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40–339 PDF 2008

THE CONGRESSIONAL BUDGET OFFICE’S

BUDGET AND ECONOMIC OUTLOOK

HEARING

BEFORE THE

COMMITTEE ON THE BUDGET 

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

HEARING HELD IN WASHINGTON, DC, JANUARY 23, 2008

Serial No. 110–28

Printed for the use of the Committee on the Budget

(

Available on the Internet: 

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

(II)

COMMITTEE ON THE BUDGET 

JOHN M. SPRATT, JR., South Carolina, Chairman 

ROSA L. DELAURO, Connecticut, 

CHET EDWARDS, Texas 

JIM COOPER, Tennessee 

THOMAS H. ALLEN, Maine 

ALLYSON Y. SCHWARTZ, Pennsylvania 

MARCY KAPTUR, Ohio 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL BLUMENAUER, Oregon 

MARION BERRY, Arkansas 

ALLEN BOYD, Florida 

JAMES P. MCGOVERN, Massachusetts 

NIKI TSONGAS, Massachusetts 

ROBERT E. ANDREWS, New Jersey 

ROBERT C. ‘‘BOBBY’’ SCOTT, Virginia 

BOB ETHERIDGE, North Carolina 

DARLENE HOOLEY, Oregon 

BRIAN BAIRD, Washington 

DENNIS MOORE, Kansas 

TIMOTHY H. BISHOP, New York 

GWEN MOORE, Wisconsin 

PAUL RYAN, Wisconsin, 

Ranking Minority Member 

J. GRESHAM BARRETT, South Carolina 

JO BONNER, Alabama 

SCOTT GARRETT, New Jersey 

MARIO DIAZ–BALART, Florida 

JEB HENSARLING, Texas 

DANIEL E. LUNGREN, California 

MICHAEL K. SIMPSON, Idaho 

PATRICK T. MCHENRY, North Carolina 

CONNIE MACK, Florida 

K. MICHAEL CONAWAY, Texas 

JOHN CAMPBELL, California 

PATRICK J. TIBERI, Ohio 

JON C. PORTER, Nevada 

RODNEY ALEXANDER, Louisiana 

ADRIAN SMITH, Nebraska 

[Vacancy] 

PROFESSIONAL STAFF

THOMAS S. KAHN, Staff Director and Chief Counsel 

AUSTIN SMYTHE, Minority Staff Director 

(III)

C O N T E N T S

Page 

Hearing held in Washington, DC, January 23, 2008 ............................................ 1

Statement of: 

Hon. John M. Spratt, Jr., Chairman, House Committee on the Budget ..... 1

Hon. Paul Ryan, ranking minority member, House Committee on the 

Budget ............................................................................................................ 2

Hon. James P. McGovern, a Representative in Congress from the State 

of Massachusetts, letter submitted by ........................................................ 4

Peter Orszag, Director, Congressional Budget Office .................................... 7

Prepared statement of ............................................................................... 16

(1)

THE CONGRESSIONAL BUDGET OFFICE’S 

BUDGET AND ECONOMIC OUTLOOK 

WEDNESDAY, JANUARY 23, 2008

HOUSE OF REPRESENTATIVES, COMMITTEE ON THE BUDGET, Washington, DC. 

The committee met, pursuant to call, at 10:04 a.m., in room 210, 

Cannon House Office Building, Hon. John M. Spratt Jr. [chairman 

of the committee] presiding. 

Present: Representatives Spratt, Edwards, Cooper, Schwartz, 

Becerra, Doggett, Blumenauer, Berry, Boyd, McGovern, Scott, 

Etheridge, Moore of Kansas, Bishop, Moore of Wisconsin, Ryan, 

Barrett, Hensarling, Lungren, Conaway, Campbell, Tiberi, Alexander and Smith. 

Chairman SPRATT. Let me call the hearing to order and welcome 

our witness this morning. 

Dr. Orszag, as always, we are glad to have you and thank you 

for coming. Today you are here to lay out your latest forecast or 

outlook on the budget and economy released just this morning. We 

are pleased to have your perspective on recent developments in the 

economy and how these changes have affected the Federal budget 

and are likely to affect it further. 

Given current discussions about economic stimulus proposals in 

your release on that subject last week, I expect that our members 

will have questions about the various roles that fiscal policy can 

play in firing up our faltering economy. Your budget and economic 

outlook offered some sobering projections on the short-term and 

long-term fronts. For the short-term, CBO’s economic forecast has 

grown noticeably more pessimistic since last August, and a number 

of ominous economic signs have emerged since CBO finalized last 

month the forecast underlying today’s report. Unemployment has 

spiked in 1 month from 4.7 to 5 percent. December retail sales, all 

important, actually fell by four-tenths of a percentage point from 

the prior month. And yesterday the Fed felt compelled to make an 

uncommon if not unprecedented cut of 75 basis points in the Fed 

funds rate. 

Today’s new economic forecast adds to the growing evidence that 

the country and that the economy has weakened and that we as 

policymakers must and should take action. Meanwhile, CBO shows 

the deficit for fiscal 2008 is larger than the deficit for fiscal 2007, 

and the ’08 deficit is actually $64 billion worse in this projection 

than in the projection you made last August. Over the long term, 

CBO’s 10-year forecast is worse and relative to August by $850 billion on an apples-to-apples basis. 

2

Because yours is a baseline forecast, it does not include the full 

deficit impact of all of the administration’s policies and the budget 

that they will send us in a few weeks. For example, your forecast 

does not include the roughly $4 trillion impact on revenues which 

will be occasioned by the President’s tax cut agenda or the full cost 

of ongoing operations in Afghanistan and Iraq. Under administration policies, the $5.6 trillion surplus projected 

in 2001 has collapsed, vanished, been replaced by deficits which are 

nearly equal in amount and which have complicated our efforts, a 

response to the current slow down in the economy. Today’s report 

provides the latest evidence that we should act and act now to 

strengthen the economy and that we should do so in a way that 

is mindful however of the long-term budget challenges, the structural deficits that we face unless we act and act seriously. 

This report reminds us also that the President’s budget policies, 

particularly his deficit financed tax cuts, have significantly increased the national debt and make it harder to address our longterm challenges. 

So, Dr. Orszag, we have a lot on our plate this morning, a lot 

to discuss with you, a lot of questions to ask. We look forward to 

your testimony, your answers to the questions that we will ask and 

follow. And before turning to you for your testimony, however, I 

want to recognize Mr. Ryan for any opening statement that he may 

wish to make. 

Mr. Ryan. 

Mr. RYAN. Thank you, Chairman Spratt. 

And welcome back, Director Orszag. 

Over the past few years, I think it is—we have almost come to 

expect good news when it comes to our near-term deficit projections 

at every one of these hearings we have had. We have seen dramatic 

declines in the deficit well below projections for each of the last 3 

years. In fact, last year at this time we found ourselves on what 

many describe as a glide path to near-term balance as a result of 

our economy’s performance. So it is no surprise that we began taking this trend for granted. We simply expected that our economy 

would keep cranking along, creating jobs, boosting revenues and 

driving down deficits. 

But today I understand that Director Orszag is here to tell us 

otherwise. CBO is projecting the Federal deficit will increase this 

year largely as a result of the economic slow down and the drag 

it is going to place on revenue growth. For the past few weeks 

there have been broad discussions on how best to address the economic downturn. And there is bipartisan consensus that the Federal Government can and should respond. 

But even while the President announced that we should act 

quickly to move an economic growth package, the exact contents of 

that package is obviously not yet resolved. As I noted last week, 

I believe there are several key principles we need to keep in mind. 

First, do no harm. I am concerned that in our rush to help we will 

talk ourselves into a quick feel-good hit today that will leave us 

with a bigger budgetary hangover tomorrow. Second, we need to 

get the fundamentals right. That means keeping tax rates low and 

spending under control both in the short and longer term. That is 

the best prudent recipe for real long-term economic growth. Third, 

3

we need to understand that we simply cannot spend our way to 

prosperity. I am particularly concerned that Congress will be 

tempted to use the excuse of fiscal stimulus to push through a wish 

list of new spending, further worsening our budget outlook and our 

nation’s economic future. In short, I believe that in addressing the 

current economic concerns, we have got to keep our focus on good 

economic policy that lasts beyond the next few quarters. 

On a final note and to be clear, this is in no way a criticism of 

the CBO. While the information we receive today is critical for 

drafting our budgets, we have got to recognize the limitations of 

something we call the baseline. The baseline concept, under which 

CBO formulates its projections, includes a built-in double standard 

favoring higher spending and higher taxes. In general, the baseline 

assumes that spending, even if scheduled to expire, goes on forever 

while tax relief is always temporary. As a result, extending the 

spending programs has no impact on baseline deficit while extending tax relief is shown as causing an increase in the deficit. Assuming revenues from the AMT or the expiration of the current tax relief in 2010 simply because they are baked into something called 

the baseline should not serve as an excuse to impose job-killing tax 

increases on our nation’s economy. 

To conclude, as we look at the current economic conditions as 

well as CBO’s longer term forecast, we should pursue policy that 

maintain low tax rates; keeps spending under control; and works 

to address the long-term unsustainable growth in our major entitlement programs. Those are the things we should keep our eye on. 

And I appreciate the Chairman for his indulgence. 

Chairman SPRATT. Thank you, Mr. Ryan. 

Dr. Orszag, the floor is yours. Before you begin, however, let me 

attend to a couple of housekeeping details. First let me say that 

your statement will be made in full part of the record so you can 

summarize it as you see fit. But I would encourage you, as I did 

earlier, to take your time and to walk us through this as carefully 

and deliberately as you see fit. 

Secondly, I would ask unanimous consent that all members be allowed to submit an opening statement for the record at this point. 

There is no objection; so ordered. 

[A letter submitted by Mr. McGovern follows:]

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Dr. Orszag, thank you again for coming. We look forward to your 

testimony. 

STATEMENT OF PETER P. ORSZAG, DIRECTOR, 

CONGRESSIONAL BUDGET OFFICE 

Mr. ORSZAG. Mr. Spratt, Mr. Ryan, members of the committee, 

my testimony this morning will focus on the economic and budget 

outlook. First, the economy has been buffeted by several interlinked shocks, and the risk of recession is significantly elevated relative to normal economic conditions.


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As my first chart shows, there was a dramatic run-up in housing 

prices during the first half of this decade, but housing prices have 

started to decline, and most forecasters expect further drops this 

year. The weakening of the housing sector directly affects the economy by reducing residential investment and indirectly affects the 

economy through reduced consumer spending as a result of lower 

housing wealth. 

Moreover, problems in the housing markets and mortgage markets have spilled over into broader turmoil in financial markets 

which poses the risk of impeding the flow of credit essential to a 

modern economy.

Energy prices have also risen substantially as the next chart 

shows. Although the effect of an increase in the price of oil on the 

macroeconomy today is smaller than it was in the 1970s and 1980s, 

the rise in oil prices is still an economic drag. The combination of 

these forces has not yet fully manifested, themselves; although the 

unemployment rate has ticked up. Indeed, as the next chart shows, 

the 3-month moving average unemployment rate has now risen 0.4 

percentage points, almost a half a percentage point, above its level 


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relative to the same period last year, which as you can see from 

the graph has only and always occurred in periods associated with 

a recession, which are those dark bars in the graph. You can see 

that the only times that we have crossed that 0.4 percentage point 

horizontal line is during those dark bars, which are recessions.

On the other hand, other measures of the labor market that have 

typically accompanied such a large increase in the unemployment 

rate at the onset of a recession have not behaved as they have in 

the past. For example, unemployment insurance claims typically 

spike up at the beginning of a recession, and they have not done 

so thus far in recent experience.

Especially with the most recent and notable action by the Federal Reserve yesterday, many professional forecasters are projecting continued, albeit sluggish, economic growth in 2008 rather 

than an outright recession. And one force leading to that conclusion 

has been net exports. Thus far, as the next chart shows, the depreciation of the dollar, which is a necessary part of the gradual adjustment of our current account deficit, has itself been gradual, and 

that has helped to stabilize and, along with growth abroad, even 


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slightly improve the current account deficit, which is shown in the 

next chart. That force has—and rapid growth in real exports is 

helping to provide a cushion or a boost to the economy.

The bottom-line is that the risk of recession is substantially elevated, but CBO expects, along with most professional forecasters, 

a period of unusually weak growth rather than outright recession. 

In particular, CBO expects growth for the year as a whole of under 

2 percent, as the next chart shows, and a rise in the unemployment 

rate to an average of 5.1 percent during 2008.

A reflection of this general slowing in economic activity can be 

seen in job growth. In 2005, job growth averaged 220,000 per 

month. It fell in half last year to an average of 110,000 per month. 

CBO projects that during the first half of 2008, it will fall in half 

yet again to an average of 55,000 per month during the first half 

of this year.


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Let me now turn to the budget outlook. As a result of the slowing 

economy, we have already seen some slowing of revenue growth, as 

the next chart shows, especially in corporate income taxes. And 

CBO expects some further slowing this year. Indeed we expect corporate income taxes to decline in nominal terms this fiscal year relative to last year. We now have information for corporate tax receipts during January and project that again in January we will 

have a year-over-year decline in corporate tax receipts—the seventh month in a row in which that occurred. This is particularly 

notable because a lot of the fiscal improvement between 2003 and 

2006/7 occurred because of a very sharp rise in corporate income 

tax revenue.

Our baseline suggests that after 3 years of declining deficits, a 

slowing economy will boost the deficit to $219 billion this year, as 

the next chart shows, which amounts to 1.5 percent of GDP or 1.5 

percent of the economy, which is up from 1.2 percent last year. If 

policymakers fund the additional appropriations for Iraq and Afghanistan that the administration has requested, that deficit would 

rise to—this year to about $250 billion. And if policymakers adoptVerDate 0ct 09 2002 20:31 Apr 01, 2008 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6602 J:\DOCS\HEARINGS\110TH\110-28\40339.TXT HBUD1 PsN: DICK

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ed some fiscal stimulus measures, the deficit this year could rise 

significantly above that. And indeed, at least from the perspective 

of short-term stimulus, that would be one of the objectives of providing such stimulus. Thereafter, under our baseline, which assumes a growing impact of the alternative minimum tax and the 

expiration of the 2001 and 2003 tax legislation, the budget moves 

towards balance in 2012.

