U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

72–574 PDF 2012

THE CONGRESSIONAL BUDGET OFFICE’S 

BUDGET AND ECONOMIC OUTLOOK 

HEARING 

BEFORE THE

COMMITTEE ON THE BUDGET 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

HEARING HELD IN WASHINGTON, DC, FEBRUARY 1, 2012 

Serial No. 112–17 

Printed for the use of the Committee on the Budget 

( 

Available on the Internet: 

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

COMMITTEE ON THE BUDGET 

PAUL RYAN, Wisconsin, Chairman 

SCOTT GARRETT, New Jersey 

MICHAEL K. SIMPSON, Idaho 

JOHN CAMPBELL, California 

KEN CALVERT, California 

W. TODD AKIN, Missouri 

TOM COLE, Oklahoma 

TOM PRICE, Georgia 

TOM MCCLINTOCK, California 

JASON CHAFFETZ, Utah 

MARLIN A. STUTZMAN, Indiana 

JAMES LANKFORD, Oklahoma 

DIANE BLACK, Tennessee 

REID J. RIBBLE, Wisconsin 

BILL FLORES, Texas 

MICK MULVANEY, South Carolina 

TIM HUELSKAMP, Kansas 

TODD C. YOUNG, Indiana 

JUSTIN AMASH, Michigan 

TODD ROKITA, Indiana 

FRANK C. GUINTA, New Hampshire 

ROB WOODALL, Georgia 

CHRIS VAN HOLLEN, Maryland, 

Ranking Minority Member 

ALLYSON Y. SCHWARTZ, Pennsylvania 

MARCY KAPTUR, Ohio 

LLOYD DOGGETT, Texas 

EARL BLUMENAUER, Oregon 

BETTY MCCOLLUM, Minnesota 

JOHN A. YARMUTH, Kentucky 

BILL PASCRELL, JR., New Jersey 

MICHAEL M. HONDA, California 

TIM RYAN, Ohio 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin 

KATHY CASTOR, Florida 

HEATH SHULER, North Carolina 

PAUL TONKO, New York 

KAREN BASS, California 

PROFESSIONAL STAFF

AUSTIN SMYTHE, Staff Director 

THOMAS S. KAHN, Minority Staff Director 
(III) 

C O N T E N T S 

Page 

Hearing held in Washington, DC, February 1, 2012 ............................................ 1 

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

Prepared statement of ............................................................................... 2 

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

Hon. Chris Van Hollen, ranking minority member, Committee on the 

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

Prepared statement of ............................................................................... 6 

Douglass W. Elmendorf, Director, Congressional Budget 0ffice ................... 8 

Prepared statement of ............................................................................... 12 

Response to questions submitted for the record ..................................... 57 

(1) 

THE CONGRESSIONAL BUDGET OFFICE’S 

BUDGET AND ECONOMIC OUTLOOK 

WEDNESDAY, FEBRUARY 1, 2012 

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

The Committee met, pursuant to call, at 10:00 a.m., in room 210, 

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

Committee] presiding. 

Present: Representatives Ryan, Garrett, Campbell, McClintock, 

Stutzman, Lankford, Black, Ribble, Flores, Mulvaney, Huelskamp, 

Young, Amash, Rokita, Woodall, Van Hollen, Doggett, Blumenauer, 

McCollum, Yarmuth, Pascrell, Honda, Ryan of Ohio, Moore, Castor, 

Tonko, Bass. 

Chairman RYAN. The Committee will come to order. Welcome all 

to this very important hearing on the difficult fiscal challenges and 

economic challenges ahead of us. I want to welcome the CBO director back with us again with his beautiful daughters. It is good to 

have you here again, Doug, I wish we had better news. 

I want to thank Doug, first of all, Dr. Elmendorf and your entire 

CBO staff for the hard work on the release of the annual budget 

and economic outlook. We have a compressed timeline this year, 

given the tardiness of the president’s budget, given our Easter coming earlier; so we know that CBO was going to be pushed extra 

hard this year, and I know you are working really hard around the 

clock over there. So first off I want to start by saying thank you 

for all you have done. 

There is no question about it; our fiscal and economic outlook is 

grim. According to CBO’s outlook, 2012 will mark the fourth 

straight year of trillion dollar deficits. Trillions more dollars will be 

added to the debt in the years ahead, putting a chilling effect on 

job creation today and committing the next generation to a diminished future. CBO projects economic growth will remain sluggish 

and the unemployment rate to hover near 9 percent through 2014. 

This report confirms what too many Americans already painfully 

are aware of: President Obama’s economic policies simply are not 

working. 

The president and his party’s leaders successfully enacted much 

of their agenda, but they have failed to advance policies that get 

our economy growing. They have failed to advance solutions that 

get our fiscal house in order. In the Senate, they have failed to 

pass a budget in over 1,000 days. The problems have been growing 

for years, and there is no question that the blame is bipartisan in 

nature. For years politicians from both political parties have failed 
2 

to be honest with the American people about the size and scope of 

this debt threat. The new House majority has worked to chart a 

new course. 

In this committee, we authored and advanced a principled reform 

agenda that provides a brighter fiscal and economic outlook. The 

House passed budget strengthens our critical health and retirement security programs, it repairs our fraying safety net, and it 

makes sensible reforms that spur job creation and economic 

growth, while putting government spending on a more sustainable 

path. 

In response to our budget, the president and his party leaders 

have still yet to put forward a credible plan to solve our country’s 

problems. Look, we have a big difference of opinion on the big questions of the day, but I hope CBO’s alarming report encourages us 

to focus on the urgent need for real solutions instead of resorting 

to the same old false attacks with no alternatives. 

Let’s build upon the sensible spending cuts enacted last year in 

a bipartisan basis. Here at the House Budget Committee, we have 

worked in a bipartisan manner to advance budget reforms aimed 

at reducing the deficit and improving accountability. There are ongoing efforts to build a bipartisan coalition on the critical need to 

save and shrink in Medicare, for example. I invite the president 

and my friends across the aisle to join us in this conversation. The 

CBO’s outlook could not be more ominous. I look forward to your 

testimony, Dr. Elmendorf, which I hope can inform and guide this 

committee as we work to advance solutions in the year head, and 

with that I will yield to the ranking member Mr. Van Hollen. 

[The prepared statement of Chairman Paul Ryan follows:] 

PREPARED STATEMENT OF HON. PAUL RYAN, CHAIRMAN, 

HOUSE COMMITTEE ON THE BUDGET

Welcome all to this important hearing on the difficult fiscal and economic challenges before us. 

I welcome Congressional Budget Office Director Doug Elmendorf to the Budget 

Committee. I thank you Doug and your entire CBO staff for their hard work on the 

release of the annual Budget and Economic Outlook. 

There is no question about it: The outlook is grim. 

According to CBO’s outlook, 2012 will mark the fourth straight year of trilliondollar deficits. Trillions more dollars will be added to the debt in the years ahead, 

putting a chilling effect on job creation today, and committing the next generation 

to a diminished future. CBO projects economic growth to remain sluggish and the 

unemployment rate to hover near 9 percent through 2014. 

This report confirms what too many Americans are already painfully aware of: 

President Obama’s economic policies are not working. 

The President and his party’s leaders successfully enacted much of their agenda, 

but they have failed to advance policies that get our economy growing and creating 

jobs. They have failed to advance solutions that get our fiscal house in order. In the 

Senate, they have failed to pass a budget in over 1,000 days. 

The problems have been growing for years, and there is no question that the 

blame is bipartisan in nature. For years, politicians from both political parties have 

failed to be honest with the American people about the size and scope of the debt 

threat. 

The new House Majority has worked to chart a new course with bold solutions. 

In this committee, we authored and advanced a principled reform agenda that provides a brighter fiscal and economic outlook. The House-passed budget strengthens 

our critical health and retirement security programs, repairs the safety net, reforms 

the broken tax code, and puts government spending on a sustainable path. 

In response to our budget, the President and his party’s leaders have still not put 

forward a credible budget plan to tackle our problems. 
3 

We have big differences of opinion on the big questions of the day, but it is not 

enough to simply criticize. It is not simply enough to oppose—we need to propose 

real solutions instead of resorting to the same old false attacks. 

Here at the Budget Committee, we’ve worked in a bipartisan manner to advance 

budget reforms aimed at reducing the deficit and improving accountability. There 

are ongoing efforts to build a bipartisan coalition on the critical need to save and 

strengthen Medicare. I invite the President and my friends across the aisle to join 

this conversation. 

The CBO’s Outlook could not be more ominous. I look forward to your testimony, 

Director Elmendorf, which I hope can help inform and guide this committee as we 

work to advance solutions in the year ahead. 

With that, I yield to Ranking Member, Mr. Van Hollen. 

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

chairman in welcoming you, Dr. Elmendorf, and your two daughters. It is great to have members of the family here today, and I 

want to reference the report that was issued by CBO yesterday 

that the chairman mentioned because while it shows that the economy remains very fragile, it also shows that it is slowly recovering; 

it demonstrates that we still have much work to do to create jobs, 

tackle the deficit and return the budget to a long-term fiscally sustainable path. 

For a moment let’s focus on the positive signs of the budding economic recovery, and remember where we were just three years ago. 

If you could please put up the first slide. 

What this slide shows is the day that President Bush left office, 

the day that President Obama was sworn in, the economy was collapsing at an even faster rate than originally thought. The gross 

domestic product was plummeting at a rate of 8.9 percent, in other 

words, negative 8.9 percent GDP, and we were shedding more than 

840,000 jobs a month; so in the month the president was sworn in, 

840,000 jobs were lost. 

As shown in previous CBO reports and findings, the passage of 

the Recovery Act, coupled with actions to save the auto industry 

and efforts by the Federal Reserve, helped end the free fall, and 
4 

began the climb upward toward economic growth. Now we have all 

heard the expression that we are entitled to our own opinions, but 

not our own facts. The fact is that the CBO said that the Recovery 

Act helped save, or create, up to 3 million jobs in the year 2010, 

that it lowered the unemployment rate by up 1.8 percentage points 

in calendar year 2010, and lowered unemployment by up to 1.4 percentage points in 2011, compared to what it would have done if the 

Congress had not taken action. 

The private sector has now added jobs in every month since 

March 2010, adding 3.2 million jobs in total. More jobs were created last year than in any year since 2005. What this chart shows, 

very plainly, is that we were on a huge downhill cascade. After the 

president was sworn in we began to reduce the downward momentum, turn the corner, and we have been steadily heading up, first 

reducing the rate of job loss, which you obviously have to do when 

you are losing GDP at a 8.9 percent rate, and headed into positive 

job territory. So the facts as reported by the CBO are clear that the 

Recovery Act did serve its purpose. It is kind of like when you are 

walking up an escalator that is going down very quickly. If you 

take no action, you will go down very fast. Even if you take action, 

it will appear at first that you are running in place, and then slowly you will be moving up, and that is what we are doing. 

The CBO report, of course, also shows that the economy remains 

fragile and that we still face serious budget obstacles. While the 

economy continues to grow, at the current rate it will take too long 

for unemployment to return to the pre-crisis levels, which is why 

our first priority has to be making sure we do what we can to help 

small businesses and businesses help put people back to work. 

We should take immediate action in this House on the plan the 

president submitted to the Congress last September. The president’s jobs plan, including his significant infrastructure investments to help rebuild our infrastructure around the country. We 

should finish the job with respect to extending the payroll tax cut 

for 160 million Americans, and making sure that unemployment insurance is there for people who have lost work through no fault of 

their own. 

