay, thank you. And with the remaining time I 

have, and remember, when I started my questioning, I complimented you about how smart you were, certainly relative to me, 

so take you in this vein. If I was a taking your credit card application, your personal one, and under the question, occupation, would 

it be plausible for you to tell me you are an economist? 

Mr. ELMENDORF. Yes, Congressman. 

Mr. ROKITA. Okay. So you are familiar with the Austrian School, 

the Chicago School—— 

Mr. ELMENDORF. Yes, Congressman. 

Mr. ROKITA [continuing]. The Keynesians, the neo-Keynesians 

and all that? 

Mr. ELMENDORF. Yes, Congressman. You and I have discussed 

this before, I think. 

Mr. ROKITA. Okay, which one do you prefer, and why are the 

other ones inferior, which school? 

Mr. ELMENDORF. So I think the consensus view in the economics 

profession, is that what people think of as Keynesian economics, 

which is the output in employment depend on the demand for 

goods and services, answers important questions about what will 

happen in the economy when unemployment is very high, as it has 

been over the past several years, but the consensus also thinks 

that over the medium term and long term, when unemployment is 

not generally so high, that what we think of as neoclassical economics is a better guide to what happens in the economy. 

Mr. ROKITA. And even Keynes thought that you have got to stop 

the spending at some point. 

Mr. ELMENDORF. I don’t know. 

Mr. PRICE. The gentleman’s time has expired. 

Mr. ROKITA. My time is expired, I am told. I yield back. 

Mr. PRICE. The gentleman from Wisconsin, Mr. Pocan. 

Mr. POCAN. Thank you, Mr. Chair, and thank you, Dr. Elmendorf. It is a pleasure to be on the committee, especially with so 

many people from Wisconsin. I know Mr. Ryan and I share a county. Back home we have neighboring districts. So it is great to be 

here representing my State. 

Dr. Elmendorf, you know, one of the top priorities, as I look at 

it, is growing the economy. How can we create more jobs right now 

to really get things going? That is the best way to get out of the 

deficit situation, and when, you know, especially before being here, 

watching the news, it seems like all they ever talk about is deficit 

reduction as the economic plan as if Congress can’t walk and chew 

gum. And I think we can do both. 

And part of that is how do we help grow the economy to help create those jobs. When I was on our joint committee on finance back 

home in the legislature, I used to be the chair of the committee, 

and we had to approve every single recovery dollar that, stimulus 

dollar that came through Wisconsin that came from Congress. And 

at that time, you know, anecdotally I have a small business. I 

heard from small business owners who benefit from it, but more 
48 

importantly, at that committee we had the road building industry, 

and the vertical construction industry. 

So, you know, road building, and building, buildings—not exactly 

your most liberal entities—put out a report saying that 54,000 jobs 

were saved or created just in the State of Wisconsin, thanks to 

those stimulus dollars, and some other minor things we did in the 

legislature. And you know, I look at that and then I look at what 

the President said yesterday about kind of investing it back again. 

And then I saw a release from Speaker Boehner yesterday, and he 

said in his release, tonight he offered them little more than the 

same stimulus policies that have failed to fix our economy and put 

Americans back to work. 

And you know, I know Wisconsin is a very unique place because 

those of us from there are very proud to be from there. I think we 

have very commonsense Midwestern values, but our experience 

was very different than that comment. I was just curious. I believe 

the CBO has done a report on the ARRA effects. Were there, indeed, is it unique to Wisconsin or were there total job increases 

across the country because of those investments? 

Mr. ELMENDORF. So Congressman, we think that there were 

more, there were more jobs and more output produced because of 

the Recovery Act. 

Mr. POCAN. And what kind of numbers jobs are we talking? 

Mr. ELMENDORF. So it varies over time because the spending and 

the tax reductions from the Recovery Act varied over time. At the 

peak effect of the Act, in 2010 and 2011, we think there were between basically half a million and 3.5 million additional jobs. 

Mr. POCAN. Okay, so up to 3.5 million. And then were there additional jobs since then through that peak period? 

Mr. ELMENDORF. Yes, so there continues to be, in our estimate, 

slightly more employment than would otherwise be the case. But 

most of the money from that, both the spending side and the tax 

cuts has now been spent, so the effects are dwindling. 

Mr. POCAN. So because of the job increase, I think it is fair to 

say, too, that it reduced the unemployment rate during that period? 

Mr. ELMENDORF. Yes, Congressman. 

Mr. POCAN. Okay, and how about the effect on economic growth 

in that period? Did it have any net effect to the economy? 

Mr. ELMENDORF. Yes, we think it boosted economic growth in 

2009 and 2010 by a considerable extent and brought down the unemployment rate again, particularly, in 2010 and 2011. 

Mr. POCAN. Okay, so you know, I just think as we look at what 

we are talking about, you know, so often people talk about whether 

you raise taxes or you cut spending, as if those are the only two 

alternatives on the table, and I think maybe sometimes in Washington, those are the only two alternatives people seem to look at. 

But from those of us who come from the heartland or maybe are 

new around here, you know, I have had a small business since I 

had hair, and it was dark. All right, so I come from a little different perspective, but it does seem that there is another way that 

if we can actually help to increase people getting to work and getting jobs and if they are paying taxes, that trajectory we saw on 

spending is the problem on that chart, we could start to then close 

up that trajectory by bringing in real revenue without raising taxes 
49 

on anyone just by having more people becoming taxpayers. Is that 

a fair assessment? 

Mr. ELMENDORF. So you are right Congressman, that if more 

people worked and they earned more money, that could have a substantial positive effect on the budget. The question is what policies 

the Congress might enact and what the cost of those policies would 

be for the budget. 

Mr. POCAN. Got you. And then when people have talked about, 

too, you know, when there is a dollar expended to do that, I mean, 

just like in business, if I invest in something you have got a cost 

to do that, but I would make a profit off of that ultimately. So 

there may be a 20, 40, 60, 80 percent, whatever the cost is depending on their product, ultimately, you still could have a net gain, 

correct? So having that investment, if it is the right policy and it 

creates jobs, can help close that trajectory? 

Mr. ELMENDORF. It is possible, Congressman, but if the government invests in something, even if that project earns a fairly high 

return for the economy as a whole, the government will collect only 

a small share of that higher return in future tax revenue. So funding projects that would pay for themselves by the Federal Government, I wouldn’t want to rule out. But on the other hand, I think 

you should view that as a very high bar—— 

Mr. PRICE. The gentleman’s time is expired. The gentleman from 

Georgia, Mr. Woodall, is recognized for 5 minutes. 