However, as both Mr. Spratt and Mr. Ryan have already noted, 

that baseline is often viewed as being unrealistic because policy 

changes that are widely viewed as likely to occur are not incorporated into it. In particular, for example, the baseline assumes no 

further relief from the alternative minimum tax and, therefore, 

that the number of taxpayers on the alternative minimum tax will 

rise from 4 million last year to 26 million this year and continue 

rising thereafter as you can see on the chart. If, instead of making 

that assumption, you assumed relief from the AMT was continued, 

you assume that the 2001 and 2003 tax legislation is continued 

past its official expiration in 2010, that you adopt one of the scenarios we have put together for the future war—global war on terrorism and you assume that discretionary spending keeps pace 

with economic growth and not just inflation, the next chart shows 

you that you get a much different path for the projected deficit 

than what the baseline shows. And indeed, under that scenario, the 

cumulative deficit, instead of being a surplus of $274 billion between 2009 and 2018 under our baseline, would show a deficit of 

$6.3 trillion or about 3.5 percent of GDP.


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So many of the policy changes that are under discussion clearly 

have a fairly significant effect on budget projections over the next 

10 years. Even over the next 10 years, furthermore, the nation’s 

longer-term budget pressures begin to manifest themselves. Caseloads on both Medicare and Social Security are projected to rise, as 

the next chart shows. Social Security beneficiaries, for example, 

rise from 50 million in 2008 to 64 million in 2018 as the first wave 

of the baby boomer generation becomes eligible for Social Security 

retirement benefits. Projected increases in caseloads, however, only 

account for about 30 percent of the growth in mandatory spending 

over the next decade. More fundamentally, the cost per beneficiary 

in Medicare is projected to continue rising rapidly, more rapidly 

than income. And you can see a significant difference even over the 

next decade, as the next chart shows, in the growth of Medicare 

and Medicaid spending, which is being driven by those rising 

health care costs, and the growth in Social Security, even though 

the increase in beneficiary roles is similar under Medicare and Social Security.


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Those projections continue, as the next chart shows, under our 

long-term budget projections that we released in December. And 

the conclusion is reinforced even more dramatically that that light 

blue area, Medicare and Medicaid spending in particular, is the key 

to our fiscal future. And we project, under our long-term budget 

projections, that Medicare and Medicaid spending under current 

law would rise from about 4.5 percent of the economy today to almost 20 percent of the economy by 2082 without a change in policy.

If you combine those spending projections with a revenue path 

that takes the 2007 tax parameters and projects that forward, you 

can combine them into what is called the fiscal gap, which is the—

basically the summarized difference between projected spending 

and projected revenue. And as the next chart shows you, over the 

next 75 years, that gap amounts to 7 percent of the economy, which 

is a very large number. What that tells you is that you would need 

to raise taxes or cut spending by 7 percent of GDP—and remember 

that both of those are about 20 percent now—in order to avoid a 

significant and unsustainable increase in government debt over the 

next 75 years.


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Most of that increase is not due to demographics, as the next figure shows. The bottom blue bars there are the pure effects of an 

aging population. And while that is important, by far a more important factor is the rate as which health care costs are growing. 

That is the single most important variable affecting our long-term 

fiscal future. 

Finally, given the short-term economic difficulties that we face 

and the very serious long-term fiscal imbalances that I have just 

highlighted, let me end briefly by discussing the report that CBO 

wrote for this committee and the Senate Budget Committee on fiscal stimulus options. In particular, when the economy is experiencing unusual weakness, as it appears to be today, the key constraint on economic growth is demand for the goods and services 

that firms could produce with existing resources. In most circumstances, by contrast, and certainly over the long term, the key 

constraint on economic growth is the rate at which those resources 

are expanded through forces like increases in capital and workforce, labor and improvements in productivity. When the constraint 

on short-term economic growth—on growth is aggregate demand—

and again, those kinds of periods are unusual—both monetary and 

fiscal policy can help by boosting spending. 

On the fiscal policy side, the automatic stabilizers built into the 

budget will help to attenuate any economic downturn by providing 

a cushion to after-tax income. The question is whether additional 

fiscal action is necessary. One way to think about it is that fiscal 

stimulus can help provide insurance against the risk and severity 

of a possible recession. Our estimates suggest that stimulus of between a half and 1 percent of GDP or so—that is roughly $75 to 

$150 billion or so—would reduce the elevated risk of recession to 

more normal levels as long as the stimulus is well designed. 

And that brings me to design questions. The stimulus need not 

be targeted at what caused the economic weakness in the first 

place. Instead, the key is that it bolsters aggregate demand and 

thereby helps to jump start a positive cycle of increased demand 

leading to increased production until the constraint once again becomes how much we are willing to produce or how much we can 

produce rather than how much we are willing to spend. We laid out 

some principles that can help guide policymakers interested in designing a package in as cost effective manner as possible, and it 

would have at least three central principles. First, it would be delivered rapidly. You do not want to be delivering additional stimulus to aggregate demand after the economy is already growing 

rapidly because all you would succeed in doing is stoking inflationary pressures and you would miss the period in which economic 

weakness was the key constraint on growth. Second, it would be 

temporary. As I just mentioned, we face a very serious long-term 

fiscal imbalance, and one would want to avoid exacerbating that 

long-term fiscal gap. And finally, it would be cost effective in the 

sense of boosting aggregate demand as much as possible at a given 

budgetary cost. And our report to this committee and the Senate 

Budget Committee evaluated various options according to that criterion also. 

Thank you very much, Mr. Chairman. 

[The prepared statement of Peter R. Orszag follows:]

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Chairman SPRATT. Let me start with what is in the context of 

what is happening right now, relatively good news, and ask you 

how confident you feel about it. You are projecting, as I understand, 1.7 percent real growth in GDP for this year. Are you comfortable with that projection? 

Mr. ORSZAG. For the year as a whole, yes. We have weaker 

growth in the first half of the year, somewhat stronger growth in 

the second half of the year. I would note that that projection is 

below the most recent Blue Chip forecast. It is below a somewhat 

older administration forecast. We will continue to monitor economic 

conditions and adjust our thinking as warranted. But at this point, 

I would not—I would not adjust that. 

Chairman SPRATT. Let me also go back to where we were at the 

outset of your testimony in trying to explain that this is a baseline 

budget projection and read what you say on the first page, just for 

reiteration: CBO’s baseline budget projections for the next 10 years 

are not a forecast of future outcomes; they are based on the assumption that current laws and policies will remain the same. The 

projections themselves stem from long-standing procedures that 

were, until recently, made law—part of the law. 

In other words, you are saying that you are not trying to predict 

the future here. You are taking the existing situation, assuming 

they will be carried forward into the future at least 5 years—in 

some cases 10 years—and showing us the cumulative and aggregate effects of that assumption? 


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Mr. ORSZAG. That is correct. This baseline is useful for legislative 

purposes for evaluating the cost of legislative changes relative to 

the baseline. But it is not a prediction of the future because policy 

will change. 

Chairman SPRATT. Let’s take the adjustments for the alternative 

scenario that you referred to in your testimony and lay out in your 

book. First of all, with respect to tax cuts, if we assume that the 

tax cuts that were affected—enacted in ’01 and ’03 were renewed 

and carried forward after expiring on December 31, 2010, what is 

the effect on the bottom-line of your budget? 

Mr. ORSZAG. There is a roughly $2.2 trillion revenue effect from 

those provisions, and then there is also an interaction with the alternative minimum tax. 

Chairman SPRATT. Okay. We will come back to the interaction 

then. 

How about other extenders, not those that were enacted in ’01 

but tax provisions like the revenue—the research and development 

tax credit? If these are extended as they typically are, what is the 

impact on revenue of extending these tax measures—tax cut measures? 

Mr. ORSZAG. $481 billion over the 10-year window. 

Chairman SPRATT. $481 billion. Now the AMT, the alternative 

minimum tax, we fixed for 2 or 3 years running, and there seems 

to be a consensus in both parties amongst us all that it should not 

be applied to middle income taxpayers for whom it was never intended in the first place and comes down on pretty heavily. If we 

fix it to lock in place its current impact so that it affects 4 to 5 percent of all tax filers but no more, what is the impact on revenues 

of fixing the AMT in that fashion? 

Mr. ORSZAG. Approximately $650 billion. And then, as I mentioned before, if you did that and also extended the 2001 and 2003 

tax legislation, there is an additional $550 billion interaction effect. 

Chairman SPRATT. Now, there are some other things that we are 

doing year to year as we try to find room in the budget for doing 

permanent solutions. One is a sustainable growth rate factor under 

physicians’ reimbursement, under Medicare. Could you give us a 

rough back-of-the-envelope estimate of what it would cost if we 

were to simply dispense with that or at least mitigate its effect so 

it doesn’t apply in the future years? 

Mr. ORSZAG. Yes, it is a couple hundred billion dollars. But let 

me get you the exact figure in a second. Depending on how you did 

it, it would be somewhere between $250 and $325 billion. And, in 

fact, it could be slightly larger than that if you also held Medicare 

beneficiaries harmless from the increase in their Part B premiums 

that would follow. 

Chairman SPRATT. Okay. Now, with respect to spending that we 

have the most control over, which we call NDD, nondefense discretionary spending, you have assumed, in my opinion, fairly stringent 

conditions for the growth of this spending over the next 5 to 10 

years. You are assuming in your forecast that it will grow with the 

rate of inflation but not with the rate of GDP. Over 5 years, what 

is the impact of that on negative cumulative NDD, nondefense discretionary spending? 

23

Mr. ORSZAG. I actually have the figure for total discretionary 

spending. We can get it for the split. For total discretionary spending over 10 years, it is approximately $1.4 trillion. 

Chairman SPRATT. Okay. So you have already squeezed that 

much spending——

Mr. ORSZAG. You can divide that roughly in half. 

Chairman SPRATT. Okay. You squeeze that much spending out of 

NDD. What about the war in Iraq and Afghanistan? What assumption do you make about its cost? 

Mr. ORSZAG. The baseline takes whatever has been enacted as of 

our projections and projects that forward. So we have $88 billion 

in enacted appropriations for the war on terrorism, and that is 

spent out and projected forward in the baseline. 

Chairman SPRATT. So the administration requested in a special 

supplemental $193 billion. Of that, $88 billion has been provided 

and appropriated thus far. That leaves 105 to go if the administration’s full request is appropriated. You are backing both of those 

out? You are leaving the 88 in for 2008——

Mr. ORSZAG. Correct. 

Chairman SPRATT. And assuming that the 105 will be forthcoming? 

Mr. ORSZAG. No, sir. If the $105 billion occurs, there would be 

roughly another $30 billion in outlays that—in other words, if you 

provided another roughly $100 billion this year, about $30 billion 

would be spent this year with the remainder being spent largely 

next year. And that was the difference between our baseline deficit 

of $219 billion. If you provided the extra $105 or roughly $100 billion that the administration has requested, about $30 billion would 

spend out this year. That would bring the deficit to about $250 billion. 

Chairman SPRATT. I think you have got a net sum impact of $981 

billion for your baseline assumption—your modeled assumption 

about the cost of Iraq and Afghanistan? 

Mr. ORSZAG. That is correct, sir. 

Chairman SPRATT. Does that involve building down methodically 

to a level of about 75,000 troops in the two theaters and then continuing along a steady and safe basis at that level? 

Mr. ORSZAG. No. Based on the rules that govern the baseline, you 

just take what has been enacted and project that forward. We also 

provide different policy scenarios that you can compare things to, 

and we do provide one in which the troop levels are reduced to 

30,000 by 2010 and another in which they are reduced to 75,000 

by 2013. In the scenario in which they are reduced to 75,000 by 

2013, there would be an additional $120 billion of increased deficit 

as a result relative to the $981 billion that you pointed out. 

Chairman SPRATT. Let me show you our notorious eye chart. It 

is back. 

Could we get the eye chart on the screen? This tests your visual 

acuity. That is why we call it the eye chart.

24

Mr. ORSZAG. I am glad I got new glasses. 

Chairman SPRATT. The main reason we do this is to show you 

the number we derive here isn’t coming off the seat of our pants. 

We actually did some arithmetic. It may be a bit-back-of-the-envelope-ish, but nevertheless, after doing the things that we just ran 

through—assuming the renewal of the tax cuts, assuming your assumption about modeling the cost of continuing missions in Iraq 

and Afghanistan, assuming what you assume about NDD and everything—we come up with a net addition to the deficit of $4.7 trillion. I can’t even see it myself. I think that is the number, $4.7 trillion. 

Mr. ORSZAG. Yes, sir. Rounds to 4.8, but okay. 

Chairman SPRATT. Are we in the same ballpark then? 

Mr. ORSZAG. Yeah. The scenario that I showed was slightly different. I think—I am not sure that you have discretionary spending 

growing with GDP there. But in any case, yes, the numbers are, 

you know, somewhere $4 to $6.5 trillion under these alternative 

scenarios, depending on exactly what you assume. 

Chairman SPRATT. If I picked up your testimony—walked in off 

the street and picked up your testimony and looked at table 1, I 

would say that, well, the near term looks a little dire; the bottom 

line is still pretty substantial, $219 billion this year, which is worse 

than last year, $163 billion. But by 2012, it appears that the budget will be in the black. But that is based upon some assumptions 

that are not likely to be obtained politically around here. And when 

we make those assumptions, instead of having an $87 billion surplus, we could have a 2 or 3 or $400 billion deficit easily by that 

point in time if we do indeed extend the tax cuts, extend the extenders, continue our mission in Iraq and Afghanistan and make 

the other policy decisions that are reflected in the total; is that correct? 

Mr. ORSZAG. That is correct. 

Chairman SPRATT. So it is a pretty dire forecast in that sense? 

Mr. ORSZAG. With those set of policy changes—and even the medium-term fiscal outlook is not pretty. And I just come back again 

to, regardless of whether you use the baseline or an adjusted set 

of projections for the medium term, the long-term fiscal picture is 

quite dismal. 


eye.eps
25

Chairman SPRATT. Thank you very much, Sir. 

Mr. Ryan. 

Mr. RYAN. Doctor—Director Orszag, let me just go with a couple 

of quick questions first and then some other maybe lengthier ones. 