Mr. Chairman, I am going to apologize to both you and Dr. Elmendorf because after the statement I am going to have to go to 

the Conference Committee on that issue, and I hope that Conference Committee will move forward quickly and without delay to 

get that job done. 

Finally, the Congressional Budget Office’s report underscores the 

need to address the looming deficit in a balanced, reasoned way. 

The Budget Control Act that this body passed last year and the 

president signed saves about $1 trillion from cuts in the discretionary budget over the next decade. It will also result in an additional $1 trillion in deficit reductions starting in January 2013. 

There are better ways to do that and there are worse ways to do 

that; I hope this Congress will come together and do it in a way 

that makes sense. 

I think as we listen to the testimony from Dr. Elmendorf, it will 

be clear that the bipartisan commission s that have looked at this 

challenge were right: Simpson-Bowles, Rivlin-Domenici, that you 

really need to tackle this in a balanced way. I am just going to 
5 

quickly put up two charts and then I will conclude my opening 

statement. 

What this chart shows, and I believe, Dr. Elmendorf, it is in your 

testimony, is that under current law the deficit would be reduced 

to that bottom heavily blue shaded line so that over the 10 year 

period the deficit would decline substantially. If we packed our 

bags and went away and did not come back until next year, it 

would reduce the deficit significantly. That very lightly shaded blue 

right over the bottom bar is the revenue that is lost if we keep in 

place all the current tax policies, and so clearly that is a factor. 

Now, I do not think anyone is suggesting that we want to put in 

policies that would capture all that revenue; I am not suggesting 

that, but this is an important chart to understand what current 

law would do in the impact of revenue. 

If we go to the next chart, it quantifies those numbers and makes 

it clear that if you extend all the 2001, 2003 tax cuts in index 

AMT, that adds 4.5 trillion to the deficit. 
6 

The other tax extenders, if you continue those, it adds $839 bil- lion. If you add the debt service on that you get to over $6.3 trillion 

in revenue; and if you look at the CBO baseline deficits, cumulative 

over 10 years, they are just over 3 trillion. So the cost of continuing 

all those policies on the revenue side leads to a doubling of the deficit over the next 10 years. 

I want to make it clear: I am not proposing that we change all 

the current policies, but I think this does give us a very clear indication of the order of magnitude. I will give a very clear example. 

One trillion of that is accounted for by the tax cuts for the folks 

at the very top, and if you returned those tax rates to where they 

were during the Clinton administration, a period of great economic 

growth, that would be $1 trillion of that. I think we need to tackle 

this through tax reform, closing loopholes, sensible tax reform, but 

I do think this underscores what the bipartisan groups have said, 

that you need to take a balanced approach; yes we need to make 

some cuts, we need to make some reforms, but we also need to deal 

with the other side of the equation as well. Thank you, Mr. Chairman, and I apologize for having to leave. 

[The prepared statement of Chris Van Hollen follows:] 

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

HOUSE BUDGET COMMITTEE

Thank you, Mr. Chairman. I want to join the Chairman in welcoming you, Dr. 

Elmendorf, and your two daughters; it’s great to have members of the family here 

today. And I want to reference the report that was issued by CBO yesterday, because while it shows that the economy remains very fragile, it also shows that it 

is slowly recovering. It demonstrates that we still have much work to do to create 

jobs, tackle the deficit, and return the budget to a long-term fiscally sustainable 

path. But for a moment, let’s focus on the positive signs of the budding economic 

recovery and remember where we were just three years ago. 

The day that President Bush left office, the day that President Obama was sworn 

in, the economy was collapsing at an even faster rate than originally thought. The 

gross domestic product was plummeting at a rate of 8.9 percent, in other words negative 8.9 percent GDP, and we were shedding more than 840,000 jobs a month. So 
7 

in the month the President was sworn in, 840,000 jobs were lost. As shown in previous CBO reports and findings, the passage of the Recovery Act—coupled with actions to save the auto industry and efforts by the Federal Reserve—helped end the 

free fall and began the climb upward toward economic growth. 

Now, we’ve all heard the expression that we’re entitled to our own opinions, but 

not to our own facts. The fact is that the CBO said that the Recovery Act helped 

save or create up to 3 million jobs in the year 2010. It also lowered the unemployment rate by up to 1.8 percentage points in calendar year 2010, and lowered unemployment by up to 1.4 percentage points in 2011, compared to what it would have 

done if the Congress had not taken action. The private sector has now added jobs 

in every month since March 2010, adding 3.2 million jobs in total. More jobs were 

created last year than in any year since 2005. It is clear that we were on a huge 

downhill cascade and that after the President was sworn in, and we began to reduce 

the downward momentum and turn the corner. We have been steadily heading up, 

reducing first the rate of job loss, which you obviously have to do when you’re losing 

GDP at an 8.9 percent rate, and now heading into positive job territory. 

So, the facts as reported by the CBO are clear that the Recovery Act did serve 

its purpose. It’s kind of like when you’re walking up an escalator that’s going down 

very quickly. If you take no action, you will go down very fast. Even if you take 

action, it will appear at first that you’re running in place and then slowly you’ll be 

moving up. That’s what we’re doing. 

The CBO report, of course, also shows that the economy remains fragile and that 

we still face serious budget obstacles. While the economy continues to grow at the 

current rate, it will take too long for unemployment to return to the pre-crisis levels. 

That is why our first priority has to be making sure we do what we can to help 

small business and businesses help put people back to work. We should take immediate action in this House on the jobs plan the President submitted to the Congress 

last September, including his significant infrastructure investments to help rebuild 

our infrastructure around the country. 

We should also finish the job with respect to extending the payroll tax cut for 160 

million Americans and making sure that unemployment insurance is there for people who have lost work through no fault of their own. And, Mr. Chairman, I’m going 

to apologize to both you and Dr. Elmendorf, because after this statement I’m going 

to have to go to the conference committee on that issue and I hope that conference 

committee will move forward quickly and without delay to get that job done. 

Finally, the Congressional Budget Office’s report underscores the need to address 

the looming deficit in a balanced, reasoned way. The Budget Control Act that this 

body passed last year and the President signed saves about $1 trillion from cuts in 

the discretionary budget over the next decade. It will also result in an additional 

$1 trillion in deficit reductions starting in January 2013. There are better ways to 

make those additional cuts; I hope this Congress will come together and do it in 

a way that makes sense. But I think as we listen to the testimony from Dr. Elmendorf, it will be clear that the bipartisan commissions that have looked at this challenge—both Simpson-Bowles and Rivlin-Domenici—were right that you really need 

to tackle this in a balanced way. 

Under current law, if we packed our bags—and didn’t come back until next year, 

it would reduce the deficit significantly. And we would lose significant revenue if 

we keep in place all the current tax policies, and so clearly that is a factor. Now, 

I don’t think anyone is suggesting that we want to put in policies that would capture all that revenue; I’m not suggesting that. But it is important to understand 

how big an impact those projected revenues have on CBO’s deficit estimates. 

If you extend all the 2001, 2003 tax cuts and index AMT, that adds $4.5 trillion 

to the deficit. And if you continue other tax extenders, it adds $839 billion. If you 

add the debt service on that, you get to over $6.3 trillion added to the deficit. Now, 

if you look at the CBO baseline deficits, cumulative over ten years, they’re just over 

$3 trillion. So the cost of continuing all those policies on the revenue side leads to 

a doubling of the deficit over the next ten years. So I want to make it clear, I am 

not proposing that we change all the current policies, but I think this does give us 

a very clear indication of the order of magnitude. I’ll give a very clear example. If 

you returned the tax rates for the folks at the very top to where they were during 

the Clinton administration, a period of great economic growth, we could reduce our 

deficit by about $1 trillion. 

This report underscores what the bipartisan groups have said—you need to take 

a balanced approach. Yes, we need to make some cuts, we need to make some reforms, but we also need to deal with the other side of the equation as well. I think 

we need to tackle this by also closing loopholes and enacting sensible tax reform. 

Thank you, Mr. Chairman, and I apologize for having to leave. 
8 

Chairman RYAN. Sure, my pleasure. Dr. Elmendorf, the time is 

yours. 

STATEMENT OF DOUGLASS W. ELMENDORF, DIRECTOR, 

CONGRESSIONAL BUDGET OFFICE 

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

Van Hollen. Thank you for your kind words about CBO. I am privileged to be leading a group of extraordinarily talented and dedicated public servants, and we all appreciate it very much this support that you, Mr. Chairman, and you, Congressman Van Hollen, 

have shown for our work. We will continue to do our very best for 

this committee and for the Congress as a whole. 

I will be referring, as I talk, to some charts that I am told are 

in your notebooks. It is about half a dozen slides. They are mostly 

out of the outlook, but they are collected in this little handout to 

makes it easier for you to follow what I say. 

Let me begin by noting that our baseline economic and budgetary 

projections are conditioned on current law, not because we expect 

that there will be no changes in law, but because this approach 

provides a benchmark against which potential changes can be 

measured. What we are presenting is a benchmark, not a forecast. 

That distinction has a large impact on the budget and economic 

projections. 

What is our assessment of the economic outlook? As you know, 

the pace of the recovery has been slow since the recession ended 

two and a half years ago, and we project that it will continue to 

be slow for the next two years, reflecting both the lingering effects 

of the crisis in the financial markets and the recession, and the fiscal restraint that will arise under current law. Specifically, current 

law fiscal policy will reduce the growth of output slightly in 2012 

and significantly in 2013 through a combination of large tax increases and spending cuts. Our projections incorporate the upcoming expiration of the payroll tax cut and emergency unemployment 

benefits, the expiration of the tax cuts enacted in 2001, 2003, and 

2009, as well as other expiring tax provisions. 

The constraints on spending imposed by last year’s Budget Control Act and the winding down of the budgetary effects of the 2009 

Recovery Act. Taken together those policies will generate a sharp 

fiscal contraction. In addition, the excess number of houses, loss of 

wealth, run-up in debt, and other legacies of the economic downturn are continuing to weigh on household and business spending. 

If you look at the first slide in the packet which looks roughly 

like this, we project that real GDP will grow by only two percent 

this year and only about one percent next year. We expect economic activity to quicken after 2013, but real GDP to remain below 

the economy’s potential through 2017. 

According to our projections, the economy is only about halfway 

through the cumulative shortfall in output that will result from the 

recession and its aftermath. This picture is not the one to which 

I am referring at the moment. The costs associated with that persistent output gap are immense and they fall disproportionately on 

people who lose their jobs, who are displaced from their homes, or 

who own businesses that fail. In particular, the labor market still 
9 

has a great deal of slack, mainly as a consequence of continued 

weakness in demand for goods and services. 

In CBO’s forecast, unemployment rate remains above eight percent, both this year and next. As economic growth picks up after 

2013, the unemployment rate will gradually decline, but in our projection it remains above 7 percent until 2015 before dropping to 5 

and one-quarter percent by the end of the coming decade. While 

the economy continues to be weak during the next few years, inflation and interest rates will remain low. Let me turn now to our 

budget projections. 

Under current law we expect that this year’s deficit will be about 

$1.1 trillion. At 7 percent of GDP, that is nearly 2 percentage 

points less than the deficit recorded last year, but still larger than 

any deficit between 1947 and 2008. Over the next few years projected deficits in CBO’s baseline narrow sharply, averaging one and 

a half percent of GDP and totaling about $3 trillion between 2013 

and 2022. 