Mr. WOODALL. I thank you, Mr. Chairman, and I want to say 

how proud I am that we have a Georgian sitting as vice chairman 

of the committee this cycle. My freshman colleague from Wisconsin 

talks about commonsense Midwestern values. It is those commonsense Georgia values that they give me great hope off of this institution. So congratulations to you in that new role. 

So I do want to talk about the common ground we have with 

Wisconsin. In fact, Rhode Island, the gentleman from Rhode Island, 

Mr. Cicilline was talking earlier about the great public works programs, and before we started our questioning, and I just wanted 

to read from FDR’s State of the Union speech back in 1935 when 

he said: ‘‘I am not willing that the vitality of our people be further 

sapped by the giving of cash or of market baskets. We must preserve not only the bodies of the unemployed from destitution, but 

also their self-respect, their self-reliance, their courage and their 

determination.’’ 

He called the payments going out at that time a narcotic, a subtle destroyer of the American spirit. And I would certainly hope as 

we talk about revenues, and I think about refundable tax credits 

as being these cash payments, anything we can do to work together 

to redirect those cash payments into those real jobs that provide 

real benefits to the human spirit, not just to the pocketbook, I 

would look forward to working together on. But thinking about my 

common Georgia upbringings, Director, I wanted you to help me 

with some things. 

I heard a lot of discussion about, we can’t get to balanced budgets just by cutting spending. There has to be a revenue component. 

And my friend from Indiana pointed out that revenue was going to 

double over the next 10 years under your projection? 

Mr. ELMENDORF. Yes, Congressman. 
50 

Mr. WOODALL. So our revenue component, if we do nothing more, 

we are going to double revenues to the Federal Government over 

the next 10 years? 

Mr. ELMENDORF. Yes, Congressman, that is our projection. 

Mr. WOODALL. Now, thinking about the cutting of the spending 

that we are going to be doing over the next 10 years, if we do nothing over the next 10 years, how much will spending fall below current levels? 

Mr. ELMENDORF. In dollar terms, Congressman, as you know, we 

expect the spending at the end of the decade will be quite a bit 

higher than spending is now. 

Mr. WOODALL. Well, you say in dollar terms. What if we did it 

as a percentage of the economy to adjust for inflation, then how 

much lower would spending be in 10 years than it is today? 

Mr. ELMENDORF. Well, as a share of the economy, we project outlays in 2023 will be 22.9 percent, and last year they were 22.8 percent. 

Mr. WOODALL. So over the next 10 years, they are not going 

down either? 

Mr. ELMENDORF. There is a dip and then there is an increase 

again. 

Mr. WOODALL. Okay. So just to be clear, tax is going to double 

over the next 10 years in real dollar terms, spending not going to 

decline over the next 10 years either in real dollar terms, or nominal dollar terms? 

Mr. ELMENDORF. That is right, Congressman. That is right. As 

you know, as I mentioned earlier there will be roughly 40 percent 

more beneficiaries of the largest, most expensive Federal programs 

a decade from now than they are today, and that is a critical factor 

driving those numbers. 

Mr. WOODALL. Unquestionable, which leads me to believe, when 

you have serious people looking at these issues as we do, that no 

one is actually talking about cutting spending. We are just arguing 

about how much more we are going to increase spending. Are we 

going to increase a whole lot more? Are we going to increase it a 

little more because there are folks out there that we have to keep 

commitments to. As useful as I find the baseline, I can’t tell you 

how much I appreciate the work that you do. I am glad that you 

do it instead of me doing it. I tell folks, the best part of my job is 

really smart people are willing to invest time in me to make me 

smarter. 

But something I don’t understand. You mentioned in your testimony that the alternative fiscal scenario assumes the sequester 

doesn’t go into effect because you have had some members mention 

that. But does the baseline assume that the war in Iraq and Afghanistan comes to an end and that money ceases going out the 

door? 

Mr. ELMENDORF. No. So what we do for, and have done for 

years—— 

Mr. WOODALL. Maybe a follow onto that. Does it assume that the 

Sandy supplemental spending was just a one-time effect and also 

won’t go on? 

Mr. ELMENDORF. No, Congressman. The answer to both parts of 

the question is that our projections of discretionary spending have 
51 

never been about the cost of doing particular sorts of programs. 

They have always been extrapolations of the latest funding Congress has provided, with the one crucial exception now of the caps 

on most discretionary spending. But the current funding for overseas wars and the funding that Congress has provided for, really 

to Hurricane Sandy, we have extrapolated those with inflation, the 

way we have traditionally done discretionary spending as a whole. 

Mr. WOODALL. And why is that? I mean, here we have done an 

alternative scenario because some Members have suggested that 

something might happen, and yet we baked into the baseline, 10 

years of Sandy aid, which we know with absolute certainty will 

never happen. What is the reason for that? 

Mr. ELMENDORF. So Congressman, I think for the things that, as 

you know, our table of alternative policies includes numbers that 

allow you and your colleagues to subtract those particular provisions if you would like, to construct your own projections of the 

budget balance. The reason we view those as somewhat different 

from the provisions in the alternative scenario, is the alternative 

scenario has a set of permanent features of law that the Congress 

has, in the past, extended or deferred taking effect. Whereas discretionary spending, as I said, has never been about particular programs, so we have written other reports, for example, on veterans’ 

health care, which is indiscretionary spending. We think that providing the level of care people now get to the people who are now 

eligible will be more expensive 10 years from now than is captured 

in the discretionary baseline. 

Mr. PRICE. The gentleman’s time is expired. 

Mr. ELMENDORF. Hurricane Sandy may not recur, but other 

storms may come, other wars may come. So we try not to judge 

what the level of discretionary spending that you all would like to 

have in the future. 

Mr. PRICE. The gentleman’s time is expired. The gentleman from 

California, Mr. Huffman. 

Mr. HUFFMAN. Thank you, Mr. Chairman, and it is an honor to 

serve with you on this committee. Thank you, Dr. Elmendorf for 

your testimony. It has been very useful. I have a pretty quick question here. We have spent most of our time today discussing the deficit, our debt, and the health care costs that are the big driver of 

future expenditures. But a couple of my colleagues have brought up 

Social Security, and so I just wanted to ask you, Dr. Elmendorf, if 

you could please explain the extent to which Social Security contributes to the deficit and the public debt that we saw illustrated 

on the chart. And also, if you assume that we should be focused 

like a laser beam on bringing the deficit down so that we can get 

our debt under control, would you agree that the discussion of reducing Social Security costs is a bit of a red herring? 