In your macroeconomic forecast on GDP growth, I think—in your 

table 2.1, you have 3.1 percent nominal GDP growth in the first 5 

years and then 2.5. In those growth forecasts, do you project any 

macroeconomic feedback from expiring—the expiration of tax cuts 

and the and the imposition of AMT? 

Mr. ORSZAG. There is, especially after the expiration of the 2001 

and 2003 tax legislation, some incorporation of the effects on labor 

supply. 

Mr. RYAN. On labor supply? 

Mr. ORSZAG. 2011, 2012. 

Mr. RYAN. How does that effect growth, nominal GDP growth 

projections? Will it increase it or decrease it by much, if any? 

Mr. ORSZAG. It has a relatively small effect because there are two 

offsetting things: Reduced marginal tax rates help to encourage 

work and that boosts GDP. On the other hand——

Mr. RYAN. So you are saying your GDP numbers don’t reflect 

much change in your projection of economic growth based on the 

expiration of these tax cuts? 

Mr. ORSZAG. They reflect our best estimates of the economic effects, which are small. 

Mr. RYAN. Okay. So if we had the largest tax increase in the history of earth, largest tax increase in the history of our country, we 

don’t think it is going to do much to change the economy? 

Mr. ORSZAG. Again, there are two offsetting effects. There is the 

one that you are thinking about. 

Mr. RYAN. The practical result, you are saying——

Mr. ORSZAG. On net. At least after—you know, after the system 

is sort of—after a few years, I would not expect a major—and I 

want to be clear about what we are comparing. We are comparing 

a world with larger deficits and tax—a lower level of taxes to a 

world with smaller deficits but higher revenue. 

Mr. RYAN. But in the current law world, which current law says we are going to have about a $4.5 trillion tax increase for 10 years 

starting in 2010, in that current law world, you don’t think it does 

much to affect the growth of the economy? 

Mr. ORSZAG. That is our estimate, yes. 

Mr. RYAN. Okay. Thank you. Your forecast on war supplemental 

spending—and I know you have to just basically peg this. You 

take—I am trying to understand what this year’s baseline is. It is 

$88 billion in war spending, which is the last bridge fund; is that 

correct? 

Mr. ORSZAG. Yes. 

Mr. RYAN. And you carry that out for 10 years and have an inflation adjuster in it as well? 

Mr. ORSZAG. Right. 

Mr. RYAN. So you are projecting that we are going to spend $88 

billion carried out through 2018 with inflation? 

Mr. ORSZAG. Well, technically there is—we also have the spendout of previous appropriations that have not yet resulted in outlays. But conceptually, yes. That is correct. 

26

Mr. RYAN. Does that figure include some of the one-time things 

like MRAD purchases? You know, we are not going to continually 

buy, you know, $8 billion of MRADs every year. Does that include 

these sort of one-time purchases in that figure? 

Mr. ORSZAG. Yes. Whatever has been appropriated is included; 

and whatever hasn’t, is not. 

Mr. RYAN. Okay. Let me turn to this—the talk about a stimulus 

package. You are hearing a kind of a consensus emerge it seems 

on both sides of the aisle, both from the administration and leaders 

of both parties, that it ought to be timely, targeted and temporary, 

the three Ts. I think that is what—I think former Secretary Summers was the guy who coined that phrase. Is transportation and infrastructure good stimulus based on the three Ts? 

Mr. ORSZAG. We ranked infrastructure spending in general as 

small cost effectiveness, i.e., not good stimulus, because in general 

those projects do not spend out very rapidly. 

Mr. RYAN. What about State fiscal assistance, such as money 

through a Medicaid program or things like that? Does that—how 

does that rank in the three Ts? 

Mr. ORSZAG. We rank that as medium in terms of cost effectiveness. And the reason is, it depends on what States do with the 

money. To the extent that providing a dollar to a State causes a 

State not to raise taxes or not to cut spending, that can turn out 

to be effective stimulus. But the States currently are in much different fiscal positions. And so to boost the cost effectiveness of 

State fiscal relief, you would have to target the States experiencing 

the most fiscal difficulty. And just a general program of fiscal relief 

would not really do that. 

Mr. RYAN. Okay. What about food stamps? Some have advocated 

food stamp increases are necessary to spur the economy. Won’t 

there be a temptation to make the food stamp increase permanent 

since that is kind of how we typically treat spending around here? 

And can it really be designed to be temporary? And is that, in your 

opinion, a great injection of timely, temporary economic growth? 

Mr. ORSZAG. Let me answer that in two different ways. The first 

is, in terms of short-term stimulus, food stamp benefit increases 

are relatively cost effective because you can get the money out the 

door fast and the money will be spent. 

You are raising a different set of considerations which are for you 

and not for me, which is whether it is plausible that having done 

that you would then reduce the benefit levels back down to their 

previous levels. My understanding is that that may be somewhat 

more plausible if it were done at the time when the benefit levels 

are adjusted each year so that you just don’t increase them, for example. But I would have to defer to you on whether that is, from 

a political economy perspective, is viable. 

Mr. RYAN. What about LIHEAP? Is that a good mechanism for 

fiscal stimulus? 

Mr. ORSZAG. In general, no. And the reason is that it is difficult 

to significantly expand the program rapidly, especially where we 

are in the winter season. I have seen some proposals that very substantially expand it, and it seemed like they are almost off by a 

decimal point. 

27

Mr. RYAN. Unemployment assistance, your report notes that extending unemployment assistance—assistance can keep unemployment levels high. Is this an effective way—putting aside the moral 

component of extending unemployment assistance from the economic standpoint, is this an effective way to address one of our 

major concerns in a weak economy, high unemployment? Is that a 

good way to create jobs? 

Mr. ORSZAG. From the perspective of short-term stimulus, extending unemployment benefits or raising their level is relatively 

effective, again, because it gets cash to people who will spend the 

money quickly. There is a tension, though, as I tried to highlight, 

between what is good short-term stimulus and what is good longterm economic policy. And those kinds of proposals may illustrate 

that point clearly because—especially during periods of economic 

strength, extending unemployment benefits or raising their level 

does increase the level of unemployment. It is not so clear that that 

effect holds during periods of economic weakness to the same degree. But that illustrates the tension, something that might be 

good in terms of boosting an economy when it is weak and getting 

money out the door and having it spent rapidly may not be what 

you want to do over the long term. 

Mr. RYAN. And then one last thing. The baseline—I am trying to 

get through the baseline. There is something that I want to get at. 

The baseline—last month, we passed a—the discretionary spending. We had the omnibus bill. And through yesterday, you—it was 

scored as the top line being $933 billion. So I think most of us who 

voted for the omnibus appropriations bill—I am not saying—I actually didn’t vote for it. But those of us who watched this process 

occur believe that we spent $933 billion. However, my understanding is that your baseline report shows an FY 2008 regular 

nonemergency discretionary top line of $941 billion in budget authority, a difference in $8 billion. And then you inflate off this 

higher number in making out-year projections. Can you explain 

why there is an $8 billion difference between the $933 billion number CBO scored for FY 2008 appropriations and the amount you 

are now showing in your baseline? 

Mr. ORSZAG. The difference has to do with changes in mandatory 

programs that are attached to appropriations bills. In 2008, those 

changes in mandatory programs, or what is called CHIMPS, totalled $7.8 billion. And that offset the discretionary spending 

amounts. The gross discretionary spending amounts, even the ones 

that were offset by those CHIMPS are projected out in our baseline, and they do increase our discretionary outlays over the next 

decade by about $85 billion. 

Mr. RYAN. One of those bigger CHIMPS is highway authority; 

correct? 

Mr. ORSZAG. That is correct. 

Mr. RYAN. And when we expire highway authority, is there actually real cash savings to the government when that occurs? 

Mr. ORSZAG. The savings are in the scoring process. They show 

up in the scoring process. But because that activity is actually governed by obligation limits, the practical impact is unclear. 

Mr. RYAN. Well, I think I have been liberal with my time. I appreciate your indulgence, Chairman. But I think this is something 

28

we ought to look at here in the committee. I think we are plowing 

some hollow savings into this baseline and inflating from there on 

out. I understand you have rules that govern the way you do this. 

But I think this is something that this committee ought to be cognizant of. 

Thank you. I yield. 

Chairman SPRATT. Mr. Edwards. 

Mr. EDWARDS. Thank you. 

Dr. Orszag. I know your presentation today is focused on longterm economic and fiscal policy and budgets. But with the nation’s 

eyes attuned to the present economic challenges we face, let me 

just be clear that—do you basically agree with Chairman 

Bernanke’s testimony before this committee last week that a tax 

stimulus in the range of $100 to $150 billion could have a significant impact on minimizing or reducing the economic downturn or 

perhaps even preventing a recession? Is it large enough in a $14 

trillion economy to have a significant impact? 

Mr. ORSZAG. As I mentioned—I should say, it need not just be 

tax stimulus, but stimulus in general of about that magnitude, if 

well designed according to our estimates, would reduce the risk of 

recession from its elevated levels now to somewhat more normal 

levels. So in terms of recession insurance, that kind of magnitude, 

if that is what you wanted to do, would be appropriate. 

Mr. EDWARDS. It could be significant. Okay. 

Let me adjust to long-term policy. In 1981, the country was told 

during the Reagan administration we could have it all: We could 

have tax cuts, defense buildup and balanced budgets. At least 

David Stockman was honest enough, the architect of that budget 

proposal, to admit later in a book that he knew that was a dishonest promise to the American people. So what we got were tax 

cuts, defense buildup, which was positive, but a quadrupling of the 

national debt, I believe, in just over a decade. 

Fast forward two decades later, the country is told essentially 

the same thing again: We can have massive tax cuts, a balanced 

budget and even fight a war in Iraq and Afghanistan as we have 

balanced budgets. The consequence is very similar to what we saw 

20 years ago. We fought a war. We had tax cuts, and the promises 

of balanced budgets were so far off in their mark it is—it is not 

even a close call. 

Let me get the facts on the table. During the Bush administration, this Bush administration, how much has the national debt 

been increased? 

Mr. ORSZAG. The national—the publicly held debt at the end of 

2007 was $5.0 trillion; at the end of fiscal year 2000 was $3.4 trillion. 

Mr. EDWARDS. So the publicly held debt is $1.6 trillion increased 

during this administration. And the debt held to the government 

is a legal debt; isn’t it? What is the gross debt today? Is it over $9 

trillion? 

Mr. ORSZAG. The gross debt is substantially higher, yes. 

Mr. EDWARDS. What was—the gross debt today is $9 trillion. 

When President Bush was sworn in, in 2001, what was the gross 

national debt of the country? 

29

Mr. ORSZAG. I don’t know that I have that number. We will get 

it to you in a moment. 

Mr. EDWARDS. So probably a $2 trillion-plus increase; is that correct? 

Mr. ORSZAG. A significant increase, yes. 

Mr. EDWARDS. All right. Let me assume it is approximately $2 

trillion. What is the average interest on our national debt today? 

Is it 3 percent, 4 percent? What do we have to pay in interest——

Mr. ORSZAG. Somewhere between 3 and 4. 

Mr. EDWARDS. So if we said 4 percent, if my math is correct, 4 percent times 2 trillion is an $80 billion a year cost in interest payments just on the national debt that has been accumulated by the 

economic promises and policies of the last 7 years. 

For the record, Mr. Chairman, I think that is more than we 

spend on all student loan, Pell grant, public education programs. 

And now, as a result of these economic policies of the last 7 years, 

we now face a massive interest payment on the debt. And I think—

am I correct that interest payments on the debt are some of the 

largest expenditures of our Federal Government, out of thousands 

of Federal programs? 

Mr. ORSZAG. They amount to more than $200 billion a year. 

Mr. EDWARDS. Now, let me ask you finally, with not much time 

left, some of those who were the architects of the economic policies 

that led to—despite their predictions of balanced budgets—a $2 

trillion increase of the national debt over the last 7 years, they are 

saying we ought to make permanent all of the Bush 43 tax cuts. 

I want to ask your opinion. If we made—Congress today made permanent all of those tax cuts that are presently temporary and they 

were paid for by borrowing, what would be CBO’s projection on 

what the impact would be on the national deficits and on the future economic growth of the country? 

Mr. ORSZAG. As I told Mr. Spratt earlier, the revenue effect from 

extending the 2001 and 2003 tax legislation over the next 10 years 

is a reduction of about $2.2 trillion. And then, in addition to that, 

there is an interactive effect with AMT. So you are looking at, say, 

$2.5 trillion or so in terms of reduced revenue. 

Mr. EDWARDS. Thank you. 

Chairman SPRATT. Mr. Barrett of South Carolina. 

Mr. BARRETT. Thank you, Mr. Chairman. 

Dr. Orszag, thank you for being here today. Very sobering information, but we greatly appreciate it. 

I know you talked a little bit about the design of the relief we 

are talking about—rapid, temporary, cost effective. Ranking Member Ryan talked about targeted, timely and temporary. And you 

really didn’t mention anything specific, but you talked in general 

terms. If there was a way we could probably do some tax credits 

to stimulate immediately some, long-term tax policies, some fiscal 

stuff and also address spending in one package, does that make 

sense to address all of these areas in some type of stimulus package? 

Mr. ORSZAG. Yes, if it is feasible. I think an important factor, 

though, is that we—we have seen significant reductions in the Federal funds rate and in interest rates with a lag that will start to 

affect the economy. In the meanwhile, there may be a bit of an air 

30

pocket. And the question is whether there can be an intervention 

that is timely in the meanwhile. So a grand package is desirable. 

And as I have mentioned, our long-term fiscal picture is not pretty. 

But there is a question of timing that is also involved. 

Mr. BARRETT. I understand. But to address the long-term fiscal 

soundness of the United States, all three of those need to be addressed; correct? 

Mr. ORSZAG. Yes. And, in fact, it would be desirable to do them 

all together if that were possible. 

Mr. BARRETT. Gotcha. Thank you. You talked about health care 

spending. And one assumption that you and many people talk 

about is that policy will not change; the United States Government 

will always provide current levels of Medicare and Medicaid. And 

when you look at entitlement spending, it is one of the fasting 

growing. Do you have any thoughts about the relationship between 

government involvement in the health care system, i.e., a federalized program or anything like that, and the rapid inflating rate of 

the health care process? 

Mr. ORSZAG. Rising health care costs are a problem in general. 