With deficits small relative to the size of the economy, debt held 

by the public drops a little as a share of GDP, but remains quite 

high. Much of the projected decline in the deficit occurs because 

under current law revenues will rise considerably. In particular, 

between 2012 and 2014, revenues in our baseline shoot up by more 

than 30 percent because of the recent or scheduled expiration of 

various tax provisions, and new taxes and other collections that are 

scheduled to go into effect. Federal spending on the baseline declines modestly relative to GDP in the next few years as the economy expands and the statutory caps constrain discretionary appropriations. 

Later in the decade, spending turns up again relative to GDP because of increasing expenses generated by the ageing of the population, rising costs for health care, and because the accumulation 

of debt and rising interest rates will cause a surge in the government’s interest costs. 

Of course, these baseline projections are heavily influenced by 

the changes in tax and spending policies that are embodied in current law; changes, that in some cases, represent a significant departure from recent policies. 

To illustrate the budgetary consequences of maintaining some 

tax and spending policies that have recently been in effect, CBO 

developed projections under an alternative fiscal scenario. Like the 

baseline, this is not a prediction by us about policy or a recommendation about policy, it is simply meant to show to you the 

consequences of some fiscal actions that are regularly discussed in 

the Congress. This alternative scenario incorporates the following 

assumptions. 

First, that all expiring tax provisions other than the payroll tax 

reduction are extended. 

Second, that the alternative minimum tax or AMT is indexed for 

inflation after 2011. 

Third, that Medicare’s payment rates for physician’s services are 

held constant at their current level, rather than dropping by 27 

percent in March and more thereafter as scheduled under current 

law; and fourth, that the automatic spending reductions required 

by the Budget Control Act, in the absence of legislation reported 
10 

by the join select committee on deficit reduction, do not take effect; 

although, in this scenario the original caps on discretionary appropriations would remain in place. 

Under that alternative fiscal scenario, deficits over the 2013, 

2022 period would be far higher than in the baseline, averaging 

five and a half percent of GDP rather than one and a half percent, 

and totaling $11 trillion, rather than roughly $3 trillion. 

Debt held by the public would climb on an unsustainable path, 

reaching 94 percent of GDP in 2022, the highest figure since just 

after World War II. Under that scenario, the economy would be noticeably stronger during the next few years than under current 

law, but noticeably weaker later in the decade. The report presents 

estimates of those effects using ranges of numbers to reflect the uncertainty involved. The midpoints of the ranges for the end of 2013 

show GNP, that is two percent higher, and an unemployment rate 

that is 1 percentage point lower than would be the case under current law. However, the midpoint of the range for 2022 shows GNP 

that is almost two and a half percent lower than under current law 

because of the crowding out of investment that would be caused by 

the escalating debt. 

It bears emphasis that projecting economic outcomes for any 

path of fiscal policy, and the budget outcomes that would result 

from them, is very difficult. Many things could turn out to cause 

the economy and the budget to be worse or better than we project; 

however, there is no plausible economic outcome under which the 

policies of the alternative scenario I have outlined would lead to a 

sustainable budget outcome. 

The fundamental fiscal challenge, during this decade and beyond, 

remains the aging of the population and rising costs for health 

care. The number of people aged 65 or older will increase by onethird in the coming decade, substantially raising the cost of Social 

Security, Medicare, and Medicaid. In addition, the Affordable Care 

Act will significantly increase the number of non-elderly people receiving assistance through federal health care programs. 

Furthermore, CBO predicts that the cost per enrollee for Social 

Security and the major health care programs will continue to rise. 

Because of these forces the stated budget policies that were in effect in the past cannot be maintained in the future. 

Here is one way to think about the problem using CBO’s projections under the alternative fiscal scenario, which as I have said, 

represents a combination of many recent and current policies. 

Under this scenario, outlays for Social Security and the health care 

programs would be much higher by the end of this coming decade 

than in the past, more than 5 percent of GDP higher than in that 

40 year average. However, outlays for all other federal programs 

are projected to be much lower than in the past, averaging in the 

past 40 years, they have averaged about 11 percent of GDP. In our 

projections for this scenario they would be about 8 percent of GDP 

in 2022. That would be lower than any year in the past 40 years. 

Despite the constraint on those programs, the rise in cost for Social Security and the federal health care programs mean that the 

budget deficit under this scenario is projected to be 6.1 percent of 

GDP. To keep debt from rising, relative to GDP, the deficit would 
11 

need to be about $900 billion smaller in 2022; and that year alone 

would be the case under this scenario. 

Therefore, to put the federal budget on sustainable path, policy 

makers will need to allow federal revenues to increase to a much 

higher percentage of GDP than we have seen in the past 40 years, 

or make very large changes to Social Security and federal health 

care programs, or pursue some combination of those two approaches. 

Let me close by highlighting the consequential choices that policy 

makers face this year. One on hand, if policy makers leave current 

laws unchanged, the federal debt will probably recede slowly relative to the size of the economy. That will occur because of a large 

increase in revenues and a sharp restraint in federal spending 

apart from the largest programs I have mentioned. However, both 

of those budgetary changes from historical patterns will have significant economic and social effects. Moreover, the sharp fiscal restraint will markedly slow the economic recovery. 

On the other hand, changing current laws to allow current policies to continue would boost the economy and allow people to pay 

less in taxes and benefit more from government programs in the 

next few years, but would put the nation on a quickly 

unsustainable fiscal course. If policy makers wanted to achieve 

both a short-term economic boost and medium-term and long-term 

fiscal sustainability, they would need to enact policies that lead 

deficits significantly wider than in our current law baseline for the 

next few years, but significantly narrower than would occur under 

this continuation of current policies that we have described in the 

alternative fiscal scenario. 

In conclusion, how much and how quickly the budget deficit declines over the coming decade will depend, in part, on how well the 

economy does. Probably more critical though, will be the choices 

you make as you face the substantial changes to tax and spending 

policies that are slated to take effect within this year. Thank you. 

I am happy to take your questions. 

[The prepared statement of Douglas Elmendorf follows:] 
12 
13 
14 
15 
16 
17 

Chairman RYAN. So in other words, it is pretty bleak. I just sum 

it up. There are so many areas I could go. Let’s talk about Medicare and your analytical tools in measuring what is going to become the largest federal program. We have two scenarios here 

which do a service of showing where we are headed. Extended 

baseline and alternative fiscal scenario: under the alternative fiscal 

scenario, which is your attempt to try and get closer to reality, that 

is my description, I do not know if that is yours, but from your 
18 

June 2011 long-term outlook, you show Medicare doubling as a percentage of GDP over the next 20 years, and then rising to 14 percent of GDP in 2085. By 2037, debt exceeds 200 percent of GDP. 

So what we find, and I think everybody agrees with this, I do not 

need to belabor this, is that Medicare becomes unsustainable under 

the alternative fiscal scenario because it drives debt to just untenable levels. So that is a future we know is not going to exist because it simply cannot sustain itself. You would agree with that, 

right? 

Mr. ELMENDORF. So I agree with the alternative fiscal scenario 

cannot persist indefinitely, and as you say, you were referring to 

our projections over the long run from last June. 

Chairman RYAN. Right. 

Mr. ELMENDORF. I think it is the combination of policies in that 

scenario that cannot be sustained together. One could sustain the 

Medicare path while making other changes, or the Social Security 

path while making other changes, or the revenue path while making other changes, and the set of changes that will be made will 

depend on you and your colleagues. That combination of policies 

cannot be sustained over the next quarter century. 

Chairman RYAN. So when we look at the extended baseline, my 

own experience from being on the Medicare Oversight Committee 

for 12 years now, is that whenever we seek to control costs by cutting reimbursement rates to providers, what we learn is that the 

cuts are either not sustained, meaning they are given back, or they 

cause higher utilization rates that actually erode the anticipated 

savings. The president’s health care law cut Medicare payments to 

providers by $500 billion over 10 years to pay for the new entitlement. It also created the IPAB and under this proposal that the 

president has more recently put out, the IPAB will be tasked with 

holding Medicare’s growth to GDP plus .5 percent by cutting reimbursement to providers. 

Now, last year you testified that CBO has, I think as you said 

it, a gap in the toolkit when it comes to analyzing the behavior of 

physicians and beneficiaries’ ability to access care. Do you still 

more or less have that gap in the toolkit to try and analyze behavioral changes and access on both the provider and the beneficiary 

side? 

Mr. ELMENDORF. I am afraid we do, Mr. Chairman. It is a gap 

that we are trying to fill. We have projects underway, and we have 

been in conversation with members of our panel, health advisers, 

about what evidence we can draw on in trying to give the Congress 

a better sense of how changes in payments to providers would affect the beneficiaries access to care and quality of care, but we are 

at the beginning of that road, certainly not the end. 

Chairman RYAN. So I obviously want to encourage you to keep 

doing that because we are getting analysis from the actuaries. Rick 

Foster, the chief actuary of CMS, was here just a few weeks after 

you were the last time, where he basically told us that he estimates 

that 40 percent of providers will become unprofitable by 2050 and 

therefore go out of business, or just stop taking Medicare according 

to the cuts in the current health care law. So they are able to make 

those kinds of projections. He also has told us that Medicare cur-
19 

rently pays physicians 80 cents on the dollar, but is on course to 

pay physicians less than 30 cents on the dollar in decades ahead. 

He is basically telling us that there are going to be massive access problems and providers are just going to stop taking Medicare 

beneficiaries. So we are getting this kind of analysis from CMS, I 

think it would be helpful to get it from CBO. 

Let me ask you another question about your toolkit. There have 

been many health care economists, both from the left and the right, 

that have argued that choice and competition actually would lower 

cost and improve quality, and we have seen some anecdotal evidence of that even in Medicare areas. A premium support model, 

which we have talked about here quite a bit, you have bipartisan 

efforts that have been made: Alice Rivlin, former CBO director and 

OMB director, and I had recently worked with Senator Ron Wyden, 

which attempt to employ a competitive bidding process to measure 

the growth rate of premium support payments. Do you still lack 

the modeling capabilities to measure the lower cost under such a 

competitive premium support kind of a system? 

Mr. ELMENDORF. We are working very hard to try to fill that gap 

as well Mr. Chairman. In the analysis that we did, for example, 

your proposal last spring, we were able to incorporate the effective 

competition and other factors on the cost of insurance through 

Medicare or the private sector today, but we did not have the tools 

to try to analyze how the flexibility of the providers that insurers 

would have in your proposal, or proposals like it, or how the price 

pressures that people would face under your proposal, or proposals 

like it, would affect the dynamic path of spending over time, and 

that is what we are working to do. Again, we are working with our 

panel of health advisers, getting their insights as well as our own 

work, but we are only partway along that road as well. 

Chairman RYAN. So here is the point I am trying to make. The 

work you do on a long-term budget outlook with respect to Medicare and health care spending because this, as you mentioned, 

health care is the big driver of our debt issue in the future. These 

gaps in the toolkit need to be filled. 

I know you face serious challenges, but I want to basically get 

your response to some of the caveats I have so we can better understand how Medicare analysis works today to get a better understanding of what we are really looking when we get these analyses 

and where they are lacking. When you compare the impact of proposed Medicare reforms relative to the alternative fiscal scenario, 

we acknowledge that that scenario is unsustainable. The comparison, therefore, is really not fair or accurate since it is based on a 

scenario in which the federal government would not have the 

means to fully fund Medicare benefits to beneficiaries, so we do not 

want to compare ourselves to some mythical future that we know 

is unsustainable and will not exist. 