Mr. ELMENDORF. So Congressman, starting a few years ago and 

continuing indefinitely into the future under current law, the Social 

Security benefits that are being paid out exceed the Social Security 

tax revenues that are being collected. The Social Security Trust 

Fund also receives, as you know, interest payments on the debt 

that it holds. So at this point in time, Social Security benefits, as 

I said, are greater than tax revenue, a little less than the tax revenue plus the interest payments, but on a unified budget basis, 
52 

where the interest payments from one part of the government to 

the other wash out, Social Security taxes benefits and taxes actually are increasing the budget deficit. And if you look in our projections out half a dozen years or so, by that point, the benefits will 

exceed the tax revenues plus the interest payments that will be 

paid in, so that the Social Security Trust Fund as a whole will be 

suffering annual deficits. 

Mr. HUFFMAN. At what point—excuse me, at what point does Social Security begin to contribute to the deficit? 

Mr. ELMENDORF. Well, again, Congressman, on a unified budget 

basis, taking account of just the tax revenues, the dedicated tax 

revenues, and the benefits, it is contributing the deficit now. If one 

instead looks at just the balance in the Social Security Trust Fund, 

that balance is, the annual balance is positive now, but will be negative within about a half dozen years. I am looking for the exact 

number and I can’t find it, but it is changing quickly. 

Mr. HUFFMAN. Okay. 

Mr. PRICE. The gentleman yields back? The gentleman yields 

back his time. 

Mr. ELMENDORF. Actually, Mr. Chairman, I do have the number 

to fully answer the question. Which is we think that by 2021, the 

Old-Age and Survivors Insurance Trust Fund will have an annual 

deficit. The Disability Insurance Trust Fund is currently an annual 

deficit. Taking those pieces together as people often do, we think 

the overall Social Security Trust Funds will be running annual 

deficits beginning in 2017. 

Mr. PRICE. Thank you. The gentleman from Ohio, Mr. Renacci. 

Ms. MOORE. Excuse me, Mr. Chairman. 

Mr. RENACCI. Thank you, Mr. Chairman. 

Mr. PRICE. The gentlelady from Wisconsin. 

Ms. MOORE. I do have time constraints, and I do believe that I 

have been overlooked. 

Mr. PRICE. The gentlelady is up following Mr. Renacci. 

Ms. MOORE. Well, is he, how many Republicans have we taken? 

Mr. PRICE. We have gone back and forth, Republican, Democrat. 

Mr. Huffman just had the time. 

Ms. MOORE. Okay, I am so sorry. 

Mr. PRICE. That is all right. The gentleman from Ohio. 

Mr. RENACCI. Thank you, Mr. Chairman, and thank you, Doctor, 

for being here. I just want to go back to my colleague’s question 

on Social Security because I do have a question on it. But the CBO 

baseline shows, and you previously mentioned that Social Security 

will run a cash deficit of $1.3 trillion over the next 10 years. Is that 

a true statement? 

Mr. ELMENDORF. That may be, Congressman. I don’t have that 

number in front of me, I am afraid. 

Mr. RENACCI. Okay, going back to some of the discussions that 

have occurred, and it has been an interesting day for me. I have 

been a businessman most of my life, only been here a couple of 

years. So when I look at the business of the Federal Government 

as to how it is going, and how my current business is ran, my small 

business is ran back home, I would be scared to death of the trajectory direction that we are going. And I think you said that con-
53 

tinuing under the current policies, it is just not sustainable, is that 

correct? 

Mr. ELMENDORF. Yes, Congressman. 

Mr. RENACCI. Okay. One question earlier, somebody talked about 

jobs, net jobs created over the last 4 years. Is that a negative number or a positive number, net jobs? 

Mr. ELMENDORF. I am sorry, Congressman, I don’t have that 

number. 

Mr. RENACCI. Okay. Let’s go back to tax rates. And again, as a 

business owner, when my tax rates increased, I was concerned and 

would not employ more people. That was an easy answer for me. 

And if I didn’t have any certainty and predictability of what those 

rates were going to be, I definitely didn’t do much as far as the future. Do you have any correlation to the raising marginal rates and 

how it affects the economy, because we have talked a little bit 

about that? 

Mr. ELMENDORF. Yes, Congressman, so when we modeled the effects of big changes in fiscal policy like the President’s budget proposals each year, our models explicitly include the effects of 

changes in tax rates on people’s work effort and on our saving behavior. We recently did a reexamination of the assumed amount of 

response that we have with a lot of consultation with outside experts, and made some adjustments in what we do and published 

reports describing how we read the evidence. But it is certainly the 

case, in our view of the research literature, that higher tax rates 

will tend to discourage work effort, and saving. 

Mr. RENACCI. So as we talked about earlier, you heard that if 

we—if we add taxes, if we do a balanced approach, when marginal 

tax rates go up, that is also going to slow the economy down? 

Mr. ELMENDORF. That is right, Congressman. Again, all else 

equal. So the crucial question is what else is going on in the Federal budget. 

Mr. RENACCI. Do you think that comprehensive—well, actually, 

let’s go back to the fiscal cliff. When we passed the fiscal cliff here 

recently, do you think people moved their taxable income? Was 

there a shift in taxable income and a change in what they were 

going to do knowing the rates were going up? 

Mr. ELMENDORF. Yes, Congressman. I think that both corporations and individuals behaved differently the last part of last year, 

not—based on their expectation and their uncertainty about what 

was going to happen with the fiscal cliff. 

Mr. RENACCI. So we will see a jump up maybe in receipts this 

year because of that? 

Mr. ELMENDORF. And in fact, Federal receipts were strong in 

January, and that may be—that is, I think, part of the story. There 

is also, of course, the end of the temporary reduction in the payroll 

tax, and other factors. 

Mr. RENACCI. Let’s talk a little bit about capital gains, which I 

know also changed. Capital gains rates could lead to—in 2012, JCT 

and the CBO said that higher tax rates on capital gains could lead 

to a level of inefficiency and conversely, lower capital gain rates 

could, in fact, encourage investment. Do you agree with that statement? 

Mr. ELMENDORF. Yes, Congressman. 
54 

Mr. RENACCI. Do you believe an increase in the capital gains tax 

could increase the long-term productivity. 

Mr. ELMENDORF. So you said the—— 

Mr. RENACCI. Increase. 

Mr. ELMENDORF. Increase. 

Mr. RENACCI. Assuming that we are increasing capital gains. 

Mr. ELMENDORF. All else equal, Congressman, no, we don’t think 

that an increase in the tax on capital is going to boost investment 

output in the future. The question, again, I emphasize, is all else 

is not usually equal. If that money is used to reduce borrowing, 

then that reduction in borrowing has a positive effect on the economy. 

Mr. RENACCI. My colleague earlier talked about revenues doubling over the next 10 years in your projection, and spending going 

up significantly. Do you have an idea how much spending is going 

to go up over the next 10 years? 