And if you look over the past several decades, the rate at which 

health care costs have grown in, say, Medicare has been roughly 

the same as in the rest of the health care system. I think a lot of 

the problems that face the public programs, including skewed incentives for providers and for beneficiaries and a lack of information, are also present in the private part of our health system. And 

the two are kind of interlinked in many ways. 

Mr. BARRETT. But is it possible that granting Americans access 

to all of these could potentially give the demise of these programs, 

though? 

Mr. ORSZAG. We are on an unsustainable path. So something is 

going to have to give. I don’t know what it is. But something has 

to change. 

Mr. BARRETT. Okay. Another assumption CBO makes in its baseline is that the expiration of the tax—of the Bush tax cuts in 2010. 

And again I know you said this about the taxes, but is it your contention that in order to balance the budget, the only viable solution 

is to raise taxes at this time? 

Mr. ORSZAG. No, sir, I didn’t say that, and I think, you know, 

mathematically, spending is above revenue and you need to bring 

them back—or projected to be significantly above revenue. You 

need to bring them back in line. There are many people on the outside who believe that—many analysts who believe that movement 

on both sides will be necessary. But that is a choice for you to 

make. And mathematically it can occur on either side. 

Mr. BARRETT. So I guess, you know—and my last question is, I 

just feel like when we talk about the government, we try to be everything to everybody. And spending has to be reined in, in some 

degree, to bring some fiscal sanity. When you look at all the issues 

that we are looking with, Dr. Orszag, would you say that the one 

issue that is probably the most important is the amount of money 

that we spend as a Congress collectively? 

Mr. ORSZAG. For our long-term——

Mr. BARRETT. Long-term fiscal sanity so to speak. 

31

Mr. ORSZAG. Yes. Or—and I would focus it even more specifically 

on what we spend on health care, how much we are getting in exchange for that and the rate at which that is rising. That really 

dominates all else over the long term. 

Mr. BARRETT. Mandatory spending is what you are saying? 

Mr. ORSZAG. Medicare and Medicaid in particular. 

Mr. BARRETT. Absolutely. 

Thank you, Mr. Chairman. 

Chairman SPRATT. Mr. Cooper. 

Mr. COOPER. Thank you, Mr. Chairman. 

Dr. Orszag, first the short term, as I understand it from your testimony, you are not forecasting a recession or a negative rate of 

growth; you are forecasting slow growth; right? 

Mr. ORSZAG. Again, I would say the risk of recession is significantly elevated, but our central forecast is for weak growth. And 

I also would note I don’t know that it matters that much in terms 

of thinking about policy whether growth in the first half of the year 

is plus .5 or minus .5 may not matter that much. I mean, it matters obviously for households, and it matters for other things. But 

in terms of thinking about policy responses, it may not be a material difference. 

Mr. COOPER. In terms of using fiscal policy to try to fine tune the 

economy so that we will remain in a growth phase of the economy, 

one of the key variables is how quickly we can get money in people’s pockets so that they can spend it. And as I understand it, the 

IRS is saying we can’t possibly get the money there until June or 

July, and that would mean the money couldn’t be spent probably 

for a couple of months after that. So that is a very remarkable policy lag in terms of implementing any policy; isn’t it? 

Mr. ORSZAG. Yeah. And let me just pause for a moment on this 

because I think some people look at the 2001 tax rebate experience 

and how quickly money went out the door there and conclude 

things about the current situation which may not work. In particular, at that time, the IRS was basically done with or was done 

with processing tax returns. It is currently in the middle of processing 2007 tax returns, the same IT system and the same people 

who process rebates are working on that. So, basically, until the 

2007 tax season is closed, the IRS really can’t turn in any significant way to processing rebates. That means you are talking about 

mid-May to early June at the earliest for checks to start going out, 

and then it takes 8 to 10 weeks to actually mail them. 

Mr. COOPER. But that is using the government. Is there another 

way to do it? For example, what if we were to look at MasterCard 

or Visa or other credit cards? They have monthly contact with their 

card holders. 

Mr. ORSZAG. I guess one can imagine different approaches. To 

the extent you are going to rely on tax information, which has been 

central to many of the proposals that I have seen, the IRS obviously then needs to be involved. 

Mr. COOPER. How about the issue of offsetting? Does it make 

sense to try to pay for the stimulus package, or should we add it 

to our long-term deficit problems. 

Mr. ORSZAG. As I noted, the Nation’s long-term fiscal imbalance 

is large and serious, and one should be very careful to avoid exacerVerDate 0ct 09 2002 20:31 Apr 01, 2008 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6602 J:\DOCS\HEARINGS\110TH\110-28\40339.TXT HBUD1 PsN: DICK
32

bating that. So, from that perspective, offsetting any short-term 

stimulus, especially if it were done out in year 5, 6, 7, what have 

you, would be desirable. 

I would note, though, that if you are going to do a stimulus, it 

makes sense to do it as fast as possible. So if the cost of delay is 

offsetting $100 billion or $150 billion, that may not be worth the 

benefit to the long-term fiscal outlook to forgo a short-term economic opportunity. 

Mr. COOPER. Shifting to the long term, you have described our 

long-term outlook as, I think you used the word ‘‘dismal.’’ That is 

a pretty severe judgment. Many people in Congress have been critical of the rating agencies, as they did not anticipate the problems 

with the subprime lending crisis. But last Friday, Moody’s joined 

Standard & Poor’s, which had done this a year earlier in projecting 

that the U.S. Treasury bond itself, not any CDO or minor instrument, but the most important financial instrument in the world, 

might lose its AAA credit rating. 

So these rating agencies now are projecting dire consequences, 

and now we are not wanting to pay attention so we fault them for 

being too lax. Now we are not paying attention when they are trying to focus our attention on our real, long-term fiscal problems, as 

you noted in your excellent slides, for example, focusing on the fiscal gap. 

You point out that, as severe as the aging problem is, it is not 

our major problem. The uncontrolled rise in health care costs is a 

much larger component of our future problem. And, to my knowledge, no committee in Congress is working on that issue. None. 

You know, to the extent we are focusing on issues like Medicare, 

we are talking about increasing spending, not decreasing spending. 

I know that you are emphasizing the CBO work in helping us 

focus on these important issues so that we can go into the health 

care sector and restrain this uncontrolled growth; but as I think 

you have correctly pointed out in your testimony, that is the central problem that we face, and this committee should be focused 

not only on the short-term, but on these dire, long-term issues. And 

it worries me when our good ranking member says that deficits 

have dramatically declined—you know, happy talk as if, hey, everything is fine for the time being, when it is clearly not either in the 

short run or in the long run. 

And if my colleagues would focus on Director Orszag’s excellent 

charts. For example, on page 2, if you look at our deficit, including 

the Social Security surplus that has been borrowed, you will see 

that the deficits are in fact not $163 billion or $219 billion, but 

more like $344 billion and $414 billion. And my colleagues need to 

remember that this is using cash accounting, too. This is not using 

the real accounting that we require everyone else in America to 

use, private business, State and local government, but that we 

have exempted the Federal Government from. 

So I would hope that our colleagues could focus on the dismal situation that the Budget Director has described. 

I see, Mr. Chairman, that my time has expired. 

Mr. ORSZAG. Mr. Chairman, could I just quickly respond to an 

earlier question, and get back to Mr. Edwards that the increase in 

33

gross Federal debt—not public debt, but gross Federal debt—between the end of 2000 and the end of 2007 was $3.3 trillion. 

Mr. SPRATT. Mr. Lungren. 

Mr. LUNGREN. Thank you very much, Mr. Chairman. I will try 

and respect the admonition of Mr. Cooper to avoid happy talk. 

I must take some small exception to Mr. Edwards’ comment 

about the dishonesty of those of us who were here 20 years ago and 

working on an effort. As a matter of fact, the Reagan administration at that time attempted to have some structural changes with 

respect to mandatory spending, which were defeated in the House 

of Representatives. Virtually every single budget that was brought 

forth by that administration was exceeded by the Democratically 

controlled house. 

So we were not being dishonest; we were working in earnest to 

try and solve the problems at that time. And I am not sure that 

kind of language helps at all. 

Mr. Orszag, here is my question. I think the United States was 

established with a skepticism toward government so long as it is 

not cynicism. So I will try to be skeptical without being cynical. 

Mr. ORSZAG. Okay. 

Mr. LUNGREN. My question is this. If you have said that it is the 

position of our office that we are going to have sluggish growth and 

define that as 1.7 percent growth in GDP—and you say the other 

outsiders are talking about 2 percent—if in those instances it is 

necessary for us to have a stimulus package, we are not in a recession as you suggest. Is that a rule of thumb for the future, that 

when growth is only 1.7 percent to 2 percent, that we need a stimulus package? 

Mr. ORSZAG. What I would say is that growth during the first 

half of 2008 is likely to be significantly weaker than that. 

Mr. LUNGREN. But you said we are not going to be in a recession. 

That is your best judgment. If we are not going to be in a recession, 

is this establishing a new cornerstone for us that when we have 

weak growth, such as you suggested short of recession, that lays 

the groundwork for the necessity of a stimulus package? 

Mr. ORSZAG. Let’s hypothetically say that growth is going to be 

a half percent during the first half of 2008. That is substantially 

below the potential growth rate of the economy. It is up to you to 

decide whether you want to intervene in that situation. But if that 

is the central estimate, the risk of a recession is elevated relative 

to normal economic conditions. 

I would make one other quick point, which is, it would be desirable, given that it takes a long time to decide these things, that if 

the Congress wanted to intervene in those kind of situations, to 

bulk up the automatic stabilizers so that things happen automatically, rather than requiring targeted fiscal stimulus, even if one 

wanted to intervene in those kinds of situations. 

Mr. LUNGREN. But you are suggesting that even if we act quickly 

here, the process takes so long it would really take a while for a 

spendout to take place? 

Mr. ORSZAG. There are only a limited number of options for you 

to affect economic activity during the first half of 2008. 

Mr. LUNGREN. Maybe we ought to put General Petraeus in 

charge. He seems to get things done pretty quickly. 

34

Mr. ORSZAG. There are a lot of options. 

Mr. LUNGREN. I am trying to figure out where we are going with 

this in terms of the philosophy involved. 

The suggestion that you have made is that we need to get that 

money spent and spent quickly. And I have heard others on the 

other side of the aisle to suggest that means that it ought to be in 

the hands of those who are in the lower economic sector rather 

than the upper sector, because they are more likely to spend the 

money rather than to save it. 

And so I am trying to figure out, what is a stimulus package 

based on tax rebates that you think would be most effective in the 

short term? 

Mr. ORSZAG. Again, if the objective is to boost aggregate demand—by the way, I should say, the experience with the 2001 rebates was actually more auspicious than previous studies would 

have suggested; that is, they resulted in a larger kick to short-term 

economic activity than I think we would have expected based on 

the experience with earlier rebates. 

The evidence from that experience, though, also does suggest, 

which is in line with economic theory, that as you move down the 

income distribution of recipients, the share of the rebate that was 

spent went up. And among recipients who were more credit constrained, who had exhausted more of their credit card limits or had 

lower credit card limits, spending was also a higher percentage of 

the rebate. 

Mr. LUNGREN. Now, let me ask you a question, just specifically 

economically. If I were to present you a plan to say, let’s keep the 

current tax rates, marginal rates, at 10 and 15 percent, where they 

are, but adjust the 25 percent rate to 28 percent, the 28 percent 

rate to 31 percent, the 33 percent rate to 36 percent, and the 35 

percent marginal rate to 39.6, would you call that a tax increase 

if I were to present that to you as a plan? 

Mr. ORSZAG. That would be an increase relative to the alternative scenario that you were presenting. 

Mr. LUNGREN. So, yes, that is a tax increase? 

Mr. ORSZAG. Do you really want to drag me into this semantic 

game? 

Mr. LUNGREN. Well, no. But I am trying to figure out—to me, 

that sounds like a tax increase. To the average person, it does. I 

want to know what an economist says. 

Mr. ORSZAG. If you are comparing two scenarios, one with a 35 

percent marginal tax rate and one with a 39.6 percent marginal tax 

rate, the 39.6 percent marginal tax rate is higher. 

Mr. LUNGREN. Thank you. 

Mr. SPRATT. Ms. Schwartz. 

Ms. SCHWARTZ. Thank you, Mr. Chairman. 

I wanted to follow up on, actually my colleague here, Mr. Cooper, 

some of his questions and comments about health care costs. And 

we have obviously had this discussion here in the Budget Committee with you a number of times. And I wanted to say that, 

clearly, I think many of us are concerned about, long term, the cost 

particularly of Medicare. 

And I would just take a little bit of exception in the fact that we 

haven’t done anything. Certainly, on Ways and Means, we did look 

35

to—it did not get done by the Senate yet, but we did look to try 

to take what we considered overpayments under Medicare Advantage to Medicare HMOs and redirect that in ways we thought 

would be smarter spending, prevention, and obviously some payment to physicians. 

You don’t need to comment on that, but I just wanted to say that 

we are certainly well aware of the need to tackle the rising costs 

and are having serious discussions about comparative effectiveness 

and ways that we can contain costs without limiting access to needed health services for our seniors. I would like to see us move in 

that direction, if we could; and there are some ideas, like electronic 

medical records and e-prescribing, that we know not only save lives 

but save money. 

So I would hope that together we can work on some of those 

issues so that we can contain costs but still get quality care to people. But I did want to follow up on some of the concerns about 

health care. 

Certainly, in the economic downturn—and I hear from families 

all the time in my district about the rising cost of health care to 

them, the fact that they are seeing a greater share of the premium 

that they have to pay, even in employer-sponsored health care. I 

certainly hear from businesses that are saying that they can’t increase wages because of the costs of health benefits. We do know 

that we have seen employees have to pay almost $1,500 in their 

share when they are covered by the employers. And, of course, 

most recently, we have seen a report that says 700,000 to 1 million 

children could be uninsured as a consequence of the economic 

downturn that we are now in. 

So given that you have, and certainly Ben Bernanke, the Fed 

Chairman, did last week make it very clear that what we ought to 

be doing if we do a short-term stimulus—not a long term now, but 

a short-term stimulus—is to put dollars in the pocket of low- and 

middle-income folks who will then spend it, as a short-term spending and increase in demand. 