When you compare Medicare reform options to the extended 

baseline, we ignore the notion that providers, if they are going to 

be paid 30 cents on the dollars, are not going to be continuing to 

provide benefits. So that scenario is pretty implausible, and we are 

not capturing a dynamic and a phenomenon that has been advocated by experts on both sides of the aisle that choice and competition actually work to reduce costs, or to tame inflation. So I think 
20 

it is important to acknowledge that we are not fully capturing a 

proper analysis of what reforms actually achieve relative to these 

two scenarios which we know are pretty much untenable, or at 

least we cannot even measure the full effects of these two alternative scenarios. Is that pretty accurate? 

Mr. ELMENDORF. I certainly think we have not provided you with 

all the information that we would like to provide to help you and 

your colleagues understand better the trade-offs that you face. As 

you know Mr. Chairman, let’s make sure others understand, over 

the course of this past year we have worked desperately hard for 

a succession of deficit reductions that have been pursued on the 

Hill. 

Chairman RYAN. I know. 

Mr. ELMENDORF. Much of that work involved proposed changes 

to health care programs, even though those were not ultimately 

voted upon. So I have a team of people who have been doing an 

awful lot of work on a number of proposals, but it has, no doubt, 

slowed our work on the ideas that you are discussing. Now, what 

effects we will find when we finish this work are unclear, I think. 

There was an exchange recently in the last couple of weeks in the 

New England Journal of Medicine about premium support plans, 

that leading health economists wrote for and against. Both the for 

and against people were members, our members, on our panel of 

health advisers were among people that we have consulted. I do 

not know, I do not want to prejudge what our findings will be, but 

I agree, and we all agree at CBO, that we need to push very hard 

to bring more to bear to give you a fuller sense of the true choices 

that you face. 

Chairman RYAN. That is basically the point I am trying to make. 

Look, we understand that there was a lot of interplay in Congress 

on all super committees and all of these efforts which tied up CBO 

analysts to do that work instead of trying to improve on the analysis of these kinds of health care reforms, but the problem is that 

where we are is that these programs, which are the biggest drivers 

of our debt in the future, we are measuring in a reform effort 

against two futures that we know, based on the latest CMS analysis and outside analysis, are untenable. We know, from other 

analysis, that if we pay providers pennies on the dollar, they are 

just not going to keep providing. What good is having a program 

if no provider will actually provide the benefit? 

And then we also know that if we stick with the status quo, 

meaning current policy baseline, that our debt gets so out of control 

that basically we go into a tailspin. So there has got to be another 

way, and we need to make sure that we have a better analytical 

toolkit to analyze how best to chart that better way, and we just 

have our work cut out for us still. With that, let me turn it to Mr. 

Doggett. 

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

you Dr. Elmendorf for your testimony, service, and the various 

studies that you bring to our work. 

Mr. ELMENDORF. Thank you. 

Mr. DOGGETT. I think all America would benefit if we were able 

to return to the prosperity of the Clinton years, contain the shortterm deficit as we did when President Clinton was in office, and 
21 

begin to work together to address these long-term challenges of 

soaring health care cost. I think we have to do it in a way that is 

different from what the chairman recommends because I believe 

whatever label you put on it, what is basically a Medicare voucher 

system simply shifts those health care costs onto vulnerable seniors 

and individuals with disabilities, and does not really resolve the 

problem, it just shifts the problem from the taxpayer to the seniors. 

Looking at the issues of how we advance our immediate economic 

growth, your office put out a study back in November that looked 

at the impact of the Economic Recovery Act and while I believe you 

had a wide range of the effects of that act, all of it was positive, 

was it not, encouraging economic growth and encouraging job 

growth. 

Mr. ELMENDORF. Yes, we think the effects over the past few 

years have been certainly positive and we have a range reflecting 

the uncertainty in the economics’ literature. 

Mr. DOGGETT. And that range reflecting the uncertainties of even 

predicting the past, if you will, that range suggested that growth 

may have been advanced through the Economic Recovery Act by 

over 4 percent in 2010, and again by over 2 percent in 2011, and 

that the Economic Recovery Act may well have been largely responsible for creating millions of jobs in this country, is that right? 

Mr. ELMENDORF. Yes, you have identified the high ends of those 

ranges, Congressman, and you have identified those correctly. 

Mr. DOGGETT. And looking at the effects of the Economic Recovery Act and the composition of it, and then trying to understand 

what that means for policy choices now, again those policies that 

would place dollars into the pockets of the families that need them 

the most right now, for example, extending unemployment compensation; that is the type of policy that will encourage economic 

growth, is that correct? 

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

Mr. DOGGETT. The same thing would be true of a good infrastructure investment in terms of roads, and bridges, and rail across the 

country. Those also would be likely to encourage economic growth. 

Mr. ELMENDORF. Yes, Congressman, they would. 

Mr. DOGGETT. And on the other extreme, other than building 

things that taxpayers can see the advantages of in encouraging economic growth, how does it compare to eliminate the inheritance 

tax, the estate tax in terms of encouraging economic growth? Does 

that have much real benefit in encouraging job growth? 

Mr. ELMENDORF. Congressman, I do not think we produced estimates of changes in the estate tax directly. We prepared a long testimony for the Senate Budget Committee in the fall that had a 

chart of this sort that looked at the effects of different sorts of tax 

and spending policies in boosting economic activity this year and 

next. On the higher end of the ranges, the policies that seem to 

have a higher bang for the buck, if you will, are increasing aid to 

the unemployed and payroll tax reductions for employees or employers. On the lower end of the range are things like broad based 

cuts in income taxes, but also on the low end of the range for the 

next few years, actually, is infrastructure spending. That is not because it does not matter when it happens, but because it tends to 
22 

happen rather slowly after the Congress acts because of the planning and contracting process. 

Mr. DOGGETT. And specifically, since you mentioned the Senate 

and the effect of changes in the tax rate, I believe that you did a 

study that was presented in the Senate in 2010 concerning what 

the effect would be of extending, over the next decade, the Bush 

tax cuts, and what did you find would be the effect on economic 

growth of extending the Bush tax cuts? 

Mr. ELMENDORF. So our findings in that testimony, consistent 

with what I have said today, is that extending those expiring tax 

cuts for a few years provides a boost to the economy during those 

few years, but will, by the end of the decade and beyond, be a drag 

on GDP because the effects of the accumulating debt and crowding 

out private investment outweigh the beneficial effects of lower tax 

rates; and that is what we showed in this testimony you are referring to from 2010 in the Senate, and again, consistent with the 

analysis we presented in this outlook yesterday. 

Mr. DOGGETT. Exactly, though it sounds really great in political 

speeches, the actual effect of extending the Bush tax cuts over the 

next decade is to reduce economic growth by between 1 and 2 percent. Is that not correct over the decade? 

Mr. ELMENDORF. Yes, again, there is a range of estimates depending on precisely what one does in the economic assessments. 

Mr. DOGGETT. That range does not include any plus economic 

growth, all of it is negative in extending those tax cuts. 

Mr. ELMENDORF. Right, so in the outlook we released yesterday, 

Congressman, I think what you are referring to when we looked at 

the effects of the alternative fiscal scenario, which is the tax cuts 

plus some other things, but the effect of that set of policies is to 

boost the economy we think, over the next few years, but by 2022 

to reduce GNP by between 1 percent and 3.7 percent relative to 

what would occur under the current law baseline. 

Mr. DOGGETT. And there were a number of things in that alternate baseline that you looked at, other than the negative effects of 

extending all these tax cuts over the next decade, during the shortterm, if I understand your testimony to Chairman Ryan, it is that 

if we reduce the short-term deficit too quickly with sudden reductions in expenditures for vital public services, it will actually retard 

economic growth in the short-term. 

Mr. ELMENDORF. Yes, I think that is right Congressman. Reductions in the deficit too quickly, through either tax increases or 

spending reductions, would retard the economic recovery and that 

is consistent with, I think, the consensus of thinking in the economics profession, consistent with the experience that we are seeing in Europe where countries that are in worse budget shape that 

we are and are forced by their inability to borrow to make very 

drastic changes in policy very quickly are suffering economic consequences from that. When we wrote an issue brief a year or so ago 

about the risk of a fiscal crisis in the United States, one of the 

risks that we highlighted was that budget situations tend to deteriorate when the economies are already in trouble, and that makes 

it a particularly bad time to then have to implement these changes 

very quickly, that emphasizes the importance of Congress acting 

before we had a crisis of that sort, but given the low level of cur-
23 

rent Treasury interest rates, our continued ability to borrow, for 

now at least, I think many experts believe that although that the 

changes should not be implemented right away; and I want to emphasize that is not an argument against the Congress deciding 

upon what changes in policy to make, given the scale of the 

changes that will be needed relative to current policies, but more 

warning that people have and business have, that state and local 

governments have, about what policies will be undertaken, the better it will be. 

So there is a real cost to waiting to decide upon the courses of 

action. Once one is decided, then there is a more difficult tradeoff 

about the speed. Waiting too long, of course, has the cost of ending 

up in a fiscal crisis. Moving too quickly has the cost of slowing the 

economic recovery. 

Mr. DOGGETT. So pursuing an aggressive austerity program similar to that that the conservative government in the United Kingdom has pursued, and some of the other European countries, is 

likely to present some of the same type of economic problems for 

us that it is presenting today to the Europeans. 

Mr. ELMENDORF. I think that is right Congressman. I want to be 

careful not to second-guess the decisions those governments have 

made. They face a particular set of circumstances and I think in 

some cases had no choice because of an inability to borrow money 

or a fear that they would be unable to borrow money in the very 

short-term. So I am not suggesting that they have done the wrong 

thing, necessarily, we have not studied their choices carefully 

enough to speak to that; I am just using that as an example of that 

sort of very sharp fiscal contraction does weigh on economic activity 

and jobs in the short run. 

Mr. DOGGETT. And as far as encouraging more jobs, though it is 

not my preferred policy choice, extending the payroll tax cut is one 

very positive way of encouraging economic growth. 

Mr. ELMENDORF. Yes, we think so Congressman. 

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

Chairman RYAN. Thank you, Mr. Garrett. 

Mr. GARRETT. So just following up on a couple of points we just 

raised on this point. With regard to what was done in Europe and 

the decision making there, obviously, as you correctly say, we cannot second-guess them. Some of that goes to one of the questions 

I have is, your presumptions on interest rates. According to your 

baseline, the American people will be paying about $4.3 trillion in 

net interest over the next 10 years based upon, I think it is on 

Page 30 or 31 of the charts, and what have you, but obviously if 

those interest rates are skewed in a different direction, that number goes up significantly, right? 

Mr. ELMENDORF. Yes, Congressman, no doubt. 

Mr. GARRETT. What is that? 

Mr. ELMENDORF. Yes. 

Mr. GARRETT. And right now we have the benefit of the fact that 

we are the reserve currency of the world, and that is able to keep 

it down, but we saw what occurred in the private sector, how the 

spreads changed in 2008 basically overnight because these various 

companies that initially had very good rates, is that not correct? 

Mr. ELMENDORF. Yes, that is right. 
24 

Mr. GARRETT. And did we not see the exact same thing that occurred over in Europe with the PIGs, with Portugal and Italy and 

Greece especially, that their interest rates were somewhat favorably for, but basically in an overnight, figuratively overnight period 

of time, the spreads expanded beyond anyone’s projections. Is that 

a fair assessment? 

Mr. ELMENDORF. Yes, that is right. I mean, I’m not sure of anyone’s projections, but certainly in a way that surprised many observers. Yes, I think a significant risk in our projections is the interest rates will rise more rapidly than we have projected. I should 

say there is risk on the other side, too. Our projection of interest 

rates lies well above the rates that are implicit in current financial 

market transactions when one can essentially back out of the 

Treasury yield curve, the market’s predictions of interest rates over 

the second half of the decade. 