Mr. ELMENDORF. I don’t have that number calculated, Congressman. We think spending this year will be about $3.5 trillion, and 

in 2023, will be pushing $6 trillion. But I don’t know the percentage change, I am afraid. 

Mr. RENACCI. Okay. I yield back at this time. 

Mr. PRICE. The gentleman yields back his time. The gentlelady 

from Wisconsin, Ms. Moore, for 5 minutes. 

Ms. MOORE. Thank you so much, Mr. Chairman, and thank you, 

Dr. Elmendorf, for appearing today. I have seen how you have done 

this very delicate dance all morning as Members have attempted 

to get you to agree with their approach about how to reduce the 

deficit, about how to grow the economy. What is more important? 

Is this tax policy better or worse? So I do appreciate your indulgence and your patience in this. But what I guess I learned and 

heard from you today, is that ultimately, we make the decisions 

around here about what happens, and that you know, it is, you 

know, all things are not equal. 

So for example, the American Taxpayer Relief Act of 2012 the socalled fiscal cliff thing we did New Year’s Day, it doubled the deficit, didn’t it? It went from like $2.3 trillion to $4.6 trillion, and all, 

you know, and in that, I think we, for example, did not extend the 

payroll tax relief, and so therefore, we didn’t help poor people 

there. We did things like make the unemployment insurance until 

December 31st of this year, whereas we increased the estate tax relief, went back to former law, made that permanent so that couples 

up to $10 million have an exemption. 

So when we think about this provision, for example, in terms of 

long-term debt and the stimulative ability, or lack thereof, do you 

have an assessment of this particular—this particular policy with 

respect to long-term deficit reduction? 

Mr. ELMENDORF. So Congresswoman, you actually understated 

the point. We thought deficits under current law had been $2.3 trillion over the decade, and the New Year’s law added about $4.7 trillion to deficits over the decade, so it essentially tripled the deficits 

under current law. That change greatly increased government borrowing. It also reduced tax rates. Those two changes have opposing 

effects on future output. We haven’t actually done a specific estimate of the economic effects of that law, but as I said before, the 
55 

level of government borrowing has an important—negative higher 

borrowing has a bigger negative effect on future economic outcomes, and I think that—— 

Ms. MOORE. My time is waning, but I think that, you know, you 

have really made the point that all—that there are consequences 

of policy, and here this was an initiative, I think, that helped 

wealthier people more because the Bush era, Obama era, whatever 

people want to call it, tax rates, disproportionately helped richer 

people. Same thing with tax expenditures. We heard discussion 

here earlier about. And Greenspan calls them not tax expenditures, 

but tax entitlements. Isn’t it, in fact, true that the tax expenditures 

almost equal the Medicare, and Medicaid, and the Social Security 

all together; that they almost equal that amount, and that they disproportionately go to wealthier people? I mean, 60 percent of our 

tax entitlements go to, you know, maybe 20 percent of the wealthiest people? 

Mr. ELMENDORF. So Congresswoman, in our report last year we 

showed that tax expenditures through the individual income tax, 

and the payroll tax were larger than government spending on Social Security, larger than spending on defense, larger than spending on Medicare. The distribution varies a good deal across tax expenditures. Some of them benefit higher income people disproportionately, others are more focused on lower income people. We have 

some work underway. 

Ms. MOORE. There is a lot of complaints, Dr. Elmendorf, about 

the 50 percent of people who don’t pay any income tax, and so, I 

mean, the tax expenditure program for homeowners, and for charitable donations which are good tax expenditures, there is a lot of 

waste in it as well. I just want you to stipulate in your testimony 

here that, in fact, there is a lot of spending that is done through 

tax expenditure programs, and it increases the income disparity. 

Mr. ELMENDORF. So I think, Congresswoman—— 

Ms. MOORE. Very regressive. 

Mr. ELMENDORF. Many economists agree that tax expenditures 

are best thought of as government spending, even though they appear in the budget as—— 

Ms. MOORE. And are they regressive? 

Mr. ELMENDORF. We have work underway on the distribution of 

tax expenditures, and it is not finished yet and I don’t want to 

speak ahead of our not having completed that analysis. 

Mr. PRICE. The gentlelady’s time is expired. 

Ms. MOORE. Thank you for your indulgence, Mr. Chairman. 

Mr. PRICE. Thank you, the gentleman from Indiana, Mr. Messer, 

for 5 minutes. 

Mr. MESSER. Mr. Chairman, I am the final questioner today. 

Mr. PRICE. I think that is accurate and we appreciate you turning on your mic. 

Mr. MESSER. Yeah, I was going to say, I have already eaten up 

my time without the mic. Thank you, Mr. Chairman, and thank 

you, Doctor. I just made the point I am the final questioner today. 

I appreciate that. Somebody gets to do it and today it is me. Doctor, 

I want to thank you for your eloquence. Thank you for your knowledge and wisdom and thank you for your stamina at today’s committee hearing. 
56 

Mr. ELMENDORF. And yours, Congressman. You are one of the 

few people who actually sat through an entire hearing. And you 

too, Congressman. 

Mr. MESSER. Well, you know, when you are new here you want 

to learn and I appreciate the knowledge that I have been able to 

gather today. I want to focus just for a second on a comment that 

you made earlier. I want to make sure that I have it accurate. You 

mentioned that by, was it 2023, we would have 40 percent more 

recipients of Medicare and Social Security than today? 

Mr. ELMENDORF. Roughly yes, Congressman. 

Mr. MESSER. You know, there is a lot of rhetorical energy spent 

around this building, appropriately so, making the point that we 

want to make sure we keep our commitments to those who have 

invested through a lifetime in Social Security and Medicare, certainly a commitment I intend to keep. I know of no one on either 

side of the aisle who believes any differently. If you saw that number and saw that we were going to increase by 40 percent by 2023, 

but you also knew that we were going to increase our workforce by 

40 percent by 2023 so that you had the same number of taxpayers 

footing the bill for those benefits, or at least per recipient, then you 

wouldn’t be nearly as alarmed by that number as you might be in 

a scenario that is far different. And so—— 

Mr. ELMENDORF. Yes. 

Mr. MESSER. I was hoping that you could comment just a minute 

about maybe the historical trend of how many taxpayers we have 

had per recipient in those programs, and where we are going in 

that same trend. 

Mr. ELMENDORF. Yes, Congressman. So we project that the labor 

force will grow much more slowly in the coming decade than it has 

grown in over the past several decades. And there are two main 

reasons for that: One is the retirement of the baby boom generation. They came into the labor force. They boosted the labor force 

growth, and as they retire, they will be holding it down. And the 

second is an end to the longstanding increase in women’s labor 

force participation, which, again, pushed up the participation rate 

late in the late century, but has been pushing the other direction. 