Could you comment on whether, in fact—as families are seeing 

the high costs of health care, whether they spend the dollars on, 

say, health care premiums, or whether they spend the dollars to 

keep their health coverage if they are doing without employer help; 

if they are spending it on COBRA because they have been laid off; 

or if they are spending it on other everyday needs that they have, 

mortgage payments, debt? Does that make a difference versus 

spending it on other kinds of goods and commodities? 

Mr. ORSZAG. To a first approximation of what goods and services 

the money is spent on doesn’t matter very much. There can be 

some differences. For example, one of the things we noted in our 

stimulus report is, to the extent that the additional spending disproportionately comes from imports, you attenuate the stimulative 

impact on domestic production. But to a first approximation, the 

mix of spending doesn’t matter as much as the aggregate amount 

that you induce. 

Ms. SCHWARTZ. That is good. That is exactly what Ben Bernanke 

said. 

So we are good. So we are on the same page there, which is good, 

because I think a lot of families, actually, to the degree we might 

36

want to suggest that they may have to pay off credit card debt, pay 

mortgages, stay in their homes, be able to pay for health care costs, 

it is certainly something we want to do. 

Let me just ask you for another comment, if I may, on the broader topic. You said this in your testimony. We are very clear—so this 

is something we are trying to work in a bipartisan way—that we 

want to not only target these dollars, however we get them out to 

families so they will use it on spending, but we also want to do 

enough to have an effect on spending in the economy in the short 

term. Again, this is only short term, not long term. But we also are 

committed to not adding to the debt, to the national debt. 

Some of us are really quite concerned and have really spoken out 

about the need to balance the budget. And as we set an example 

for American families, we know that we have to pay down our debt, 

we have to be able to start to have our income match our spending, 

however we do that. 

So might you want to talk about how much we—how far we 

could go, and the fact of whether or not we have to commit to paying for whatever economic stimulus package we put forward in the 

short term. 

Mr. ORSZAG. Well, first let me say, if you were going to do economic stimulus, it doesn’t make sense to offset the cost in that 

year, because that undermines the very purpose of what you are 

trying to do. 

There is no reason why you couldn’t, though, from a short-term 

stimulus perspective, offset the costs in year 6 or 7 or 8 or 9. That 

does not diminish the effectiveness of the stimulus in this year and, 

in fact, could under some scenarios help to accentuate it. 

I would come back, though, to say time is of the essence here; 

and if you are going to act, it is important to act quickly so that 

you don’t miss your window. And if the price of obtaining those offsets is a very substantial delay, that is probably a trade-off that, 

from an economic perspective, is not a good one to make. 

Ms. SCHWARTZ. And I think my time is up. But certainly I think 

what has become very, very clear even as we talk about the shortterm stimulus, is that in the long term any tax cuts, any kind of 

work we do on tax policy has to be paid for as well, that that has 

an effect on our budget and obviously has an effect on the economy. 

Thank you, Mr. Chairman, and I yield back. 

Mr. SPRATT. Mr. Campbell. 

Mr. CAMPBELL. Thank you, Mr. Chairman. 

Thank you, Dr. Orszag. 

Looking at your projection, even with the slower economic growth 

that you are showing, we are showing slower revenue growth, but 

it still is revenue growth I think of 3.4 percent year over year. Does 

it follow then that if total Federal spending were held to 3.4 percent growth, that there would be no increase in the deficit in this 

coming year? 

Mr. ORSZAG. Not quite, because you are starting off with spending higher than revenue, so it magnifies a little bit, but not a big 

increase. 

Mr. CAMPBELL. Okay. If you were to hold Federal spending 

growth to 3 percent or 2.9 percent, then the deficit would decline? 

Mr. ORSZAG. Something like that, yeah. 

37

Mr. CAMPBELL. And if total Federal spending were held even, in 

other words, no increase over the prior year, we probably would be 

in surplus? 

Mr. ORSZAG. Yes. 

Mr. CAMPBELL. Is that correct? 

Mr. ORSZAG. I would imagine so, yes. 

Mr. CAMPBELL. Okay. Thank you. 

Now, switching to the stimulus package. If we were——

Mr. ORSZAG. Actually, not quite. 

Mr. CAMPBELL. Oh, not quite? 

Mr. ORSZAG. Very close. 

Mr. CAMPBELL. You are just doing the math on the back of an 

envelope? 

Mr. ORSZAG. Yes. Very close. Not quite. 

Mr. CAMPBELL. So at zero it would be—at no increase in Federal 

spending, if we held Federal spending the same as last year, then 

probably no deficit, or close to even? 

Mr. ORSZAG. Yes. Again, this is keeping net interest, things that 

won’t happen. But you would be certainly under $100 billion. 

Something like 70 or 80. 

Mr. CAMPBELL. If we were to pass—if this Congress were to pass 

and the President were to sign a stimulus package that included 

revenue, tax provisions or spending provisions, or some combination thereof, in areas in which you felt they were reasonably effective, would you then be revising this estimate to increase GDP 

growth and/or lower unemployment and/or increase nominal revenue? 

Mr. ORSZAG. What I would say is that in periods like today, 

where the economic conditions are potentially changing rapidly, we 

will monitor the situation carefully. And there have been times in 

the past when, during our reestimate of the President’s budget, we 

have updated our economic projections; and will reach a judgment 

as to whether that is warranted in this situation. 

Mr. CAMPBELL. Because I am sure you can tell where we are 

going here. 

If we were to pass something that is intended to stimulate the 

economy, then one would presume we should project that it was 

going to, in fact, stimulate the economy or we wouldn’t do it. And 

if it does stimulate the economy, GDP should go up, unemployment 

should go down, from your projections, and revenue from the nominal basis should be higher. 

Mr. ORSZAG. I am sorry. Were you asking about the scoring of 

the proposals? 

Mr. CAMPBELL. Yes. 

Mr. ORSZAG. Oh, I see. 

Mr. CAMPBELL. Well, the scoring of the proposal, but overall. 

Mr. ORSZAG. Let’s separate the scoring in which those kinds of 

feedback effects would not be taken into account, and then a subsequent evaluation by CBO, including potentially updating our economic baseline. 

Mr. CAMPBELL. So when you score the proposal, you don’t take 

that into account? 

Mr. ORSZAG. That is right. That is correct. 

38

Mr. CAMPBELL. But then would you then—which again, then, basically we are assuming that the stimulative package will have no 

stimulus; ‘‘if’’ is essentially what that assumes. 

Mr. ORSZAG. In the scoring rules, that is correct. 

Mr. CAMPBELL. In the scoring rules. 

So would you then revise somewhere, so we could get some idea 

of what you think might happen? 

Mr. ORSZAG. We have done dynamic analysis or basically the 

macroeconomic feedback effects of major proposals. And I suppose 

that if there were a major fiscal stimulus proposal and you wanted 

us to evaluate what the macroeconomic impact would likely be 

within some range, we could provide that information to you. 

Mr. CAMPBELL. Okay. Then the last question I have is, there is 

all this talk now about a rebate package, and there has been a lot 

of discussion here this morning about how we can get consumers 

to spend it quickly. 

This downturn we are in was not consumer led, it is credit led. 

And, arguably, you and others have said here, gee, our saving rate 

isn’t high enough, that sort of thing. Arguably, you could say part 

of the credit leading is that some consumers at least borrowed too 

much, borrowed money they couldn’t afford to pay back, et cetera, 

et cetera. 

Why would we not want to do some stimulative package, where 

we are encouraging and telling people to save and invest that 

money or pay down debt on that money, because that is what 

caused the crisis, not a lack of spending? 

Mr. ORSZAG. I guess I would say two things. I think most fundamentally there is this tension between what we need to do over 

the medium and long term, which is, we need to raise our national 

savings rate. And what is most appropriate where the economy is 

weak and we have goods and services that could be produced, but 

won’t be because there is not sufficient demand for them, that is 

a very unusual circumstance for the economy to be in, or a relatively unusual circumstance. And the tension is that what is appropriate in that kind of unusual circumstance is often exactly the 

opposite of what we need to be doing in the medium and long term. 

And figuring out how you would do what might be appropriate 

now and then transition to what would be appropriate in the long 

term is very tricky. How do you convince households that they 

should spend more now but, oh, no, you should start saving a lot 

more next year and the year after, is in some sense the ideal economic policy, but it is very difficult to do in practice. 

Mr. SPRATT. Mr. Doggett. 

Mr. DOGGETT. Thank you very much. I am impressed with the 

remarkable consistency of all of the economists who have come to 

testify about the stimulus; and I think that perhaps that is the result of the fact that, as you have referenced in your testimony, we 

do have substantial experience with what has an effective stimulative effect for the economy and what does not, and we have substantial academic studies now in that area. 

First, is that correct, that there are many studies and experience 

with several different attempts to stimulate the economy? 

Mr. ORSZAG. That is correct. 

39

Mr. DOGGETT. And the first area in which every economist who 

has come to this committee has agreed, and you have reiterated it 

this morning, is that there is no reason we can’t have substantial 

stimulative effect and pay for this within the PAYGO rules. 

Mr. ORSZAG. That is correct. 

Mr. DOGGETT. Indeed, you just indicated to Ms. Schwartz that it 

could actually increase—or ‘‘accentuate,’’ I believe was your term—

the stimulative effect to pay for it within the PAYGO requirements. 

Mr. ORSZAG. That is correct also. 

Mr. DOGGETT. And the only caveat you have offered is if we have 

some people who are so wed to their borrow-and-spend ideology 

that they refuse to pay for it, you say, don’t let that hold you up; 

go ahead and get it approved, because it is important to act 

promptly if we are to get this recession insurance. 

Mr. ORSZAG. Correct. 

Mr. DOGGETT. As far as the size of the stimulus, there also seems 

to be some consistency in that area. The first people who urged 

that we take action, the Democrats, recommended something under 

$100 billion in the size of this stimulus. When I asked Chairman 

Bernanke last week what he saw as being too much, too excessive 

a stimulus, I think he put a cap of about $150 billion. I know the 

President has said about $145 billion. 

If you begin to exceed $150 billion now, I am concerned that this 

will balloon out of control. Will it be counterproductive? 

Mr. ORSZAG. It could be. And especially if you do things that are 

not only expensive, but don’t really kick in until late 2008, early 

2009, mid-2009. 

Mr. DOGGETT. Too much and too late. 

Mr. ORSZAG. Stimulus delayed is stimulus denied. You do not 

want to be adding fuel to an economy that may well be growing 

rapidly by 2009. 

Mr. DOGGETT. And you have indicated in your testimony today 

and yesterday—and it has cut across the parties, but that some 

things that may fit an ideological framework, whether it is building 

a bridge or a tax cut for the rich, they just get there too late and 

they have too little stimulative effect to make much difference. 

Mr. ORSZAG. We went through lots of different options in the 

stimulus report we prepared for this committee. 

Mr. DOGGETT. And that report is very helpful, and just to highlight some of its findings: Based on all of the academic studies, if 

we really wanted to have the maximum bang for the dollar and 

stimulative effect, this afternoon we would approve an extension of 

unemployment benefits on a temporary basis and an expansion of 

food stamps on a temporary basis, wouldn’t we? Isn’t that what you 

found to be the most effective? 

Mr. ORSZAG. Those were among the options that were ranked 

with large or high bang for the buck or cost effectiveness. 

Mr. DOGGETT. And they will get the dollars out and stimulate the 

economy quicker and more effectively than any tax rebate scheme 

that you have heard of. 

Mr. ORSZAG. The administrative challenges on the tax side for individuals are significant. 

Mr. DOGGETT. Because even under the best scenario, those tax 

dollars are not going to flow until sometime—and begin to be spent 

40

until sometime in the middle of the summer. Unemployment benefits, food stamps could be spent now. 

Mr. ORSZAG. The information we are receiving is that changes to 

that employment insurance system or to the food stamp program 

could result in additional benefits for households within, say, 2 

months, and that is faster than a rebate. 

Mr. DOGGETT. If, since the President wants nothing but tax rebates to date, that is the direction in which much of this stimulus 

goes, and we adopt a very inefficient tax stimulus and go in that 

direction. Chairman Bernanke said focus it on low- and moderateincome families. Some people have forgotten what that is and think 

that means buddies at $100,000, $200,000, $300,000 a year in income. He said that $49,000 is the median income, and perhaps you 

go into the mid-50s. 

But do you believe, to be most effective, if you have tax rebates, 

they should be focused on low- and moderate-income families? 

Mr. ORSZAG. That would get you more short-term demand for 

any dollar you spend. 

Mr. DOGGETT. And as far as the various corporate tax breaks 

that some have advocated, who worship at the altar of tax cut salvation, those—of all the various schemes that have been advanced 

to give another tax break to corporations, which ones appear to be 

the least efficient and which ones have the most potential to stimulate? 

Mr. ORSZAG. The least efficient options for short-term stimulus 

appear to be things like a reduction in the overall corporate tax 

rate, because a significant part of that is a payoff to existing investment or existing capital as opposed to an incentive for new capital investments. 

The theory behind temporary investment incentives like bonus 

depreciation or a temporary investment tax credit is sound. It creates an incentive for firms to accelerate their investments that they 

were going to make in 2 or 3 years into the short term, and that 

can be beneficial. 

The experience with the 2002 and 2003 bonus depreciation provisions was somewhat disappointing relative to what we had expected and hoped for and what we would have thought based on 

that theory, so at least some caution is warranted. Basically left 

with, there is a good theory and in fact you could even supercharge 

the incentives by applying it only to investments above some historical level so that it is an incremental incentive. 

But the most recent experience didn’t turn out so well in terms 

of encouraging more investment. It may be that the situation now 

is different, and you could get more impact from those provisions 

than we experienced several years ago. 

Mr. DOGGETT. Just one clarification on that last point, just so 

that it is crystal clear. 

If we have to—even though it is not as effective as the other approaches, but if we must include into this package in order to get 

bipartisan support for it, some type of business or corporate reduction, what is the best way to do it? 

Mr. ORSZAG. The best way to do it, if it could be done administratively quickly, would be either an investment tax credit or bonus 

depreciation for new investment above some historical threshold—

41

I am making this up: 90 percent of the average over the past 3 

years. 

The question becomes whether the benefit of doing it incrementally is worth the administrative complexity. But generically, temporary investment incentives, either bonus depreciation or investment tax credit, rank among the highest options for cost effectiveness on the corporate side. 