Mr. GARRETT. But they are certainly not above historical averages for the United States. All we have to do is go back and look 

into the Carter years and we would see those rates off the charts, 

and that would put this number at a multiple of this 4.3 trillion. 

Is that not correct? 

Mr. ELMENDORF. Yes, that is right. 

Mr. GARRETT. So within our lifetime we have seen interest rates 

in this country dramatically above where they are. 

Mr. ELMENDORF. Yes, Congressman. 

Mr. GARRETT. Which may give, in the final point of this, credence 

to the argument that whether we not overly aggressive contraction, 

but an aggressive contraction as far as spending, might be the prudent direction this Congress should go in. 

Mr. ELMENDORF. Yes, I think and we have said in other testimonies as well, that there is this trade-off. 

Mr. GARRETT. Right, I understand that. Let me just go back on 

something. Earlier this past month, a bill came out of this committee, 3581, the Budget and Accountability Transparency Act, 

which among other things changes the credit reform methodology. 

You are familiar with that, I am sure? 

Mr. ELMENDORF. Yes. 

Mr. GARRETT. Back in June, CBO testified before the Committee, 

quote ‘‘By including a market based risk premium, fair value estimates provide a more comprehensive measure of cost which recognizes that financial risk that the government assumes when it is 

issuing guarantees, is more costly to the taxpayers than estimates 

suggest.’’ In other words, fair accounting suggests. Do you agree? 

Mr. ELMENDORF. Yes, Congressman. We believe that the fair 

value method of accounting for federal credit transactions provides 

a more comprehensive measure of their true cost. 

Mr. GARRETT. Okay, moving on to another topic that we have 

had in discussion here, and that is the FHA bailout. Very quickly 

then, on FHA bailout, there is a possibility, it reports that chances 

of future net losses on the current outstanding portfolio could exceed current capital resources at close to 50 percent, which could 

necessitate a taxpayer bailout for them. Currently the numbers 

show that their leveraging ratio is around 400 to 1, which obviously 

makes everything else that we have been seeing on Wall Street basically pale by comparison. Have you all examined this? Have you 
25 

examined the budgetary implications if we have to go through a 

bailout for FHA; and B, what would the implications be to the debt 

limit; and C, a quick answer on that one is can you give a projection as to the next debt limit increase? 

Mr. ELMENDORF. So you are correct, Congressman, that the reserves that FHA holds are below the statutory minimum, but there 

will be no bailout required in the sense that the Congress does not 

need to take any action to deal with this low level of reserves. If 

more people default on FHA guaranteed mortgages than FHA has 

reserves for, then like other federal credit programs, there will be 

what is called a credit re-estimate. There will be an assessment of 

a higher cost that will be recorded in the budget, but will not require the Congress to take any explicit action. This is the case for 

all federal credit programs. What it will mean, of course, is that if 

the FHA does not get money back, or pays money out, that it would 

not have to, then that will affect future government borrowing. 

Mr. GARRETT. So the estimates that we have seen by analysis 

that we may have to pony up another $50 to 150 billion at that 2 

percent capital level which is now at .25 basis points goes to zero, 

and they will not have the money actually to make the payments, 

that we would not actually have to come up with the cash to pay 

that is incorrect? 

Mr. ELMENDORF. Depends what you mean by whether you have 

to pony up. What I was saying was that automatically, in the budget, without Congressional action there will be no vote about whether to bail out the fund. 

Mr. GARRETT. But my question was have you have seen what 

that impact would be on the budget deficit? 

Mr. ELMENDORF. Yes, so our baseline projection includes our assessment of what the cost will be for FHA going forward, and I 

think that is incorporated in the projections that we have shown. 

Chairman RYAN. We have a lot of members here, so with all due 

respect, we have to keep to the time so everybody can get a chance. 

Mr. Blumenauer. 

Mr. BLUMENAUER. Thank you, Mr. Chairman. Thank you, doctor, 

for the good work that your staff does and your patience with this 

committee coming before us as we plow some of the same ground, 

but I think each of your visits, for me, provides greater clarity, and 

I am not as grumpy as our chair. I think there is a pretty clear 

path going forward which actually is buried in your report, implicit 

in your testimony, and I think what most of the people here can 

sort of get their arms around. The chair references the problem we 

have had in controlling Medicare costs, for example, over time, and 

it is because we have a flawed payment system more than anything 

else, and as long as we are going to pay for volume, people will up 

the volume. Congress will, when the heat comes on, dial down what 

purported to be reforms and it is a bipartisan failing. Congress has 

folded. More volume, less value. 

What we have in the Affordable Care Act, at least, is an outline 

of things that if your studies show if allowed to work over the 

course of the next 20 years, would have a substantial affect on 

bending the cost curve. I think we could have a very robust conversation around this table if we focused on how we right-sized the 

military. I think most of us do not think we need troops in Western 
26 

Europe 65 years after World War II. We can dramatically scale 

down what is necessary to maintain a nuclear arsenal. Do we need 

12 multi-billion dollar aircraft carriers and build another one, when 

nobody else in the world has even one that is comparable to what 

we have got; and you do not build those things overnight, so we 

could gear up if some change took place. 

I mean, I go through the things with the chairman on agriculture, and actually that was, I thought, a little bright spot in an 

otherwise mixed bag that was offered up. There is a chance to come 

together to actually save money. What you buried in your testimony there, I loved the line where you talked about the various 

scenarios going forward, but you talked about one where the deficit 

scale is up a little bit in the short-term, but with balanced policies 

that deal with refinement and revenue, we can end up having 

lower deficits in the out year without economic disruption that are 

predicted with some of the other scenarios that you are talking 

about. 

I would hope that we get to the point where this committee 

starts zeroing in on areas of agreement that are not necessarily 

ideological or partisan, but really point us towards the path that 

you have outlined. I think it is very, very important. One thing 

that I am concerned about is equipping you to be able to help us 

go through. There was a fascinating article in Ezra Klein’s column 

this morning where he talked about how much of the deficit is attributed to policies that President Obama signed into law, and how 

much is attributable to policies that were part of the Bush administration. He comes up with a calculation $1 billion Obama, $5 billion Bush administration policies. 

Now to debate, more or less, what you are talking about on this, 

but this should not be from a columnist in the Washington Post 

and a couple of think tanks. It would be great to be able to work 

in a refined basis with you on things like that going forward; but 

I wish that you would comment on your capacity to deal with the 

demands of this committee for more data, more methodology, more 

ideas that are coming thick and fast; that we want faster turnaround, and the implications of what we do with the data is profound, dealing with trillions of debt and spending in the out year. 

What is happening to your budget and your ability to respond to 

this committee? 

Mr. ELMENDORF. I appreciate your concern. 

Chairman RYAN. And please answer in 30 seconds. 

Mr. ELMENDORF. I appreciate your concern for our capacity, Congressman. Certainly for the three years that I have been at CBO, 

the demand for work for us has greatly outpaced our ability to supply it, and we feel bad about that all the time, and the chairman 

referred to some specific cases, but it happens many, many times. 

I am on the phone with colleagues of yours apologizing for work we 

have not been able to get to. 

On the specific question, yes our budget is being reduced, I think 

along with the budgets of the other congressional support agencies 

and the committee staffs, and from my parochial perspective, that 

is too bad, but it is not for us to judge that decision of the Congress 

any more than we can judge the other divisions of the Congress. 
27 

Mr. BLUMENAUER. Right, my time is expired, I appreciate the 

chair’s patience, but I think that this is one thing that we ought 

to look at. Cutting their budget 10 percent when we are throwing 

more things at them and there is more that relies on what they can 

produce for us, is something that every member of the Budget 

Committee ought to maybe reflect on, if that is maybe not penny 

wise and pound foolish. 

Chairman RYAN. As you know, that is the jurisdiction of the Appropriations Committee, but thank you. Mr. Campbell. 

Mr. BLUMENAUER. No, no. We are so persuasive I think it would 

make a difference if we outlined being the budget torch carriers. 

Chairman RYAN. Mr. Campbell. 

Mr. CAMPBELL. Wow, it is like I am at concerts ready to sing. If 

I do sing I think I would rather sing like President Obama than 

Mitt Romney, unfortunately, but one of them would be better at 

being president, but that is not what we are here to talk about, and 

not the same one that is better at singing. I do not know whether 

I will be as obedient as Mr. Blumenauer, as grumpy as Mr. Ryan; 

I will try to be cheerfully realistic. 

Dr. Elmendorf, good morning. The ranking member, in his opening comments, threw out a couple of figures that if all the Bush tax 

cuts were allowed to expire and the AMT index et cetera, it would 

raise about $6.3 trillion using static modeling, which those of here 

do not always subscribe to, but $6.3 trillion over the 10 years. He 

also said that if it was just the wealthy, which I presume is 

$250,000 or more, since that is the number the president has 

thrown out, it would raise about a trillion. I do not know whether 

those numbers are correct, but if they are, and you can tell me if 

they are roughly in the ballpark, then that means that the over 

$250,000 account for about 15 percent, roughly, of the total tax potential if you let everything expire over the next 10 years, is that 

correct? 

Mr. ELMENDORF. I think that is right, Congressman. It is about 

20 percent of the set of tax provisions enacted 2001, 2003, 2009. 

Then we also show on our tables other expiring tax provisions, including, for example, the research and experimentation tax credit 

to set more standard tax extenders. So I think the effects of the top 

tax rate as being about a fifth, based on the latest estimates I have 

seen from the staff of the Joint Committee on Taxation, of the set 

of things often described as the Bush tax cuts. 

Mr. CAMPBELL. Right, okay. So if you take all of the different tax 

things, 15 to 20 percent let’s say, then if you wanted to get to the 

alternative scenario, and you only raised taxes on $250,000 or 

more, then you have to take, roughly, 80 to 85 percent of the rest 

of that money and get it out of spending, is that correct? 

Mr. ELMENDORF. Yes, I think that is right. I mean, the alternative fiscal scenario said what if you do not do these things, and 

I think what you are saying is that the piece, which is just raising 

those top tax rates, only makes a small difference in moving the 

alternative fiscal scenario back toward the current law baseline. 

Mr. CAMPBELL. Correct, thank you, and the reason I bring this 

up is there is obviously a lot of rhetoric that goes on, that somehow 

we can solve the deficit problem with just that slice of the populace, and we cannot. If you want to do that, then you have to do 
28 

a lot on the spending side, or you have to increase taxes on virtually everybody to get more towards the alternative scenario. 

Second thing I would like to ask about, and I think I have these 

numbers correct, but the health care law, which we affectionately 

call Obamacare, the numbers on that were on the basis of some 

late 2009 CBO projections, and at that time CBO projected that 

unemployment would be 4.9 percent in 2014. From looking at your 

thing here, you have 2013 at 9.2 percent. You have 2014 through 

2017 at 5.6, so clearly in 2014 you project, now, significantly more 

unemployment. 

Mr. ELMENDORF. 8.7 percent. 

Mr. CAMPBELL. Okay, 8.7 percent you now project in 2014 versus 

4.9 percent when CBO’s numbers scoring the Obamacare law were 

put into effect. So, if we were rescoring that today, based on the 

scores that you have today because that is when some of the Medicaid increases and exchange subsidies kicked into effect, would not 

the cost of Obamacare be projected to be significantly larger because of that much higher unemployment figure? 

Mr. ELMENDORF. So that piece alone would raise the cost of the 

Affordable Care Act. I do not know by how much. We say this in 

the outlook, but I should emphasize, we are not able, for this outlook, to update those estimates; that is a particularly involved job. 