But it has not been doing that now. 

So the labor force growth will be a good deal slower going forward than it has been in the past. A lot of that is outside of the 

control of the Congress, but there are policies that Congress can 

enact or not that can have effects on labor force participation and 

policies on both the tax and spending sides of the budget. 

Mr. MESSER. Yeah, and you know, I know you are probably reluctant to just throw out numbers that you may not have access to 

right in front of you, but could you talk just a little bit at least— 

if you have the numbers, great, but in the last 10, to 20, to 30 

years how many workers per recipient did we have? What are the 

likely trends by 2023, for example? 

Mr. ELMENDORF. I know that I have one fact, which is that a few 

years ago, 21 percent—a few years ago, the population age 65 or 

older was 21 percent of the population between ages 20 and 64. So 

65 or older relative to those of working age, 20 to 64, that share 

was 21 percent a few years ago, and it will be 37 percent 25 years 

from now. 
57 

Mr. MESSER. Which would lead to, there will be fewer people 

paying for each recipient later? 

Mr. ELMENDORF. Yes. 

Mr. MESSER. If you can get those numbers to me, I would appreciate it. I would like to see whatever we are able to get track of. 

Mr. ELMENDORF. Yes, Congressman. Yes. 

Mr. MESSER. I just would want to make this very simple point, 

rightly so. A lot of energy is spent talking about the injustice that 

would fall to those who have invested and paid in over their lifetimes if they did not receive the benefits that they rightly should 

receive, but probably not enough energy is spent talking about the 

injustice to the next generation, those who will pay far more into 

a program that through which they may receive far less if nothing 

is done either. And so as we focus as a body on the importance of 

the justice of making sure that current recipients and those nearing retirement receive those benefits, I hope we spend equal energy 

thinking about the next generation and how we preserve these programs for them. 

Mr. ELMENDORF. I would just say, Congressman, we produce a 

report every summer or fall on the Social Security program which 

lays out just the points you are making about the ratio of workers 

to beneficiaries, and about the effects of—the differential effects of 

the program on people born in different birth cohorts and at different points in the income distribution. 

Mr. MESSER. I would love to see that. 

Mr. PRICE. The gentleman yield back. I want to thank Director 

Elmendorf for being with us today, for his wisdom and his patience. 

I am charged with asking unanimous consent. The members have 

7 calendar days to submit questions for the record, and without objection, so ordered. This hearing is adjourned. 

Mr. ELMENDORF. Thank you, Congressman. 

[Questions submitted for the record and their responses follow:] 

QUESTIONS SUBMITTED FOR THE RECORD BY CHAIRMAN RYAN

SENSITIVITY OF PROJECTED DEFICITS AND DEBT TO

HIGHER-THAN-PROJECTED INTEREST RATES

Please provide how higher-than-expected interest rates would affect federal budget deficits and debt held by the public over the next decade. The three interest rate 

scenarios are as follows: 1) interest rates rise to their average levels over the 1991- 

2000 period, 2) interest rates rise to their average levels over the 1981-1990 period, 

and 3) interest rates follow a path that is consistent with the average of the 10 

highest projections shown in the October 2012 and February 2013 releases of Blue 

Chip Economic Indicators. This is an update of an analysis that CBO did for Chairman Ryan on February 24, 2011. 

ADDITIONAL INFORMATION ON THE IMPACT OF THE SEQUESTER

CBO has provided the Budget Committees with estimates of the impact from the 

automatic sequester on budget functions 050 (National Defense) and 570 (Medicare). 

The sequester’s impact on non-defense accounts has been assigned to function 920 

(Allowances), which is a non-specific classification used for programs and policies 

that are not easily classified into a more specific budget function. With publication 

of the OMB Report Pursuant to the Sequestration Transparency Act of 2012 (P.L. 

112-155), information is now publically available on the impact of the sequester on 

an account-by-account basis. With this new information available, I am requesting 

that CBO provide an estimate of the non-defense sequester impact on a functionby-function basis in order to give the Budget Committee greater precision on understanding the impact of the sequester on non-defense budget functions. 
58 

PRIMARY BALANCE AND BUDGET SUSTAINABILITY

Based on CBO’s recent budget outlook, if the fiscal year 2023 deficit was reduced 

to the level of net interest projected under the current law baseline, what is known 

as primary balance, would that stabilize the federal government’s debt as a share 

of GDP and put its fiscal position on a sustainable path? 

ADDITIONAL INFORMATION ON MACROECONOMIC FEEDBACK

RESULTING FROM DEFICIT REDUCTION

CBO’s report on Macroeconomic Effects of Alternative Budgetary Paths provides 

information on additional deficit impacts resulting from macroeconomic feedback 

under various budgetary paths. To better understand these results, I am requesting 

CBO to provide information on the revenue and outlay components of the ‘‘Effects 

on primary deficits’’ displayed in Table B-2 of the report. 

QUESTIONS SUBMITTED FOR THE RECORD BY HON. LUKE MESSER, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF INDIANA

As a member of the Committee on Education and the Workforce, and its Subcommittee on Higher Education and Workforce training, I am especially interested 

in slowing the rapidly rising cost of higher education. College costs too much. Parents are scrimping and saving and spending their nest eggs to pay for their children’s education while trying to make ends meet in this sluggish economy. 

Between 2001 and 2012, federal financial aid in constant dollars increased 140 

percent. However, over the same period, published tuition and fees for in-state students at public four-year colleges increased by an average of 5.6 percent faster than 

the rate of inflation. In last year’s State of the Union address, the President said 

‘‘we can’t just keep subsidizing skyrocketing tuition; we’ll run out of money.’’ Last 

night, the President said ‘‘taxpayers cannot continue to subsidize the soaring cost 

of higher education.’’ 

I am concerned that well-intentioned Federal education subsidies are hyper-inflating the cost of higher education, leading to more borrowing, higher interest payments, less disposable income, and slowed economic growth, essentially creating an 

‘‘education bubble’’ not dissimilar to the housing bubble that nearly crippled the 

economy several years ago. 

I have several questions on this topic for Dr. Elmendorf: 

1. Do you believe the current rate of tuition inflation is driven in part by federal 

education subsidies? 

2. Might rising college costs be constrained by more carefully targeting and measuring the effectiveness of federal education assistance? 

3. What role has federal education assistance like Pell Grants played in subsidizing rising tuitions? 

4. CBO’s February baseline shows the Pell Grant program facing a funding cliff 

in Fiscal Year 2015 and annual shortfalls in subsequent years through the budget 

window. Do you believe the current structure of this important program is sustainable? 