Mr. SPRATT. Mr. Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

One of the most renowned economists of our time, Nobel Laureate winner, Dr. Milton Friedman, in his writings, spoke of a permanent income hypothesis. And I see your head nodding; I assume 

you are familiar with the hypothesis, which essentially said that 

consumers do not fundamentally change their spending habits 

based upon small differentials in their income. In short, you cannot 

convince people they are richer than they are. 

As I look at the histories of the 2001 tax rebate plan, which I 

believe was most important in helping consumers pay their bill—

and I always champion the cause of giving taxpayers more of their 

tax money, but isn’t it true that almost 2 years after that rebate 

plan, that the economy was still losing jobs, that the stock market 

had plummeted and business investment had still not turned 

around? 

Mr. ORSZAG. Unemployment peaked in 2003. 

Mr. HENSARLING. Wasn’t it also true—my reading of the history 

is that it wasn’t until the 2003 tax relief that signaled to the economy, that signaled to businesses, small businesses, entrepreneurs, 

that we actually cut rates, which was different from a temporary 

tax rebate? 

We cut tax rates, we cut marginal tax rates, capital gains, dividends; and then what we saw was almost 5.3 million new jobs created within 18 months of those reductions, and a stock market leap 

of 32 percent. 

I mean, doesn’t the evidence suggest that you cannot fool enough 

people into thinking they are richer than they are, and that if you 

truly measure economic growth by, first, keeping your job and 

then, second of all, having even greater job opportunities with 

greater upside potential, that we need to signal to those who create 

jobs that they can count on lower tax relief as opposed to the 

threatened tax increases that we see today? 

Mr. ORSZAG. Let me come back first to the 2001 rebate. We need 

to remember that the aggregate size of the rebate was under $40 

billion, and the evidence does suggest that that $40 billion or so did 

cause a spike in economic activity. And on the permanent income 

hypothesis, one of the reasons, in fact, one of the leading——

Mr. HENSARLING. I am sorry, Dr. Orszag, but let me interrupt 

you on that point, because what I did, when I viewed the statistics, 

I saw that consumer spending did rise temporarily with the rebates. 

But my reading is—is that capital investment spending fell by 

roughly a corresponding amount, leaving no net infusion into our 

economy. Do you have a different reading? 

Mr. ORSZAG. Yes. My reading would be that there was this very 

substantial capital overhang that we went into 2000 and 2001 

42

with, and that investment was going to be relatively weak and that 

the partial effect of the rebate was to boost economic activity. 

And I want to just briefly mention, on the permanent income hypothesis, one of the reasons—in fact, the leading reason—why people believe, or economists believe, that targeting credit-constrained 

households is the most effective way of targeting a temporary tax 

change is precisely that for those households, the permanent income hypothesis doesn’t apply because they can’t borrow against 

their expected future income. And so changes in temporary income 

do result in changes in their spending pattern, more so than for 

permanent income hypothesis households. 

Mr. RYAN. Would the gentleman yield? 

Mr. HENSARLING. Yes. I would be happy to yield. 

Mr. RYAN. Director Orszag, isn’t it the case that in 2001 that was 

not a temporary increase? 

Mr. ORSZAG. Yes. 

Mr. RYAN. The rebates were forward; on permanent or long-term 

reductions in marginal income tax rates, you simply got the reduction of the tax rate forwarded. So it is kind of an apples-to-oranges 

comparison to today’s proposals of temporary, one-shot rebates to 

2001’s lower permanent reduction, correct? 

Mr. ORSZAG. Yes. 

Mr. RYAN. So people more adequately thought their take-home 

pay would be higher, given they were going to experience lower tax 

rates going forward than what we are discussing today, correct? 

Mr. ORSZAG. As we noted in the stimulus report we prepared, the 

experience with the 2001 rebate seems different from the studies 

of earlier rebates; and one reason may be that, as you note, it 

wasn’t a purely temporary thing. It was basically an advance payment on tax changes that were scheduled to occur. 

Mr. HENSARLING. I yield back. Thank you, Dr. Orszag. 

Mr. SPRATT. Mr. Blumenauer. 

Mr. BLUMENAUER. Thank you, Mr. Chairman. 

I appreciate, Mr. Orszag, your description about the tension between the short-term stimulus and some of the long-term structural problems that the economy faces, one of which is clearly an 

entitlement deficit that we are concerned about. 

There are other deficits that actually have severe consequences. 

A deficit in terms of infrastructure investment, where we probably 

have a gap as large as any in the world with our international competitors in China, Japan, European Union. We are also looking at 

some fundamental weaknesses, and this has come out in the hearings; I appreciate your help in sort of guiding us through. 

But one of the things that concerns me is a fundamental weakness now because of what is happening with this spreading housing 

crisis, where we had regulatory sleepwalking, people asleep at the 

switch where housing in this frothy market was used as an ATM 

to drive spending. Gone now. Housing values are lower. They are 

likely to be lower still next year at this time, and we are going to 

have hundreds of thousands of people losing their homes. 

I think it is appropriate that we do move forward with some 

stimulus activity, and I am mindful of what you said about that 

tension between the short-term and our long-term needs. In that 

43

connection, I guess I would like to put two items on the table for 

you to react to for us. 

There is an emerging industry in this country where we are trying to—in alternative energy, wind energy for instance, we have a 

production tax credit scheduled to expire this year; and because it 

is scheduled to expire and we haven’t renewed it, people are cutting, starting to cut back now on investments. And if you talk to 

the industry, they are basically going to shut down in the next 2 

months because they can’t make those long-term investments on 

the possibility that we are going to renew the production tax credit. 

We are looking at, for the first time in history, a deficit in the 

highway fund—never happened before. There is no borrowing authority, so that means real reduction. And because of the slow payout rate, that means, say, a $5 billion reduction in the Highway 

Trust Fund, translates into maybe $20 billion in contract authority. 

Both of these can have significant ripple effects for the economy, 

are going to have significant ripple effects. 

I am wondering about your assessment of whether we could include something like extending that production tax credit, which 

we are likely going to do before the year ends anyway, to avoid the 

slowdown in the economy. It would be in that window that you 

talked about, within 2 months and—the potential of an infusion in 

the highway fund to make sure that we don’t have disruption of 

that engine machine in terms of infrastructure. 

Could you comment on either of those: The impact that we are 

likely to see further economic downturn because of the uncertainty, 

and the potential of investments that could help strengthen what 

happens in the next 6 months? 

Mr. ORSZAG. I guess, first, let me just say in general on the tax 

incentives side, trying to target the tax incentives to particular 

types of investments in the short term probably is not ideal from 

a short-term stimulus perspective. You may well have longer-term 

objectives that one could meet, but in terms of overall effectiveness, 

trying to pick out particular industries that you are going to try to 

encourage in the short term is probably not as wise as just providing a broad-based and, ideally, incremental, if it can be done administratively, investment incentive. 

On infrastructure spending and especially on some highway 

spending, infrastructure spending, as I said before, in general, 

spends out very slowly and so is not an ideal short-term stimulus. 

There are some subcomponents of infrastructure spending, for example, road resurfacing, where the spendout rates tend to be higher. The challenge is whether you can pick out those specific projects 

or those specific types of spending quickly and get the money out 

the door quickly. And I think there is at least some skepticism 

among budget analysts in general about whether that can be done 

in a timely and effective manner. 

Mr. BLUMENAUER. Mr. Chairman, I would like to work with your 

staff and Mr. Orszag to be able to zero in on the consequences of 

these items that I raised in terms of the depletion of the Highway 

Trust Fund and the disappearance of something like this production tax credit, in terms of what the economic impact is going to 

be if they are not remedied. 

44

Mr. SPRATT. We will do that particularly in conjunction with the 

budget resolution, which is on a fast track this year. 

Mr. BLUMENAUER. Thank you, sir. 

Mr. SPRATT. Thank you. 

Mr. Tiberi. 

Mr. TIBERI. Thank you, Director. Mr. Cooper brought up Medicare, and you have talked about the costs associated with that, 

with Medicare and with health care. And this is not a ‘‘gotcha’’ 

question. 

Today we are discussing SCHIP on the floor of the House. I have 

supported that bill, the Democrat bill. 

A physician lectured me back in Ohio about Medicare and us not 

tackling Medicare; and that we were making matters worse with 

this SCHIP bill in the way that we were paying for it with tobacco 

taxes, and rather than solving problems in the health care area on 

costs, we were adding to our long-term fiscal problems on the 

health care side. 

What is your view of that? I haven’t heard you talk about SCHIP 

related to Medicare related to the costs. 

Mr. ORSZAG. I guess I am a little bit confused. The assertion was 

that a higher tobacco tax exacerbates our——

Mr. TIBERI. Well, a higher tobacco tax is a revenue source that 

has been and will continue to deplete as there are fewer and fewer 

smokers in America, which is a good thing——

Mr. ORSZAG. Right. The Joint Committee on Taxation, when it 

does the revenue estimates, tries to take that into account, so the 

revenue streams that are associated with a change in policy include 

the behavioral response of people smoking less as a result. 

Mr. TIBERI. But a broader picture, Dr. Orszag. You concur that 

we have not—as a society, as a government, as a health care industry—got our arms around the increasing costs of health care. Whoever is paying for those benefits, whether it is government, whether it is business, it continues to rise exponentially. And you continue to say—I don’t want to put words in your mouth—but that 

will continue to occur in the future. And so if we struggle as policymakers here with that issue, and it complicates the future of Medicare funding, how does it complicate the future of Medicaid and 

SCHIP funding if we pass this bill, which I support? 

Mr. ORSZAG. The legislation would raise SCHIP funding. I mean, 

I guess that is in some sense the objective. 

Mr. TIBERI. How does that contribute to our long-term fiscal 

and—when the Federal Government is taking the largest responsibility for paying for that program? 

Mr. ORSZAG. I guess I would say, at least officially, that that legislation is scored as having a net budget impact of roughly zero. 

There are questions that have been raised about the——

Mr. TIBERI. Long-term? 

Mr. ORSZAG. The time profile in the outyears of the assumed 

SCHIP funding. In general, we are spending as—the policy community is spending a lot more time focused on covered questions in 

health care than on cost containment or trying to bend that curve; 

and ultimately, we are going to have to bend the curve. 

Mr. TIBERI. You do think we will have to bend the curve? 

Mr. ORSZAG. Something that can’t go on forever won’t. 

45

Mr. TIBERI. Thank you. 

With the issue of scoring, if you could clear this point up for me 

from your perspective, the question is, does CBO have a bias toward a pro-spending budget? An example, if you can answer this 

question, is in this document that you have. 

You assume that the expiration of the tax cuts will occur, and 

it occurs. Yet, on the spending side, the Reconciliation Act that was 

passed last year dealing with Pell Grants expires in 2017, but you 

assume that that expiration will not occur, that it continues. 

Why, on a program area, do you assume it will continue, but on 

a tax area, you assume it will not continue? 

Mr. ORSZAG. Let me first say that in general I think a lot of the 

commentary about the imbalance between how revenue and spending is treated misses the observation that there is an integrity between the baseline and the scoring process. 

However, the example that you cite is a good example of an imbalance. When you adopt a new program or a change in a program 

and that, even if it expires within the budget window, it is assumed to be extended. When the window rolls forward, that additional year of expenditure, to the extent it’s included in the baseline, has not been part of the scoring process, but winds up in the 

baseline; and that does not occur on the revenue side, and that is 

an inconsistency in the rules that govern the scoring process. 

That particular decision was made after consultation with the 

Budget Committees, and so I obviously leave up to your own internal deliberations how you decide the guidance that you give us on 

those particular cases where it is ambiguous what should happen. 

Mr. TIBERI. And, in America, I assume that is a pro-spending 

bias? 

Mr. ORSZAG. In that particular case, that spending program was 

treated more favorably than most revenue things would. I would 

note, though, there are things on the tax side that are treated similarly. In particular, taxes that are dedicated to trust funds have a 

similar type of system associated with them. 

Mr. TIBERI. Thank you, Director. 

Mr. SPRATT. Mr. Scott. 

Mr. SCOTT. Thank you, Mr. Chairman. 

Thank you, Dr. Orszag, for being with us. I just want to make 

a couple of observations to put things in historical perspective. 

In 2001, we had a surplus that exceeded Social Security, and we 

were talking about a lock box to keep Social Security surplus for 

Social Security. This year, you have listed the deficit as $219 billion so far. Does that include spending almost $200 billion of Social 

Security surplus? 

Mr. ORSZAG. Yes. 

Mr. SCOTT. And then you go additionally another $219 billion in 

the hole? 

Mr. ORSZAG. That is correct. 

Mr. SCOTT. Now, in 2001, it looked like we were going to be able 

to pay off the entire national debt held by the public by 2008, and 

all debt paid off by 2013. Is that your recollection? 

Mr. ORSZAG. Something like that, yes. 

46

Mr. SCOTT. And that would mean we would be paying zero interest on the national debt by 2013. By 2013. You say we are starting 

off with about $200 billion a year in interest right now? 

Mr. ORSZAG. A little bit above that. Yes, 230. 

Mr. SCOTT. Okay. And if we continue, the Bush agenda would 

add almost $100 billion more interest on the national debt by 2013? 

Mr. ORSZAG. It would add, I am sorry, how much? 

Mr. SCOTT. 94. An additional $94 billion? 

Mr. ORSZAG. That sounds plausible to me. I believe that is off 

Mr. Spratt’s scenario. Yes. That includes a variety of policy changes 

beyond extending the tax legislation. 

Mr. SCOTT. Right, but the expected agenda, you would add another—so that would be almost $300 billion in interest on the national debt by 2013 rather than zero? 

Mr. ORSZAG. In our—you are comparing now to the 2001 projections? Okay, yes. 

Mr. SCOTT. At $300 billion, how many people can you hire at 

$30,000 each? Is that about 10 million? 

Mr. ORSZAG. Yes. 

Mr. SCOTT. How many people are unemployed today? 

Mr. ORSZAG. The unemployment rate is about 5 percent. So 

something—7.5 million. 

Mr. SCOTT. Seven and a half million unemployed at $30,000 

each. With the interest on the national debt, we can hire 10 million 

people, just putting the numbers kind of into perspective. 

Mr. ORSZAG. But of course, that wouldn’t actually occur. 

Mr. SCOTT. That’s right. Okay, but just to put the numbers in 

perspective. 

Mr. ORSZAG. Okay. 