We will be doing that as part of our March baseline, which is due 

out in just a month and a half we hope. In the March baseline you 

will see new estimates of all of the programs in the budget, but 

part of that will be new estimates of the cost of the coverage provisions in the Affordable Care Act, and onboard that change. 

Mr. CAMPBELL. Right, that and then the CLASS Act which we 

may be dealing with this week and the fact that likely that is going 

to be pulled back. Thank you very much; I yield back the remaining three seconds of my time. 

Chairman RYAN. Ms. Bass is next in line. 

Ms. BASS. Thank you for your testimony this morning. Earlier 

when we opened, I believe the chair mentioned the need for the 

president to present solutions instead of just criticizing, and I just 

wanted to mention that yesterday the president sent his Start Up 

America Legislative Agenda to accelerate start up and small business growth to Congress. Parts of this agenda have already won bipartisan support in the House, including allowing small businesses 

to raise capital using social networks and eliminating taxes on capital gains and key investments in small businesses; and I think 

this is an example of the types of economic stimulus we should be 

pursuing, and I am hoping that my colleagues on the other side of 

the aisle will bring the president’s package to the House floor for 

a vote soon. 

I did want to ask you about states and the fiscal pressure on 

states, which I do see as a major obstacle to sustainable recovery. 

At the start of 2012, 29 states have already projected a gap of 

about 44 billion for fiscal year 2013, and I imagine that this number is going to grow. Given that federal aid was a lifeline for states 

and now, far from providing assistance to states, I am sure that we 

will likely be proposing additional cuts. I wanted to know if you 

could respond to what toll on the overall economic growth is due 

to states still facing a long and uncertain recovery. 
29 

Mr. ELMENDORF. Congresswoman, of course we do not study 

state budgets as carefully as we study the federal budget, but state 

budgets do matter for the overall economic outlook for the economy, 

and for the federal budget outlook as well. States, as you know, 

have been through a terribly tough time. Things are a little brighter than they used to be; revenues have started to grow a little bit 

in many states, but the overall levels of revenues remain well 

below what they were, in most cases, before the recession. Obviously, the experiences varies a great deal across states, but in general, revenues remain well below pre-recession levels. 

As you have said, the federal support, much provided through 

the Recovery Act of 2009, is extra federal support and is now waning, which will put increasing pressure on state budgets. One way 

in which that matters for the economy is that state and local governments have been reducing their level of employment. So if you 

look back from the peak of the business cycle, before the recession 

started at the end of 2007, since then state and local governments 

have shed nearly half a million workers and that is part of what 

has, not a large part, but a non-trivial part of the loss of jobs. 

Ms. BASS. Thank you. Could you also comment about the proposed changes to unemployment insurance, specifically what impact it would have on the economy to reduce the number of weeks, 

that is currently being proposed? 

Mr. ELMENDORF. I will answer the question sort of a little backward, if I might. Our baseline, our projections that you see assume 

current law and thus assume the expiration at the end of this 

month; however, if the Congress were to extend the emergency unemployment benefits along the same lines that they are currently 

in place, and that is one of many options of course, that they would 

extend along the same lines that would add maybe about a quarter 

of a percent to the level of GDP at the end of this year without any 

other changes in policies, and that would then add maybe about a 

quarter million jobs by the end of the year. 

Ms. BASS. Thank you. Chairman Ryan. Mr. McClintock. 

Mr. MCCLINTOCK. Thank you, Mr. Chairman. Mr. Elmendorf, we 

have been hearing a recurrent them from the other side that the 

recovery is pretty strong, the economy is getting better, of all is 

well with the world. Let me ask you, are there more people working today or fewer people working today than on Inauguration Day 

of 2009? 

Mr. ELMENDORF. I believe the answer to that is there are fewer 

people, Congressman. 

Mr. MCCLINTOCK. Is the unemployment rate higher or lower 

than it was on Inauguration Day? 

Mr. ELMENDORF. To be honest, Congressman, I do not know the 

unemployment rate on Inauguration Day. 

Mr. MCCLINTOCK. In January 2009 I believe it was 7.8 percent. 

Is that higher or lower than it is today? 

Mr. ELMENDORF. So the current rate is higher than that rate 

that you have identified Congressman. 

Mr. MCCLINTOCK. And if the labor participation rate had remained the same as it was on Inauguration Day, that is if so many 

workers did not get discouraged and leave the workforce, what 

would the unemployment rate be today? 
30 

Mr. ELMENDORF. Let me see if we have an answer to that question. I am sorry; I do not have that off-hand Congressman. 

Mr. MCCLINTOCK. Would you say it is over 10 percent? 

Mr. ELMENDORF. I do not know. It is a complicated question; I 

do not want to speculate. 

Mr. MCCLINTOCK. Is the debt higher or lower today than it was 

on Inauguration Day? 

Mr. ELMENDORF. The debt is higher, Congressman. 

Mr. MCCLINTOCK. How much higher? 

Mr. ELMENDORF. Again, Congressman, I have a lot of tables, but 

they do not really keep track of political events, they keep track 

mostly of economic events. 

Mr. MCCLINTOCK. Would $4.5 trillion more be in the ballpark? 

Mr. ELMENDORF. That may be right; I do not know. 

Mr. MCCLINTOCK. How about the price of a gallon of gasoline, 

more or less than it was on Inauguration Day? 

Mr. ELMENDORF. I am sorry Congressman, I do not know. 

Mr. MCCLINTOCK. Would it be up about 83 percent, perhaps? 

Mr. ELMENDORF. I do not know. 

Mr. MCCLINTOCK. Let me ask you this. We heard it said that we 

just need to go back to the Clinton prosperity, and I would heartily 

agree with that. That looks awfully good by today’s standards. Did 

the Clinton administration increase or decrease spending as a percentage of GDP during his eight years in office? 

Mr. ELMENDORF. I can check; we have these nice tables in the 

back of our book. 

Mr. MCCLINTOCK. As a percentage of GDP, did it not decrease 

under the Clinton administration by a whopping 3.5 percent? 

Mr. ELMENDORF. Depends, of course, how one aligns the fiscal 

years with the presidencies. Fiscal year 1994, for which the budget 

was set in 1993, spending was 21 percent of GDP, and in the year 

2000, it was 18.2 percent of GDP. 

Mr. MCCLINTOCK. So he cut spending relative to GDP? 

Mr. ELMENDORF. Well, I would have said that the president and 

the Congress in that era made a set of decisions. 

Mr. MCCLINTOCK. Give credit where credit is due, the president 

signed that legislation. Did he expand or contract the federal government’s entitlement obligations during this period? 

Mr. ELMENDORF. That is a hard question to answer Congressman, I do not have it off-hand. 

Mr. MCCLINTOCK. I am referring to specifically to welfare reform 

that abolished the open ended welfare system that we had at the 

time. 

Mr. ELMENDORF. Yes, so that was a change. 

Mr. MCCLINTOCK. Did it turn in deficits or surpluses during the 

last four years of his administration? 

Mr. ELMENDORF. There were several years of surpluses, Congressman. 

Mr. MCCLINTOCK. Okay, so Clinton reduced spending relative to 

GDP, he contracted our entitlement obligations, he turned in budget surpluses during his final years in office. Bush, on the other 

hand, increased spending relative to GDP, expanded our entitlement obligations, and turned in major budget deficits. It seems to 

me if increasing spending, increasing our entitlement obligations, 
31 

and turning in major deficits were the path to prosperity, we 

should be in the golden age of the American economy right now. 

Let me ask you this question. How does this recovery track with 

the Reagan recovery? Senator Phil Gramm has estimated that if 

the economy tracked under the Obama administration as it did 

under the Reagan administration; and if you recall, Reagan inherited a double digit unemployment, double digit inflation, mile long 

lines around gas stations, interest rates at 21.5 percent. Gramm estimates that if the economy tracked today as it did under the 

Reagan years, at this point of the administration there should be 

16 million more Americans working with per capita income $4,000 

higher than it is today. Do you have a comment on that? 

Mr. ELMENDORF. No doubt Congressman this recovery has been 

very unusually weak by U.S. historical experience, and we have 

shown charts like that. 

Mr. MCCLINTOCK. One final quick question, and that is last year 

we had a number of experts including yourself warning that we 

were about five years away, at best, from a sovereign debt crisis. 

Where are we today? 

Mr. ELMENDORF. I was not one of the people who put a date on 

that. What we said consistently is that is very difficult to predict: 

what set of economic and budgetary circumstances, what set of political dynamics will drive financial markets to stop being willing 

to lend a government money at reasonable interest rates? 

Chairman RYAN. Mrs. Castor. 

Ms. CASTOR. Thank you very much. Thank you for your testimony. The economy is creating jobs right now. The trends are positive; they are in the right direction. Private sector payrolls added 

nearly 1.9 million jobs in 2011. The announced unemployment rate 

in December is 8.5 percent, which is the lowest in three years. We 

always hear that if the economy can create more jobs, it would 

lower the deficit. Could you give us a little more detail on that? I 

know you have a certain projection, now. If your projections of the 

unemployment rate, if we created more jobs how does that reduce 

the deficit? 

Mr. ELMENDORF. So we actually wrote a letter, which I was looking for but cannot find off hand, to Congressman Van Hollen a few 

months ago that talked about the effects of a stronger economy on 

the budget, and the largest part of the widening of budget deficits 

over the past few years has been the weakness of the economy. The 

explicit actions of the government, the Recovery Act and other 

things, have also led to wider deficits, but the largest part of the 

widening has been the automatic changes, particularly in revenues, 

but also on the spending side to a weak economy: less taxable income, more people out of work, and those things have had a big effect on the budget. A very important part of the narrowing that we 

see in the budget deficit over the next few years under current law 

is improvement in the economy. There is also, of course, a very 

large part, which is the changes in policies scheduled to take effect 

under current law; but the economy matters a great deal. We show 

in an appendix in this outlook a rule of thumb for how stronger or 

weaker economic growth would affect budget outcomes. 
32 

Ms. CASTOR. Is there a precise number, if the unemployment rate 

is reduced, say, by .2, the exact impact that has on cutting the deficit? 

Mr. ELMENDORF. There certainly is not a precise number in my 

head, whether we could estimate a number for you, I think we 

probably could. I did find the letter we wrote to Congressman Van 

Hollen, this was actually October 4th of last year. In this experiment I think we looked at the effects of moving the economy all the 

way back to its potential level, but we could certainly look, Congresswoman, at what the effects of a particular change in the unemployment rate might be. 

Ms. CASTOR. Because this is the great frustration, that over the 

last year the Congress really has the ability to do some things, for 

example, the Transportation Bill that is long overdue, I know you 

said there is a lag there, but what if we had gotten it done a year 

ago? What if we had some short-term investments in some jobs initiatives that the president laid out in the American Jobs Act? People at home love the idea of repairing schools, putting people to 

work there; we have got so many bridges in the state of Florida 

and schools that are in need of repair, and it would just seem to 

be a great common sense solution that would put people back to 

work and help us reduce the deficit. 

Mr. ELMENDORF. I found the answer to your specific question, actually, and this was in the letter to Congressman Van Hollen. We 

estimate that a one percentage point reduction in the unemployment rate would reduce the deficit by about a half a percent of 

GDP, using some average historical relationships. 

Ms. CASTOR. Great, thank you very much. On another topic, colleagues, we really should all be working together to try to find a 

solution on a permanent Medicare ‘‘doc fix.’’ I know one proposal 

that is being considered is looking at the savings, President Obama 

has now ended the war in Iraq with the support of the American 

people, and there are savings in the overseas contingencies funds, 

which are the funds where, I guess, CBO has said we are going to 

anticipate staying in Iraq longer. What is available in the OCO for 

us to use in possibly developing a permanent fix so that our parents and grandparents can maintain their relationship with the 

doctor of their choice? 