QUESTION SUBMITTED FOR THE RECORD BY MR. VAN HOLLEN

How do today’s discretionary funding levels compare with pre-recession funding 

levels? 

CBO’S RESPONSES TO QUESTIONS SUBMITTED FOR THE RECORD

RANKING MEMBER VAN HOLLEN

Question: How do today’s discretionary funding levels compare with pre-recession 

funding levels? 

Answer: With discretionary appropriations in 2013 based on H.R. 933 as passed 

by the House (including the effects of the sequestration in March) and on P.L. 113– 

2, the Disaster Relief Appropriations Act, 2013, total discretionary budget authority 

would be 5.4 percent higher this year than it was in fiscal year 2007 (the year before the recession officially began). Total annual discretionary budget authority increased by $57 billion over that period—from $1,070 billion in 2007 to an estimated 

$1,127 billion in 2013 (see the table below). 

That difference is affected by a decline in funding for the wars in Iraq and Afghanistan and the substantial appropriations made in 2013 in response to Hurricane Sandy (funding in 2007 included some funding in response to Hurricane 
59 

Katrina and other hurricanes). War-related funding dropped from $170 billion for 

2007 to $92 billion (including the effects of sequestration) for 2013, a reduction of 

$78 billion. However, the funding for 2013 related to hurricane relief and recovery 

was $40 billion higher than the amount provided for similar activities in 2007. 

Excluding appropriations for those purposes, discretionary budget authority rose 

from $892 billion in 2007 to $987 in 2013, an increase of about 11 percent. During 

that period, prices (as measured by the consumer price index for urban consumers) 

rose by 13 percent, and nominal gross domestic product (GDP) increased by 16 percent. As a result, discretionary appropriations—based on the House-passed appropriations for 2013 and excluding funding for overseas contingency operations and 

hurricane relief—declined by 2.2 percent in real (inflation-adjusted) terms between 

2007 and 2013 and dropped from 6.4 percent of GDP to 6.2 percent of GDP over 

that period. 

DISCRETIONARY BUDGET AUTHORITY IN FISCAL YEARS 2007 AND 2013 

Billions of dollars 

Percentage 

change Actual 2007 Estimated 

2013 

War-Related Funding .............................................................................................. 170 92 ¥46.0 

Hurricane Relief Funding ........................................................................................ 7 48 545.5 

Other Funding ......................................................................................................... 892 987 10.7 

Total ........................................................................................................... 1,070 1,127 5.4

CHAIRMAN RYAN

Question 1: Sensitivity of Projected Deficits and Debt to Higher-than-Projected Interest Rates—Please provide how higher-than-expected interest rates would affect federal budget deficits and debt held by the public over the next decade. The three interest rate scenarios are as follows: 1) interest rates rise to their average levels over the 

1991–2000 period, 2) interest rates rise to their average levels over the 1981–1990 period, and 3) interest rates follow a path that is consistent with the average of the 

10 highest projections shown in the October 2012 and February 2013 releases of Blue 

Chip Economic Indicators. This is an update of an analysis that CBO did for Chairman Ryan on February 24, 2011. 

Answer: To estimate the effect that higher interest rates would have on the budget, CBO has updated the analysis it did in February 2011 (that earlier analysis is 

available on CBO’s website at www.cbo.gov/publication/22039). 

For scenarios 1 and 2, we have assumed that by 2017, interest rates would rise 

to and then remain at the levels that Treasury interest rates averaged during the 

1990s (scenario 1) or 1980s (scenario 2). Thus, over the 2018—2023 period, rates for 

3-month Treasury bills would be 4.9 percent under scenario 1 and 8.8 percent under 

scenario 2, compared with 4.0 percent in CBO’s baseline projections (see Table 1 

below). Similarly, rates on 10-year Treasury notes would average 6.7 percent between 2018 and 2023 under scenario 1 and 10.6 percent under scenario 2, compared 

with 5.2 percent in the baseline projections. 

For scenario 3, we have based the assumed path of rates on the average of the 

10 highest forecasts from the Blue Chip Economic Indicators: Rates for 2013 and 

2014 come from the February 2013 Blue Chip report, and rates for 2015 through 

2023 come from the October 2012 Blue Chip report (the most recent report with 

longer-term projections). Following the procedure used in our 2011 analysis, we 

have adjusted the Blue Chip forecast upward by 30 basis points to account for significant interest rate movements since that report was released. Under that scenario, interest rates for 3-month Treasury bills would be much higher from 2015 

through 2017 than in CBO’s baseline projections and would be 4.5 percent from 

2018 through 2023, compared with 4.0 percent in the baseline projections. 

The budgetary effects of those alternative interest rate paths would be minimal 

in 2013 but substantial over the coming decade. Relative to CBO’s baseline projections, interest payments between 2014 and 2023 would be $1.4 trillion higher under 

scenario 1, $6.3 trillion higher under scenario 2, and $1.1 trillion higher under scenario 3 (see Table 2 below). Cumulative deficits and debt held by the public at the 

end of the 2014—2023 period would be higher by similar amounts. 

CBO strives to create baseline budget and economic projections that are in the 

middle of the distribution of possible outcomes. As a consequence, CBO sees an 

equal risk of interest rates’ being higher or lower than in its baseline projection. 
60 

Lower interest rates would imply lower federal interest payments, and the budgetary effects of differences in interest rates relative to CBO’s baseline would be 

roughly symmetric. 

It is important to note that the estimates in Table 2 do not account for the effects 

on the federal budget of other differences in economic conditions that would probably accompany higher interest rates. For example, interest rates could be higher 

than in CBO’s baseline because inflation could be higher than CBO anticipates. Indeed, inflation was higher during the 1990s, and much higher during the 1980s, 

than CBO projects for the next decade: Inflation as measured by the consumer price 

index averaged 5.1 percent annually during the 1980s and is projected by CBO to 

average 2.2 percent over the coming decade. If CBO assumed that inflation over the 

next decade matched the average seen during the 1980s, to parallel the assumption 

about interest rates, projected tax revenues would be much higher than in CBO’s 

baseline projections, and federal spending would be moderately higher. On balance, 

those two effects would reduce deficits. 

Not only was inflation higher in the 1980s and 1990s than is currently projected 

for the next decade, real interest rates (nominal rates adjusted for inflation) were 

also higher during those periods than in CBO’s baseline projections for the coming 

decade. If real interest rates over the next decade ended up matching those historical values, it might be because the economy (and thus demand for credit) was 

stronger than in CBO’s projections. In that case, revenues would be greater than 

the amounts projected in the baseline, offsetting some of the increase in interest 

costs. 