Mr. SCOTT. Now, you exhibited a little reluctance to get into semantics about whether or not you cut taxes and then restore the 

taxes right back to where they were, whether or not the restoration 

would count as an increase. 

How about if you lose 2 million jobs and then people get their 

jobs back, whether or not that counts as a creation of 2 million 

jobs? 

Has any administration done worse in job creation since Herbert 

Hoover than this administration? 

Mr. ORSZAG. Economists don’t normally measure job growth by 

administration. Job growth has been relatively weak over the past 

few years for this stage of the business cycle. 

Mr. SCOTT. Now, we heard about this robust stock market. If the 

stock market collapses and then comes right back to where it was, 

is that a robust stock market? 

Mr. ORSZAG. I think I am just going to probably stay away from 

this whole line of questioning. 

Mr. SCOTT. The Iraq war, if the surge is working and we actually 

need 150,000 troops to be there, would your alternative scenario be 

actually worse than it is? 

Mr. ORSZAG. If you needed 150,000 troops in perpetuity for a significant period of time, like over the 10-year window, yes. 

Mr. SCOTT. The chart would be worse than it is? 

Mr. ORSZAG. That is correct, sir. 

47

Mr. SCOTT. If the stock market doesn’t do better than it has done 

in the last couple of days, what would that do to the capital gains 

part of your revenue projections? 

Mr. ORSZAG. I can get you that number. 

Mr. SCOTT. And you mentioned accelerated depreciation as part 

of a possible corporate tax. If it is incremental and actually—people 

actually buy things, would it pay itself back, short term? 

Mr. ORSZAG. Most of the 1-year budget effect of things like accelerated depreciation are offset, or made up, if you will, in the remaining 9 years of the 10-year window. 

Mr. SCOTT. So the cost is only time, value of money, in effect? 

Mr. ORSZAG. Although the only part is exactly why firms are responding to the incentive. But, yes. 

Mr. SCOTT. Your scoring of public projects scores that as weak 

because it is long term. If the public projects were required to be 

ready to go—that is, you don’t have the planning, land acquisition, 

environmental studies. If the governor can represent that the 

project is ready to go, they can start laying asphalt as soon as they 

get the check, would your analysis change? 

Mr. ORSZAG. It really depends on what you mean by ‘‘ready to 

go.’’ There are many assertions that things are ready to go. The 

delays involved in the process are often longer than one would 

imagine. 

But if there are literally projects that are on hold because funding is inadequate and then projects could get restarted immediately, yes, that money could spend out quickly. The challenge is 

isolating those things in an overall pot of infrastructure projects 

that might not have that. 

Mr. SCOTT. One of the proposals is to fund projects that are 

ready to go, then that would be different than an overall public 

works project, significantly different in terms of stimulus effect? 

Mr. ORSZAG. Yes. But it all comes down to defining ‘‘ready to go’’ 

and who decides that. 

Mr. SCOTT. Mr. Chairman, just very quickly. 

Summer jobs for teenagers and winterization programs and labor 

intensive, that could be—people could be on the job by this summer. Would that not qualify for timely, targeted and temporary? 

Mr. ORSZAG. I think the question becomes whether—if you are 

talking about a new program, whether the various apparatus that 

need to be put in place in order to get that moving can actually 

be accomplished fast enough. 

Mr. SCOTT. If the apparatus is there and the teenagers, all they 

need is a check to hire teenagers, that would be timely, targeted 

and temporary? 

Mr. ORSZAG. It would. I would just caution that the more targeting you try to do in terms of specific programs, the less timely 

things may turn out to be. 

Mr. SPRATT. Thank you, Mr. Scott. 

Mr. Etheridge. 

Mr. ETHERIDGE. Thank you, Mr. Chairman. And thank you for 

the hearing. 

Dr. Orszag, thank you for being here again. And I guess we 

wouldn’t be doing this today if it weren’t a confidence factor. I 

48

mean, it is about the economy, but it is really about a confidence 

factor. 

Last week, when the Chairman of the Federal Reserve was 

here—things changed a lot since he left, and they made significant 

changes in the discount rate early in the week. 

My question—and I want to follow my colleagues’ line here just 

a minute because I really believe it is a confidence issue. I agree, 

it is a whole lot different than when we would have had a stimulus 

in the 1960s or even in the 1970s, because today we are more a 

service-oriented economy than we were 30 years ago. Then, we 

looked to create jobs in manufacturing and move things; today, the 

manufacturing piece is a little bit harder to get our arms around 

than it was earlier. 

So my question is, you talked a little bit about the short-term effect, the three Ts. And the three Ts have sort of been—well, I guess 

we got here because housing is—not only the financial markets get 

hit, but we are starting to see the real ripple effect on Main Street 

versus Wall Street when these people have lost their jobs who were 

building the houses and the people who were selling the houses lost 

them. So it is affecting Main Street a whole lot more today than 

it was even 3 months ago. 

So, today, it really is about getting it into people’s hands. But it 

is also about jobs. Simply put, people need jobs, to go to work so 

they can buy things to keep it going. So I want to get back a little 

bit to this issue of those things that you can put in place. 

We have talked about roads and infrastructure, and I think it is 

important, but I want to expand it just a bit; and I would appreciate your comment on it. 

If you can’t fit this stimulus package, how important is it for the 

economic viability and I think the long-term consequences for this 

country of our overall infrastructure, because today we see movement of populations at a rate that we haven’t seen in a long time. 

Schools are bursting at the seams. Communities are unable to cope 

with the growth patterns, and we have a bill in we have been trying to move for a long time. 

With plans on the shelf, ready to go, if we could just get some 

money into people’s hands, we can put a lot of people to work 

across this country and a whole lot of infrastructural pieces. You 

commented on it sort of generally, and I would appreciate your 

comments even beyond this, because Chairman Rangel and several 

of us, about 216, are on a piece of legislation to do just that. 

And I would appreciate your comment in the short term and in 

the long term in terms of sustainability of the economy. 

Mr. ORSZAG. Well, let me clearly delineate and separate those 

two. 

In the short term, again the concern with infrastructure spending in general is that the spendout rates tend to be very slow. So 

you get very little of the aggregate amount that you would appropriate actually spending out during the short term or during the 

first 6 months or first year during a period of economic weakness. 

It may be possible to improve upon that general conclusion by 

targeting particular kinds of infrastructure, but the challenge then 

is how you choose to rapidly and target those things. 

49

Over the long term, infrastructure is one of the things that leads 

to economic growth. It is a component of our physical capital which 

improves productivity and improves economic performance, and I 

think there are concerns that have been raised not only about the 

level of investment in that kind of public infrastructure, but perhaps as importantly, or maybe even more importantly, how we allocate it and how we price it, whether we are using what we put in 

place as efficiently as we could. 

Mr. ETHERIDGE. Thank you. And I do happen to believe we have 

got to do something about schools to put something in place. Last 

week, Dr. Bernanke said when he was seated there that—I raised 

a question on $3 a gasoline as high, and it has been sustained now 

for a good period of time, is having an impact on people, on the average person, just trying to get to work. And I have noted when 

I go to the station, a lot of them will buy $2, $3, $5 worth, just 

enough to get to work and back. 

His point was, and I wonder if you would agree, he said appar- ently at $3-plus, it is taking about a half a point off our gross domestic growth in this country. Would you agree with that number, 

because of the additional cost for petroleum? 

Mr. ORSZAG. Each $10 increase in the cost of a barrel of oil, 

which is what I have in my head, imposes a drag on the economy 

of perhaps $50 billion or so per year. 

Mr. ETHERIDGE. Thank you, Mr. Chairman. 

Mr. ORSZAG. So that is a little under half a percentage. 

Mr. SPRATT. We have a vote at 12:00, so we would like to move 

ahead with dispatch so we can finish and adjourn by the time the 

bell rings, or at least by the time the vote is imminent. 

We will move next to Mr. Berry of Arkansas. 

Mr. BERRY. Thank you, Mr. Chairman. Thank you for having this 

hearing. 

And, Dr. Orszag, we appreciate you and your great knowledge of 

this subject. I don’t know how you keep up with all of this stuff. 

I continue to be amazed. I have noticed, and this is—you are the 

only Director of CBO that I have ever dealt with because I just 

came on this committee when you came—became Director of the 

CBO. But——

Mr. ORSZAG. We are both doing all right so far, huh? 

Mr. BERRY. Sir? 

Mr. ORSZAG. We are both doing okay so far. 

Mr. BERRY. Well, I guess—we are still here. 

Mr. ORSZAG. Yeah, we are still here. 

Mr. BERRY. I notice that when you refer to the debt, that you always refer to the publicly held debt, and you don’t include the debt 

that we owe ourselves basically. Is there a reason for that or——

Mr. ORSZAG. Yes, there is. And the reason for it is that the publicly held debt is a better measure of the interactions between the 

government and the rest of the economy. When the publicly held 

debt goes up, that is really the measure of the credit that the government needs to draw upon from other sources. The debt that is 

owed from one part of the government to another is very important 

for programmatic purposes, but does not have the same macroeconomic consequences as debt held by the public, which is why I 

focus on debt held by the public. 

50

Mr. BERRY. I guess my exception to that would be that by what 

I consider to be understating the amount of debt that we owe, it 

makes the American people think that we don’t owe as much as—

that the future may be a little bit better than it actually is would 

be my impression of that. 

Mr. ORSZAG. That is not the intention. And obviously I would say not only is our long-term fiscal imbalance severe, but $5 trillion, 

which is the level of publicly held debt, is still a significant sum. 

Mr. BERRY. Yeah, I think so, too. In Arkansas we completely 

agree with that. 

My other question to you is this. I remember back in ’01, the administration was saying that if we just cut taxes and stimulated 

the economy, that things would be so good that we would pay off 

all of the debt, and that we wouldn’t even have any government 

bonds to invest in, we wouldn’t be worried about the—about the 

rating of the bonds; there just wouldn’t be any, we would be so 

rich. 

And I remember a little fellow named Mitch Daniels coming to 

the Blue Dogs and explaining to us—because we didn’t understand 

it, and we still don’t—that if we just vote for these tax cuts, that 

there would just be money running in the streets, and the only 

danger would be the—that we wouldn’t have any national debt. 

And then again we—in ’03, we heard these same arguments. And 

then I have heard my colleagues from across the aisle today talking 

about what a wonderful thing that was, and all the good that it has 

done, and what we need to do is more of it. If that is the case—

and like I say, I still don’t understand that. I missed it somewhere. 

If all of those things were such a wonderful idea and such great 

economic policy for this country, how come we are in the mess we 

are in today? It seems—would you agree we are in a mess? That 

may be a little bit too ‘‘one horse store’’ for you. But I——

Mr. ORSZAG. I would say that our fiscal—our long-term fiscal 

condition is undesirable, and short-term economic conditions are 

also problematic. 

Mr. BERRY. If these tax cuts stem—work all this magic that we 

hear about, I just—I am mystified as to why we have got these 

problems. And that is all I will say about that. 

Mr. ORSZAG. Okay, then. 

Mr. BERRY. Thank you, Mr. Chairman. 

Chairman SPRATT. Thank you, Mr. Berry. 

Mr. Becerra. 

Mr. BECERRA. Thank you, Mr. Chairman. 

Dr. Orszag, good to see you again. Thank you very much for your 

testimony. 

Actually let me ask us to step back for just a second and consider 

this conversation. I think it is actually stunning, it is breathtaking 

to think that here you are today. Last week we had Chairman 

Bernanke of the Federal Reserve talking to us about how we better 

do something because this economy is diving into the tank. And so 

I am assuming that you will agree that it is fair to say that the 

best of times of this economic period of growth—or this period of 

economic growth—the so-called good times are now behind us. 

Mr. ORSZAG. We are in a period of significant economic difficulty 

during the short term. 

51

Mr. BECERRA. I love the way economists say that. So the best of 

times in this period of economic growth are gone, and tomorrow the 

horizon for the economy and for the American people is not as 

bright. Some would say it is dim as compared to what it was in 

previous years. 

Yet today after this period of economic boom, we have more 

Americans who have lost their health insurance coverage today. 

Forty-seven million Americans today don’t have health insurance 

coverage. Six hundred million—600,000 more children became uninsured back in 2006. And in 2006, that number had reached almost 8.7 million kids. I suspect after 2007, the numbers will increase. 

Poverty in America increased so that today one in eight Americans, some 361⁄2 million Americans, live in poverty; one in every six 

American children lives in poverty today. That is some 13 million 

kids. And that is after the best of economic times. 

But hold your breath, because the rest of the story was reported 

in the L.A. Times about a week or so ago—less than a week ago—

when in an article they mentioned that Wall Street brokers made 

records amount of money. 

Just some quick lines from the article: Wall Street’s five largest 

investment firms paid record amounts of compensation in 2007 despite the fact that three of the five firms posted quarterly losses 

as a result of the souring investments in subprime mortgages. 

These five brokerage firms shelled out $65.6 billion in compensation and benefits last year. Sixty percent of those $651⁄2 billion 

came in the form of year-end bonuses at the time that we saw 

things tanking. Merrill Lynch, which just reported a quarterly loss 

of $9.8 billion and in 1 year lost 43 percent of its value, is paying 

its top executives major bonuses. These bonuses—these numbers 

are based on calculations for about 186,000 employees in the Big 

Five firms. The average payout was $211,000 per executive. That 

is about four times the average household income in the U.S. That 

was just the bonus. Total compensation for these 185,000 employees averaged $353,000. 

By the way, they make a little note here in another paragraph. 

These payouts they are talking about don’t include the pays for the 

top executives of these firms, which have yet to be calculated. 

These are the middle managers, sales force guys that are making 

that kind of money. 

It seems kind of strange that now that we are talking about difficult times, we forget that there are a lot of folks that never got 

to take advantage of this, and there were some folks that took 

drastic advantage of the good times. And so I think it is worth it 

for us to step back. 

I wanted to also mention as we talk about—I keep hearing my 

colleagues on the Republican side talk about these tax cuts that are 

going to expire and how there will be a tax increase. And I appreciate that you are trying to be an economist in responding to questions about it, the so-called tax increase in 2011 and 2012. I think 

my Republican colleagues should remember that they are the ones 

that imposed this formulation that required these tax cuts to expire. So this Republican tax increase, if you want to call it a tax 

increase, should be called what it is. It was an automatic, preVerDate 0ct 09 2002 20:31 Apr 01, 2008 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6602 J:\DOCS\HEARINGS\110TH\110-28\40339.TXT HBUD1 PsN: DICK
52

arranged return to the tax rates that we had before, any tax increases due to the Republican measures that gave us these tax cuts 

to begin with. 