Mr. ELMENDORF. So let me try to explain this issue of the Overseas Contingency Operation funding and how it appears in our projections; I think it is a technical and complicated one. Let me try 

to explain for everyone. There is not an OCO fund in the sense of 

a set of money which is sitting somewhere. What our baseline does 

do is for discretionary spending that is not capped by the Budget 

Control Act, and this OCO funding is not capped by the Budget 

Control Act, for that sort of funding we take the latest level of appropriations provided by Congress, and we extrapolate that with 

increases for inflation over time, and that extrapolation from the 

latest funding that Congress has provided for those purposes 

amounts to about $1.4 trillion over the coming decade; but that is 

just our extrapolation based on the latest actions of the Congress, 

and how the Congress might want to think about that money in 

relationship to other things that Congress wants to do, is really up 

to you all. 
33 

Chairman RYAN. Which is all borrowed money. 

Mr. ELMENDORF. Well, there is a lot of tax revenue, there is a 

lot more spending than tax revenue; we are borrowing a lot for 

some purpose, Congressman. 

Chairman RYAN. Thank you. Mr. Stutzman. 

Mr. STUTZMAN. Thank you, Mr. Chairman and thank you Mr. Elmendorf for being here today and I really appreciate your testimony today and I think we would all be wise to take your report 

and act upon it. I would like to touch on two things. I would like 

to touch on the tax rate, and then also on Social Security a little 

bit. Could you, and maybe you touched on this a little bit and 

maybe I missed it, but could you touch on if Congress would raise 

taxes at the end of this year outside of the payroll tax rates, what 

kind of effect would that have on the economy immediately? 

Mr. ELMENDORF. If Congress did nothing, so the tax rates automatically increased going into next year, then we have shown an 

estimate in the outlook for the effects of that and other policies together, but I can give you an estimate for the effects of the tax 

piece alone. Let me be clear about what experiment I have in mind 

here. In the current law baseline, taxes go up and spending is cut, 

particularly because of the Budget Control Act; and our economic 

forecasts has conditioned on that. If instead the Congress extended 

the expiring tax provisions for the next few years, then that would 

increase the level of GDP at the end of 2013 by between .3 percent 

and 2.5 percent, by our estimates. That is about two-thirds of the 

total effect of this alternative fiscal scenario that we show in the 

outlook, the other third is the effects of relaxing the spending cuts 

that we include in the scenario. 

Mr. STUTZMAN. Would you recommend that Congress extend the 

current tax rates for three to five years to boost the economy and 

then revisit the issue once the economy started to progress? 

Mr. ELMENDORF. It is not our place, Congressman, to make recommendations, but we have tried to illustrate here in the analysis 

we did and the comments I have made, the short-term negative 

economic consequences of fiscal contraction that is very rapid, and 

of course, as you understand, as we talked about there are longterm very negative economic consequences of our not having fiscal 

restraint relative to the current policies in place. 

Mr. STUTZMAN. I think the facts are pretty clear that if we would 

raise taxes, if taxes were to be raised at the end of this year, that 

could be a detriment to the current state of our economy, is that 

correct? 

Mr. ELMENDORF. We think that the increases in tax rates built 

into current law for the end of this year, will reduce economic activity and employment next year, relative to what would occur if 

those tax rate increases were deferred. 

Mr. STUTZMAN. I want to touch on the payroll tax rates currently. Your estimate of the deficit does not include any costs associated with extending the payroll holiday. What is the cost of extending the payroll holiday to the end of this year and what would 

be the deficit that would be added to that cost? 

Mr. ELMENDORF. If the lower payroll tax rate were extended 

through the end of this calendar year, we estimate that would add 

$75 billion to the fiscal year 2012 deficit, and $25 billion to the fis-
34 

cal year 2013 deficit; of course that is just because fiscal year 2013 

starts in the last quarter of this calendar year. So the total is about 

$100 billion. 

Mr. STUTZMAN. So what does that do to Social Security? How 

many years are we shortening the life of Social Security if we continue the current rates? 

Mr. ELMENDORF. Well, it has no direct effect on the Social Security trust fund. It depends, of course, how you do it, but what has 

happened in these lower payroll tax rates so far is that general revenue has been transferred to the Social Security trust fund in the 

amount of the foregone payroll tax receipts. So the trust fund has 

been held harmless on the lower payroll tax rate, and if you extend 

the lower payroll tax rate with the same provision as is in place 

now, then the trust fund would continue to be held harmless. If you 

did not do that, then the trust fund would be $100 billion to the 

worse by the end of the year, relative to what would happen under 

current law. I do not know what effect that has on, say, the expiration date of the trust fund. The trust fund is trillions of dollars, we 

think the Old-Age and Survivors Insurance fund, that part of Social Security has decades before it will be exhausted. 

Mr. STUTZMAN. Did you look at if the payroll tax rates were not 

to be extended at the current levels, what kind of effect would that 

have on the economy? If we let Americans keep more of their 

money in their pocket, does that have any effect on the economy, 

positive or negative? 

Mr. ELMENDORF. Yes, relative to current law extending the payroll tax cut for the end of the year will increase output and increase employment by the end of the year. I mean, in general, 

lower taxes or higher spending, in the short-term, given an economy with so many unused resources, those actions would tend to 

provide a boost in the short-term. The amount of the boost depends 

on the specifics of the policy, and the testimonies that we have 

done, including the one last fall, we tried to lay out what we estimate to be the relative bang for the buck of different sorts of policies, but the directions are pretty consistent. The crucial point to 

remember is that works for a few years in an economy with unemployed resources because the constraint on economic activity now 

is really the demand for goods and services. 

By later in the decade, the constraint on their economic activity 

will be the supply of savings, it will be the later supply, it will be 

productivity, and in that sort of world, the way the budget choices 

matter is importantly through the amount of borrowing the government does, also through the effects of tax rates on people’s behavior 

and through the effects of certain spending programs. 

Chairman RYAN. Mr. Pascrell. 

Mr. PASCRELL. Thank you Mr. Chairman. There was a sharp increase in military spending in 1943, guess why? So when you take 

numbers out of context and game the numbers, I think we all have 

a responsibility here to set the record clear. We have an entirely 

different situation. 

Chairman RYAN. Who are you addressing? 

Mr. PASCRELL. The gentleman from California just took off. 

Chairman RYAN. The gentleman is not here. 
35 

Mr. PASCRELL. I will reduce my remarks about it, if that is okay 

with you. We had a very different situation in terms of President 

Bush I when you lowered taxes, and Mr. Clinton raised taxes. So 

if you want to put numbers in context and why things were better 

at one time and not so good at another time, we need all of the 

facts. Both of those presidents worked hard to do what was necessary at the particular time in history when they took office. This 

president took office in January of 2009, and you know what the 

employment and unemployment was in the two months before him, 

and in the two years before him, and in the two months after he 

raised his hand and in the two years after he raised his hand? 

So I want to show you a chart, if I may. 

We are gaming the numbers. The blue line in this chart shows 

the rate at which state and local government have been growing 

or shrinking as compared to real GDP since the late 1980s; it is 

very clear, even I understand it; so you all should understand it. 

Those are the numbers. You did not put them there, and I did not 

put them there. These are the numbers. In 2007, if you try to look 

closely, the private sector and government were growing, then the 

economy began to shrink and then fell off the cliff during the financial crisis which occurred at the end of 2008. 

Can I see the second chart please? 

Thank you. This chart shows the rate of government investments 

or how we are sacrificing the future as well as the present. At the 

beginning of 2009, in the face of political timidity and outright obstructionism, we acted to stem the drop in economic growth and 

unemployment, and we passed the Recovery Act, February of 2009. 

The most successful parts of the Recovery Act were state fiscal relief that went directly into state and local jobs. The result was the 

blue line’s upward spike in 2009. 

Then we all know the rest of the story. The private sector 2009 

recovery stalled, and everything started to drop in the second quarter of 2010. The president proposed the American Jobs Act, which 

included $35 billion to reverse this trend, but it stalled in the Congress. We lose teachers, we lose police, and we lose firefighters. 

Now we have lost close to 700,000 in the public sector; so one is 

going up, and the other is going down dramatically. 

Last night, so we could put a human touch on this, Mr. Elmendorf, police officer Kevin Brennan in Brooklyn was shot down, shot 

in the face pursuing an individual with an illegal gun. We have reduced, in human factors, when we glibly talk about what we can 

cut, and what we cannot cut. I mean, the direction we are going 

we are going to have to cut money to the FBI, transportation, border security, vets benefits because that is where we are headed. 

There are people here that want to destroy the government, and 

that it has no responsibility and they cannot live up to the obligations. Now, my question to you is this: In your opinion, was the effect of the elimination of thousands of public sector jobs, teachers, 

police, and firefighters, in overall economic growth to the economy? 

Mr. ELMENDORF. No, Congressman. 

Mr. PASCRELL. Why not? 

Mr. ELMENDORF. The loss of public sector jobs is, as I said earlier, a part of the overall loss of jobs that we have seen in this very 

prolonged and severe economic downturn. 
36 

Mr. PASCRELL. We have seen that sector of the job market 

shrink. 

Mr. ELMENDORF. Yes, Congressman. 

Mr. PASCRELL. Thank you very much. 

Chairman RYAN. Mr. Flores. 

Mr. FLORES. Thank you, Mr. Chairman, thank you director Elmendorf for joining us today. Start out with a caveat to begin with. 

Economic growth is virtually the same as employment growth, 

right? I mean, if we talk about economic growth, we can talk about 

more people working. 

Mr. ELMENDORF. They certainly move together, obviously not 

perfectly. 

Mr. FLORES. Not perfectly, but pretty good correlation. So my 

question starts with this, and I would like to keep the answers fairly short. Which economic activity provides greater economic growth 

and employment, option A is private investment or option B is federal spending. 

Mr. ELMENDORF. Congressman, it depends on the nature of the 

federal spending you have in mind. 

Mr. FLORES. Well, I have a chart, I do not have it with me right 

now, but private investment is the correct answer. Private investment trumps federal spending almost every time. Which policy option provides greater economic growth, leaving a dollar in the 

hands of a taxpayer, or taking that dollar from that taxpayer and 

increasing federal spending? 

Mr. ELMENDORF. Depends on the nature of the federal spending, 

Congressman. I am not trying to be difficult, but it does matter 

what money is used for. 

Mr. FLORES. Okay. Well, let’s put it this way then. What would 

create more jobs, Keystone XL pipeline or Solyndra? We spent 

about a half billion dollars on Solyndra, how many jobs do we have 

from that? 

Mr. ELMENDORF. Congressman, we have not studied those particular examples. 

Mr. FLORES. Not very many though, right? 

Mr. ELMENDORF. Companies that fail generally do not create a 

lot of jobs, they do along the way, of course, and I have not tried 

to study the history of that firm. 

Mr. FLORES. And how many federal dollars is it going to take to 

build the Keystone XL pipeline? 

Mr. ELMENDORF. I do not know Congressman. 

Mr. FLORES. Zero. And the estimates varies widely; some people 

say 20,000 temporary jobs, some people say it is just in the thousands, but it does not make any difference. On one hand, option A 

is Solyndra, where we spent a half a billion taxpayer dollars and 

got no jobs. On the other hand, we have $7 billion of private investment and we get good long-term economic job growth out of it, 

right? 