The causes of higher interest rates would also affect the conduct of monetary policy by the Federal Reserve. Changes in both interest rates and the magnitude of 

the Federal Reserve’s purchases and sales of securities would affect remittances by 

the Federal Reserve to the Treasury (which are counted in the budget as revenues). 

Without knowing what overall economic conditions would be under those three scenarios, and thus what actions the Federal Reserve would take, it is not possible to 

estimate how the Federal Reserve’s remittances to the Treasury might differ from 

the amounts in CBO’s baseline projections. 

TABLE 1.—CBO’S ESTIMATE OF THE TREASURY INTEREST RATE SCENARIOS 

REQUESTED BY CONGRESSMAN RYAN 

[Percent, by fiscal year] 

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 

Rates on 3-Month Bills 

CBO’s Baseline ..................................... 0.1 0.1 0.2 1.0 2.9 4.0 4.0 4.0 4.0 4.0 4.0 

Scenario 1 ............................................ 0.1 0.1 0.2 1.7 4.0 4.9 4.9 4.9 4.9 4.9 4.9 

Scenario 2 ............................................ 0.1 0.1 0.4 3.6 7.4 8.8 8.8 8.8 8.8 8.8 8.8 

Scenario 3 ............................................ 0.2 0.4 2.6 4.0 4.4 4.5 4.5 4.5 4.5 4.5 4.5 

Rates on 10-Year Notes 

CBO’s Baseline ..................................... 1.9 2.5 3.2 4.1 4.9 5.2 5.2 5.2 5.2 5.2 5.2 

Scenario 1 ............................................ 2.2 3.4 4.5 5.5 6.4 6.7 6.7 6.7 6.7 6.7 6.7 

Scenario 2 ............................................ 2.7 4.7 6.7 8.6 10.1 10.6 10.6 10.6 10.6 10.6 10.6 

Scenario 3 ............................................ 2.2 2.9 4.7 5.6 5.7 5.7 5.8 5.8 5.8 5.8 5.8 

Source: Congressional Budget Office. 

Note: Scenarios 1, 2, and 3 were specified by Congressman Ryan as alternatives to CBO’s baseline projections. 

TABLE 2.—EFFECT ON THE DEFICIT OF INTEREST RATE SCENARIOS REQUESTED BY 

CONGRESSMAN RYAN RELATIVE TO CBO’S FEBRUARY 2013 BASELINE 

[Billions of dollars, by fiscal year] 

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 

Total, 

2014– 

2018 

Total, 

2014– 

2023 

Scenario 1 ........... 2 13 32 66 104 136 162 190 218 246 274 352 1,443 

Scenario 2 ........... 4 33 85 201 355 529 671 833 103 1,185 1,378 1,204 6,274 

Scenario 3 ........... 3 11 55 126 138 122 120 129 137 147 157 453 1,143 

Source: Congressional Budget Office. 

Note: Scenarios 1, 2, and 3 were specified by Congressman Ryan as alternatives to CBO’s baseline projections. 
61 

Question 2: Additional Information on the Impact of the Sequester—CBO has provided the Budget Committees with estimates of the impact from the automatic sequester on budget functions 050 (National Defense) and 570 (Medicare). The sequester’s 

impact on non-defense accounts has been assigned to function 920 (Allowances), 

which is a non-specific classification used for programs and policies that are not easily classified into a more specific budget function. With publication of the OMB Report Pursuant to the Sequestration Transparency Act of 2012 (P.L. 112–155), information is now publically available on the impact of the sequester on an account-byaccount basis. With this new information available, I am requesting that CBO provide an estimate of the non-defense sequester impact on a function-by-function basis 

in order to give the Budget Committee greater precision on understanding the impact 

of the sequester on non-defense budget functions. 

Answer: The best information to answer this question is contained in backup data 

for the Office of Management and Budget’s OMB Report to the Congress on the 

Joint Committee Sequestration for Fiscal Year 2013 (March 1, 2013). Those data are 

not yet available. CBO will provide you with these functional breakdowns when the 

data become available. 

Question 3: Primary Balance and Budget Sustainability—Based on CBO’s recent 

budget outlook, if the fiscal year 2023 deficit was reduced to the level of net interest 

projected under the current law baseline, what is known as primary balance, would 

that stabilize the federal government’s debt as a share of GDP and put its fiscal position on a sustainable path? 

Answer: Assuming primary budget balance in 2023 would lower CBO’s deficit projection for that year from $978 billion to $857 billion, or 3.3 percent of GDP (all else 

being equal). However, that is not enough information to know whether the federal 

government’s debt as a share of GDP would be stable in that year. That answer 

would depend on the ratio of debt to GDP in the previous year, and on output and 

interest rates in 2023, which in turn would depend on the path of deficits in prior 

years. 

Question 4: Additional Information on Macroeconomic Feedback Resulting from 

Deficit Reduction—CBO’s report on Macroeconomic Effects of Alternative Budgetary 

Paths provides information on additional deficit impacts resulting from macroeconomic feedback under various budgetary paths. To better understand these results, I am requesting CBO to provide information on the revenue and outlay components of the ‘‘Effects on primary deficits’’ displayed in Table B–2 of the report. 

Answer: Those revenue and outlay components are shown in the table below. The 

amounts in the table represent only the macroeconomic feedbacks; the underlying 

changes in revenues and outlays that produced different paths for the deficit, and 

thus different macroeconomic conditions, were not specified in the report. 

The estimated macroeconomic feedback effects on primary deficits consist largely 

of changes in revenues; the estimated changes in primary outlays are relatively 

small. Changes in the amount of interest paid on federal debt held by the public 

are similar in magnitude to the changes in revenues. 

CBO estimated the additional deficit impacts resulting from macroeconomic 

feedbacks for that report using a simplified analysis that took into account changes 

in taxable income and interest rates, among other factors. That analysis did not incorporate a detailed program-by-program analysis, as do CBO’s regular budget projections. 

BUDGETARY IMPACT OF ECONOMIC EFFECTS OF ILLUSTRATIVE PATHS, 

FISCAL YEARS 2014 TO 2023, RELATIVE TO PROJECTIONS UNDER CURRENT LAW 

[Billions of dollars] 

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 

Total, 

2014– 

2023 

Increases (Ø) / Decreases (+) in Deficits 

$2 Trillion Increase in Primary Deficits 

Effect on primary deficits 

Revenues ............................................... 7 11 7 2 ¥5 ¥9 ¥13 ¥18 ¥23 ¥28 ¥70 

Noninterest spending ............................ * ¥1 * * 1 2 1 * * * 3 

Net effect on primary deficits .......... 7 12 8 2 ¥6 ¥11 ¥14 ¥18 ¥23 ¥28 ¥71 

Debt service ............................................... * ¥1 ¥3 ¥5 ¥5 ¥6 ¥9 ¥12 ¥16 ¥22 ¥79 
62 

1Stephanie Reigg Cellini and Claudia Goldin, Does Federal Student Aid Raise Tuition? New 

Evidence on For-Profit Colleges, Working Paper 17827 (National Bureau of Economic Research, 

February 2012), www.nber.org/papers/w17827. 