By the way, unless you disagree with this number, my understanding is that over the next 17 or so years, the cost of these tax 

cuts, were we to extend them forward beyond 2011 to, say, 2017, 

would cost us about $7.2 trillion. That is more than it would cost 

us to make sure that we take care of any shortfall in Social Security for the next 75 years. And so I think if we put it all in context, 

we get a sense of where we are. 

And a final comment and perhaps a quick question is if we have 

a budget fight last year in December where we differed with the 

President to the tune of $22 billion—we wanted to give more 

money for NIH, for cops on the street, education—how does that 

compare to the amount of money that we may see now put out 

without paying for it in a stimulus package of somewhere between 

100- to $150 billion. 

Mr. ORSZAG. It is a lot smaller. 

I would just note quickly on the other point you made, I am not 

sure about the 17-year figure, but a lot of the comparisons that I 

have seen that do that sort of thing compare nominal dollars to a 

present-value figure for Social Security, which would not be something I would want to do. 

Mr. BECERRA. And just to make it clear for clarification, the 

present value of the shortfall in Social Security would be about 4.7 

trillion, I am told. And the present value of the tax cuts extended 

for about 17 years would be about $7.2 trillion. And if it is incorrect, please—I appreciate——

Mr. ORSZAG. That sounds high to me. If extended over 75 years, 

you may get a figure of approximately that large. But 17, I don’t 

think so. 

Mr. BECERRA. Okay. Or perhaps that means it is the extension 

over—for a permanent period of time. Either way it is more than 

what it would cost us to stabilize Social Security. 

Mr. ORSZAG. The present value of the Social Security imbalance 

over the next 75 years is somewhere—it depends on whose numbers you use, but it is well under 1 percent of GDP. The tax legislation, if it is not eroded over time by the alternative minimum tax, 

amounts to about 2 percent of GDP. 

Mr. BECERRA. Thank you. So about twice as much it would cost 

for the Social Security shortfall to be taken care of? 

Mr. ORSZAG. In present value. 

Mr. BECERRA. Thank you, Dr. Orszag. 

Chairman SPRATT. Ms. Moore of Wisconsin, who only 2 days ago 

was in Marion, South Carolina, where she appeared in Mount Pisgah Baptist Church out of nowhere like a swirling dervish. Welcome back to Washington from Marion, South Carolina. Ms. Moore, 

the floor is yours. 

Ms. MOORE. Thank you so much, Mr. Chairman. 

And thank you, Dr. Orszag. 

Before I ask my question, I just wanted some clarifications. 

When Congresswoman Schwartz was talking to you about—about 

what would be an economic stimulus, you made a statement that 

it didn’t matter where people spent the money. And I thought I 

53

heard an exchange where there was a suggestion that paying off 

credit card debt would be a stimulus. But I thought—and—that—

I just want to clarify that that would not, 

Mr. ORSZAG. By ‘‘spend the money,’’ I did not mean paying off 

credit card debt. 

Ms. MOORE. Right. 

Mr. ORSZAG. I meant spend the money on—whether you buy food 

or you buy clothing——

Ms. MOORE. She also talked about paying a health care premium. Do you—is that a—is that a stimulus? She seemed to try 

to elicit that response from you. But I didn’t——

Mr. ORSZAG. No, not really. When you purchase health care—yes, 

when you purchase health care——

Ms. MOORE. Well, people go to Target, Target and Payless Shoes 

and so on. Okay. Good clarification. 

Now, Mr. Becerra and others—in your papers it really seemed to 

lay it out that the lower the income family, the greater the stimulus effect because they are bound to spend it right away. If you 

give it to—if I were to get one of these rebates, for example, I know 

I would pay off credit card debt, not an economic stimulus. Others 

might say that. 

Do you—don’t you find it ironic as you heard Mr. Becerra and 

others mention that really the lowest, lowest, lowest-income families really are not going to benefit by any of the strategies that are 

currently on the table? For example, unemployment insurance—the 

unemployment rate is 5.2 percent, but in my district, for example, 

those discouraged workers—we have 17 percent unemployment 

among white men, 22 percent unemployment among Hispanic men 

and 48 percent unemployment among black men. These are people 

who are not going to be eligible for unemployment insurance if they 

haven’t been in the system. 

Same thing with—like you talked about the 13 million poor children. These 13 million poor children are in families probably headed by women who, under the old system, AFDC—perhaps you could 

get some sort of check for them. They won’t be eligible for the 

EITC. They are probably off TANF because it is time-limited, sanctioned off. 

Don’t you find it ironic that the people who could stimulate the 

economy most probably are outside of the reach of our targeting 

and timeliness? 

Mr. ORSZAG. It is true that the unemployment insurance system 

has holes in it, especially for part-time and some lower-income 

workers. Food stamps tend to do somewhat better in reaching the 

very bottom of the income distribution. 

Ms. MOORE. But the food stamps are very underutilized. 

Wouldn’t you agree with that? I mean, if someone is on disability 

insurance, for example, they get $10 a month SSI. I mean, people 

don’t even bother to show up and stand in line for the $10 a month. 

So my question before I run out of time is, is—there is no definition in your book on automatic stabilizers, so I don’t know what 

that means. But do you think that, given the economy moves in 

certain cycles, that it would be worth it for us to build some sort 

of infrastructure for identifying these poorest of the poor? Because 

there is all kinds of codewords within this Congress about who we 

54

want to help, workers and middle-class families, and help businesses trickle down, but there is no strategy for getting the money 

into the hands of the people who, in fact, would stimulate the economy the most. 

Mr. ORSZAG. What I would say is in periods of economic weakness, which are again unusual, the normal tension between being 

warm-hearted and cool-headed evaporates because you can be both 

warm-hearted and cool-headed at the same time, the more money 

you can get to low- and moderate-income households. And you are 

right, that many of those households don’t qualify for unemployment insurance under current eligibility, and there are, you know, 

various other imperfections in the existing system. 

Ms. MOORE. So this economic stimulus—I mean, there are millions and millions of people—I guess I am calling them the wantto-be worker class, people who are eligible for work. We have basically put our children in a situation where if their parents don’t 

work, they can’t get any economic support by having ended the Aid 

to Families With Dependent Children program. 

So this is a class of people that would spend the money. I mean, 

they would be in Wal-Mart the next day with their checks if they 

could get it. And I certainly hope that this Congress, this committee will really take the advice of the economists and try to figure out a way to get money in the hands of the people who need 

it the most. 

And with that, my time unfortunately has expired. 

Chairman SPRATT. Mr. Bishop. 

Mr. BISHOP. Thank you, Mr. Chairman. 

And I am sure, Dr. Orszag, you are anxious to move on. 

Mr. ORSZAG. No, no, no. I was trying to answer a question. But, 

no. 

Mr. BISHOP. We were all talking about this mantra of timely, targeted and temporary for the economic stimulus package, and it just 

seems to me so remarkably self-evident that two programs that fit 

all three of those criterions are unemployment benefits and extension of food stamps. And my understanding is that unemployment 

benefits have—are estimated to have an economic payoff of about 

2 to 1 in terms of dollars spent, and food stamps of about 11⁄2 to 

1, and yet they are resisted by—certainly by our friends on the 

other side, resisted by the White House. 

And so my question is, is there any nonideological argument that 

is rooted either in economic theory or in empirical evidence that 

says that those two programs would not be stimulative? Or is the 

opposition purely ideological? 

Mr. ORSZAG. I wouldn’t want to characterize opposition or support. What I would say is that from the perspective of short-term 

economic stimulus in a period of—these unusual periods of economic weakness, things like food stamps and unemployment insurance benefits were ranked by the Congressional Budget Office as 

having relatively high bang for the buck precisely because they can 

get money out the door fast to people who will spend most of it. 

Mr. BISHOP. And infrastructure exists to handle the program. 

The same question for providing tax rebates to those who pay 

payroll taxes, but do not pay Federal income tax. Is there any, 

55

again, argument rooted in economic theory that says that that 

would not be stimulative? 

Mr. ORSZAG. The more that you target those types of households 

who tend to be lower income, the bigger bang for the buck you generally get. 

Mr. BISHOP. And what would our mechanism be if the person 

does not pay Federal income tax? What would our mechanism be 

to give them a rebate? Would it be a rebate on payroll taxes? 

Would it be an extension of the Earned Income Tax Credit? 

Mr. ORSZAG. There are a variety of ways in which it could be 

done. The vast majority—in fact, almost all people who have wage 

income file a tax return even if they don’t owe income tax liability. 

And indeed if you were going to make a rebate refundable, you 

would probably want—and base it on 2007 tax information, you 

would probably want to limit it to those with wage income, because 

if not, you could get a very substantial increase in filing among 

people who don’t have wage income in order to get a rebate. What 

you could do is—again using—once the IRS is done processing the 

2007 tax returns, take anyone who reports—who files a tax return 

and has reported wage income, design whatever structure you want 

and basically mail them a check. 

Mr. BISHOP. Okay. Thank you, Mr. Chairman. 

Ms. MOORE. Would you yield some of your time to me? 

Mr. BISHOP. Of course. I would be happy to. 

Ms. MOORE. Did you just tell him that—you just said that you 

would want to limit it to people who had wage income, otherwise 

you would have all these other people filing. Wouldn’t that help? 

I mean, if people filed, and they didn’t have any wage income or 

very little, wouldn’t that help reach the lowest of the low-income? 

Mr. ORSZAG. Those nonfilers tend disproportionately to be elderly 

households. 

Ms. MOORE. Why wouldn’t we want to help them? 

Mr. ORSZAG. Let me answer it in two ways. It is not that you 

wouldn’t want to help them, but two answers. First, as I have already noted, there is a very substantial concern about timing involved here. If you had a massive increase in filing during the 2007 

tax return season, I don’t know that the IRS would be able to wrap 

it up even on time, and that would delay the sending of all of the 

checks. 

The second thing is for whatever it is worth, and the evidence 

is not great on this, but for whatever the evidence is worth, at any 

given level of income, it appears that, if anything, elderly households have a lower marginal propensity to consume than nonelderly households. So all else being equal at the same level of income, sending the dollar to an elderly household may not have 

quite as much kick to it as a nonelderly household. But that is obviously—you may want to do it for other reasons anyway. I would, 

though, be very cautious about overloading the IRS system at this 

point if you want to get checks out in a timely fashion. 

Ms. MOORE. Well, it would help primarily the elderly. But that 

other class that I just described to you of those people who just recently were kicked off TANF, for example, it would help those 

households tremendously to be able to file an income tax. I mean, 

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there are a lot—I mean, I think your paper even described that 

there are many more households in that situation. 

With 3 seconds left, let me ask this question. Is there any—in 

the long term, in the long run, don’t you think we need to reform 

our unemployment metric system so that we can find a way to 

measure those people who are eligible for the workforce, but are 

not working? Because, you know, this 5.2 unemployment rate, I can 

tell you—I can look out the window of my home and know that 

that is not correct. 

Mr. ORSZAG. Well, we actually have a system in place. We just 

don’t tend to use those measures as much. But, for example, if you 

examine the ratio of employed people to the population rather than 

the number of unemployed people to the labor force, the labor market over the past few years looks much weaker. We basically have 

had a significant—we haven’t yet had the employment population 

ratio rise back up to—or the share of the population working would 

be the simplest way of putting it—rise back up to the levels that 

we saw in the late 1990s, and that may be a better indication for 

many purposes of the overall state of the labor market than the official unemployment data which require that people be actively 

searching for a job in order to be counted. 

Ms. MOORE. I just think it is worthless at a time like this, you 

know, if the economy were to get weaker than it is, if we were to 

actually move into a depression or a recession, we would actually 

be totally incompetent at delivering money to those people who are 

starving. Thank you. 

Chairman SPRATT. Thank you. 

And one final housekeeping term, the issue of—let me ask unanimous consent that all Members who did not have an opportunity 

to ask questions to submit the questions for the record. 

Dr. Orszag, thank you for your clear and forthright and expert 

testimony. You have helped us tremendously. Let me thank you 

and CBO also for a fine piece of work on the budget and economic 

outlook for the forthcoming period. We look forward to working 

with you towards sensible budget policies, and we very much appreciate your help. 

Can I ask one final question? 

Mr. ORSZAG. Sure. 

Chairman SPRATT. You have put three graphs on the front page. 

They have displaced the health care graph that we have been accustomed to seeing as your logo almost. The very top one indicates 

the percentage of mortgage delinquencies by different adjustablerate mortgages. 

Mr. ORSZAG. Yes. 

Chairman SPRATT. One is subprime, and the others are conforming or prime——

Mr. ORSZAG. Right. 

Chairman SPRATT [continuing]. ARM mortgages. If you look at 

that, it appears that as recently as ’98, ’99, 2000, 2001, the percentage of adjustable-rate mortgages which were subprime and delinquent was well above 15 percent, whereas the prime adjustablerate mortgages were significantly below 5 percent. So for some time 

now, ARMs, subprime ARMs, have been three times—delinquencies 

have been three times as much or as frequent as under prime 

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ARMs. How do you account for the fact that we are now just seeing 

the markets get spooked by subprime mortgages when this problem 

has been with us for several years? 

Mr. ORSZAG. One significant change is the volume of subprime 

ARM activity. So this is the share of the outstanding subprime 

ARMs. But the level of activity in subprime ARMs skyrocketed over 

the past several years, and so the aggregate amount went up substantially relative to, say, the late 1990s. 

Chairman SPRATT. I know from the experience of running a 

small bank that the examiners would chew you out when your 

loans get more than 1 percent delinquent. And I don’t know why 

it took us so long to get around to recognizing what was happening 

in the subprime market. 

Mr. ORSZAG. And, Mr. Spratt, if I could just join you quickly in 

thanking the CBO staff not only for the work on the outlook, but 

also for that stimulus options report that was undertaken in a very 

compressed time schedule. 

Chairman SPRATT. Thank you very much indeed. That concludes 

our hearing. 

[Whereupon, at 12:18 p.m., the committee was adjourned.]

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