BUDGETARY IMPACT OF ECONOMIC EFFECTS OF ILLUSTRATIVE PATHS, 

FISCAL YEARS 2014 TO 2023, RELATIVE TO PROJECTIONS UNDER CURRENT LAW—Continued 

[Billions of dollars] 

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 

Total, 

2014– 

2023 

Effect on Total Deficits ......................... 7 11 5 ¥3 ¥11 ¥17 ¥23 ¥30 ¥39 ¥50 ¥151 

$2 Trillion Reduction in Primary Deficits 

Effect on primary deficits 

Revenues ............................................... ¥7 ¥11 ¥11 ¥4 4 9 13 17 22 28 61 

Noninterest spending ............................ * 1 2 1 * 1 2 2 2 2 13 

Net effect on primary deficits .......... ¥7 ¥12 ¥12 ¥5 3 8 12 16 20 26 47 

Debt service ............................................... * * 1 2 3 4 6 9 13 17 57 

Effect on Total Deficits ......................... ¥7 ¥12 ¥11 ¥3 6 12 18 25 33 43 103 

$4 Trillion Reduction in Primary Deficits 

Effect on primary deficits 

Revenues ............................................... ¥14 ¥23 ¥23 ¥13 7 18 26 34 44 55 112 

Noninterest spending ............................ * 2 3 2 * 1 2 2 3 4 19 

Net effect on primary deficits .......... ¥15 ¥25 ¥26 ¥15 6 17 24 32 41 52 92 

Debt service ............................................... * 2 2 2 3 6 10 16 22 30 94 

Effect on Total Deficits ......................... ¥14 ¥24 ¥24 ¥13 9 23 35 48 63 82 186 

Source: Congressional Budget Office. 

Notes: The illustrative paths are described in detail in Congressional Budget Office, Macroeconomic Effects of Alternative Budgetary Paths 

(February 2013), at the beginning of the section ‘‘Budget Deficits Under Three Illustrative Paths.’’ 

The primary deficit equals revenues minus noninterest spending. Debt service is the change in the deficit that would result from changes 

in the amount of interest paid on the public debt (including the effects of changes in interest rates). The effect on total deficits is the sum 

of the effect on primary deficits and debt service. 

Negative numbers indicate that deficits under the path are larger than those under CBO’s baseline, which incorporates an assumption that 

current laws generally remain unchanged; positive amounts indicate that deficits are smaller. 

* = between ¥1 and 1. 

CONGRESSMAN MESSER

Question 1: Do you believe the current rate of tuition inflation is driven in part 

by federal education subsidies? 

Answer: CBO has not studied the extent to which federal education subsidies affect tuition inflation. In fiscal year 2012, the federal government provided about 

$106 billion in direct student loans, $33 billion for Pell grants, and $9 billion for 

education benefits for veterans. That federal assistance probably has contributed to 

increases in listed tuition rates, at least in some cases. The potential for federal subsidies to contribute to higher tuition rates probably depends on the share of students receiving aid at different types of educational institutions—such as public, private nonprofit, and for-profit schools—as well as the institutions’ financial objectives 

and constraints. For-profit schools have the largest share of students receiving federal subsidies (64 percent in 2007—2008), and one study found that for-profit 

schools where students can use federal aid charge tuition 75 percent higher than 

similar schools where they cannot use federal grants.1 However, some unknown portion of that 75 percent difference may represent higher costs that schools incur to 

meet the Department of Education’s requirements for participation in federal student financial aid programs. 

Question 2: Might rising college costs be constrained by more carefully targeting 

and measuring the effectiveness of federal education assistance? 

Answer: To the extent that federal aid has an effect on tuition rates, reducing the 

amount of such aid could reduce the effect. If the same total volume of aid was targeted so that more of it went to students who would not otherwise attend college, 

it would be more effective in stimulating demand for postsecondary education but, 

as a result, would tend to increase any effect on tuition rates. CBO does not expect 
63 

2Lesley J. Turner, ‘‘The Incidence of Student Financial Aid: Evidence from the Pell Grant Program’’ (draft, Department of Economics, Columbia University, April 2012), www.columbia.edu/ 

?ljt2110/LTurner—JMP.pdf (1 MB). 3 Ibid. 

that increased monitoring or measurement of the effectiveness of federal assistance 

would have a significant impact on tuition rates. 

Question 3: What role has federal education assistance like Pell Grants played in 

subsidizing rising tuitions? 

Answer: CBO has not studied the effect that Pell grants or other federal aid has 

had on rising tuition. However, there is some evidence that federal assistance has 

been a factor in tuition rates at for-profit schools. The evidence for an impact of federal subsidies on tuition rates listed by other types of institutions is weaker, perhaps in part because such subsidies make up much lower shares of their total revenues. Data from a recent study of the Pell Grant program indicate that the grants 

account for 14 percent of revenues at for-profit schools eligible to distribute federal 

aid, 7 percent at nonselective public schools, 4 percent at nonselective nonprofit private schools, 2 percent at selective public schools, and 1 percent at selective private 

schools.2

A related question is the impact of federal education subsidies on the ‘‘net tuition’’ 

rates students face after subtracting their schools’ own financial aid from the listed 

tuition rates. The study on Pell grants estimated that institutions capture 16 percent of the value of the grants by reducing their own aid to recipients.3 However, 

the estimated capture rates varied widely, from essentially zero for public institutions to close to 80 percent for selective private schools. 

Question 4: CBO’s February baseline shows the Pell Grant program facing a funding cliff in fiscal year 2015 and annual shortfalls in subsequent years through the 

budget window. Do you believe the current structure of this important program is 

sustainable? 

Answer: Under current law, funding for the Pell Grant program comes from both 

discretionary and mandatory sources. In 2009, the Congress began supplementing 

the discretionary portion of the program with funding provided outside the regular 

appropriation process. The combination of supplemental funds and the budget authority provided in the regular appropriation process allowed the discretionary portion of the program to support a maximum award level of $4,860. In the future, 

maintaining the award level at $4,860 would require either large increases in the 

regular appropriations (which would have to be accommodated under the annual 

caps on discretionary spending enacted as part of the Budget Control Act of 2011) 

or significant additional supplemental funding. 

[Whereupon, at 12:44 p.m., the committee was adjourned.] 

Æ