Mr. ELMENDORF. Certainly a shortfall in private investment in 

the past years has been a drag on the economy during the past few 

years and will continue to be a drag on the economy over the decade. Part of the reason we say in that report that we have marked 

down the projection of GDP at the end of the decade, relative to 
37 

what we would have had without the financial crisis and recession, 

is a shortfall in investment. 

Mr. FLORES. That takes us to my next question. In your opinion 

or in your agency’s analysis, what is the optimum level of these activities as a percentage of GDP? Tax revenues, what is the optimum level at which you have good economic growth, you are not 

raising the deficit too high to cause long term damage, but at the 

same time you are taxing at an appropriate level to fund the government. What percentage of GDP is that? 

Mr. ELMENDORF. I do not think there is an analytic answer to 

that question, Congressman, it is a matter of people’s choices. Deciding the level of taxes that one thinks is appropriate cannot really be done separately from deciding the level of spending that one 

thinks is appropriate. 

Mr. FLORES. Well that is my next question. So what is optimal? 

I mean, one of the things you have talked about here is the rub 

that we have, on one hand, you have said that the increase in tax 

rates that we are going to have on January 1st of next year is 

going to dampen economic activity, and it is going to have a pretty 

big dampening impact on economic activity. 

On the other hand, you said that the deficits, which deficits are 

just transfer payments; they represent government spending and 

excess revenues; so you could call it a giant stimulus bill if you 

wanted. If you have a trillion dollars of deficits, it is really a trillion dollars of government stimulus. You said that stimulus is 

going to ramp up economic activity; if we turn that spending down 

it is going to lower economic activity. So what I am trying to get 

to is what the optimum percentage of tax revenues versus spending 

is? I mean, in the real world they ought to be the same, and I am 

just trying to get a feel for what that should be, and, again, as a 

percentage of GDP. 

Mr. ELMENDORF. It certainly cannot be too far apart for too long. 

Mr. FLORES. Right. 

Mr. ELMENDORF. So the thing that cannot happen is that the 

ratio of our debt to our GDP rises indefinitely. That cannot occur 

because at some point, we cannot really predict when, but at some 

point people will stop lending that government money. 

Mr. FLORES. Right. Let’s go to the next one. What was the cost 

per job created under the stimulus spending, under the ARRA? 

Mr. ELMENDORF. I am sorry, Congressman, I do not have an answer to that off-hand. We can take the estimate we have of the 

changes in employment, and divide that by the $837 billion, but I 

do not know off-hand what the answer to that would be. 

Mr. FLORES. Okay. Well, it is substantial. It is a lot more than 

private dollar investment or the number of jobs you get for a private investment dollar spent. Lastly, you noted in your report that 

the cost of the stimulus has increased from $821 billion to $839 billion. What is behind that cost increase? 

Mr. ELMENDORF. I think we made some small revisions to the 

cost of some of the refundable tax credits enacted in that legislation, and maybe on the unemployment insurance side as well: just 

the refundable, I am told. Some revision of the refundable tax credits. 
38 

Mr. FLORES. I guess the bottom line is the cost of the stimulus 

plan is still going up, and we do not have many jobs from it. Thank 

you. 

Chairman RYAN. Mr. Honda. 

Mr. HONDA. Thank you. Thank you very much. Thank you Mr. 

Chairman and welcome back. 

Mr. ELMENDORF. Thank you, Congressman. 

Mr. HONDA. I enjoyed that last discussion and congratulate your 

daughters coming to watch you work. 

Mr. ELMENDORF. Thank you. 

Mr. HONDA. I am sure they are going to learn something here. 

One of the things I have learned over the last couple years of being 

in this Budget Committee is that your job is to be neutral in your 

responses, and to respond in ways that are objective and honest 

and not be shaded by some the way we would like to lead our questions, and to have some sort of a response that appears to be favorable or unfavorable. I appreciate the difficulty of your task and I 

am awed at your grasp of the information that you have, having 

to respond to the different folks here. 

Mr. ELMENDORF. Now you are going to stump me. You set me up. 

Mr. HONDA. No, I am trying to just reflect my thinking on the 

kinds of things that we are trying to struggle with here in the 

Budget Committee on behalf of the country. I think every member 

of Congress agrees that we do have a deficit and a debt problem 

that deserves our serious attention. This attention should be looked 

at in terms of the dynamics of what has happened in the past, 

what could happen in the future, but how we put together the different policies and the mixture of that so that we try to figure out 

what is the best outcome in the future. We only disagree, I guess, 

about the best way on how to solve it, and I hope that we can really take a balanced approach and use a mix of the many tools at 

our disposals. 

So in your initial gut reaction to a plan that has these kinds of 

characteristics, what was your reaction to having the plan that balances the budget by 2021, and makes a targeted investments in 

areas like infrastructure and education, and then finances these 

changes with a progressive tax code, and also ending our overseas 

military engagements? What would be your gut reaction to a plan 

that has those kinds of elements in it? 

Mr. ELMENDORF. Congressman, I mean, we can and do analyze 

the economic effects of particular sorts of policies that Congress is 

considering. We have done quite a bit of this, for example, in terms 

of different tax policies that we have talked a little about today. We 

have also written about the value of certain sorts of government investments in physical capital, of a sort, of traditional sorts of highways and other infrastructure, but also in what economists call 

human capital, the skills of workers. That is harder to quantify, 

though. So we can talk about specific choices of that sort. 

We have not been asked to analyze the effects of an overarching 

fiscal plan, except to the extent that we do an analysis every year 

of the president’s budget, both the direct budgetary effects and the 

economic effects; and we have done an analysis in this outlook of 

this particular alternative scenario, which is not good in the long 

run. We have not looked at what you are talking about, exactly, 
39 

and we would have to know exactly what it was. But also, I want 

to emphasize that the reason that CBO does not make policy recommendations is because the policy choices are not just a matter 

of analysis. It is a matter, ultimately, of value judgments by you 

and your colleagues on behalf of me and my fellow citizens of what 

we want the government to do and not to do. I think the lesson of 

this alternative fiscal scenario and the size of the gap in 2022, and 

the fact that relative historical pattern we see there is so striking 

is the rise in the cost of Social Security and the health care programs. 

The ultimate question will be whether we want to make, as a 

country, substantial cutbacks in Social Security and the federal 

health care programs, relative to how they are scheduled to work 

now, or substantial increases in tax revenue, relative to the historical experience. We have to pick at least one, we could do a combination of those two, we cannot do neither. We cannot sustain the 

traditional levels of tax revenue and the current benefits we provide for Americans when they become older at the same time, given 

the rising number of older Americans and the rising cost of health 

care. So any proposal that is set on one side of that or the other, 

has implications for the other side, and it is up to you and your 

colleagues to weigh those, and we can provide some analysis that 

I hope is helpful, but ultimately it is a matter of value judgments. 

Mr. HONDA. Thank you, and I guess the analogy remains X 

equals whatever your value system is. 

Mr. ELMENDORF. Thank you, yes. 

Chairman RYAN. Mr. Mulvaney. 

Mr. MULVANEY. Thank you, Mr. Chairman, thank you Mr. Elmendorf. I am going to move away from the policy and get down 

into the weeds on some of the numbers if I can. If I could get that 

first slide up, that would be great; it’s probably something that is 

just of interest to you and me, but let’s take five minutes and go 

over some detail. 

I was looking at the report last night, and noticed something 

fairly interesting regarding the inflation numbers, and it is something that you and I have talked about before, I have talked about 
40 

with Dr. Bernanke, a bunch of different folks. To run through the 

quick history, in your forecast of last year, you all expected inflation, and we’re talking about the CPI now for urban workers, we 

can pick any measure you want, but we use them across this same 

analysis. You thought it would be 1.3 percent, then in August you 

adjusted that up to an assumption of 2.8 and then we finished the 

year at about 3.3. 

At the same time that we saw in actual rates of inflation that 

were higher than your estimates, you did not change the assumptions for 2012, roughly the same: 1.3 last January, 1.3 again in August, and 1.4 in the report from yesterday. That grabbed my attention and it led me to the next slide, which I want to ask you about. 

We took a look at your projections for CPIU for the next five year 

window, the first five year window and the second five year window; they are slightly different, off by a year because of they are 

a rolling number, but let’s call it the first year in the five year window. You have, despite the fact that inflation turned out to be considerably higher last year than you had expected, you actually revised down your expectations for inflation over the course of the 

first five year window, and left it the same for the second five year 

window. What we did, Mr. Elmendorf, was went in and looked at 

the historical data from the BLS since 1970, and took a series of 

five year rolling averages, and it turns out you are using an assumption for the first five year window in this report that would 

be the lowest five year rolling average in recorded history; and I 

am just wondering how you can justify that? If you take a look at 

what we have got: the average five year rolling average, which I 

know sounds strange, but I think you can see where I am going, 

over the last 40 years is almost 4.5 percent. The average five year 

rolling average over the last 10 years is 2.5 percent. The lowest we 

could find of any five year rolling average, going back to 1970, was 

actually 2006 through 2010, and that was still 2.2 percent, 2.18; 

and the worst, as Mr. Garrett referenced earlier in his questioning, 

was 1977 through 1981, when the average was above 10 percent. 

What is the justification in taking these unprecedented rates of inflation, as your assumption, as you look into the future? 

Mr. ELMENDORF. I have not looked at those precise numbers, but 

I understand your point, I think, Congressman. You are certainly 

correct that our forecasts of inflation have errors in them like our 

forecasts of all other economic variables. In terms of last year, 

there were some particular developments in energy markets and 

other parts of the economy that pushed inflation above what we 

and many people have been expecting, and a number of people 

thought at the time that those were likely to be transitory developments, and the way the data are unfolding, is so far consistent 

with that story. So the change in the CPIU over the past three 
41 

months is less than it was over the past six months, which is less 

than it was over the past 12 months. The latest information about 

inflation suggests that it is in fact coming down. 

Now, more broadly, I will mention two things. One is that, relative to years preceding the early 1980s, there has been a fundamental change in the behavior of central banks, in this country and 

around the world, related to a fundamental change in economists 

understanding of the role of central banks in keeping inflation 

down. 

So as we look out to the second half of the decade, we think it 

is very clear that the Federal Reserve’s objective is to keep inflation around 2 percent, and we think they have the tools to do that. 

For the next few years, I think the crucial thing to realize is that 

we have a period of unprecedentedly prolonged high unemployment 

since the Depression. We are living through a period that is the 

longest period of excess workers and houses and so on in the economy, that we have had in my lifetime, and there is a systematic 

relationship. 

Mr. MULVANEY. And I do not mean to cut you off but I am running out time, and I may have to finish this in a second round, but 

I understand the relationship between GDP growth and the fact 

there is excess capacity in the labor markets, and that would allow 

us to grow the economy without seeing a lot of inflation, and this 

is the next slide, you all have actually revised up your GDP estimates over the course of the first five year window from 3.4 percent 

when we did this last January to 4.1 percent today, which again 

is well above the historical average and approaching the highest 

ever of the actual performance within the GDP growth in a five 

year window. 

So I guess my question is: How is it that you are assuming historic rates of growth and historically low rates of inflation? 

Mr. ELMENDORF. The 15 second answer, Mr. Chairman, if I 

might, is that we are starting that growth from a particularly large 

gap between our actual output and the potential output of the 

economy. Then I am happy to take this up with you additionally, 

Congressman, later. 

Mr. MULVANEY. Thank you, Mr. Chairman. 

Chairman RYAN. Ms. McCollum. 

Ms. MCCOLLUM. Thank you very much Mr. Chair. Dr. Elmendorf, 

it is good to have you here. I have two questions. They are rather 

brief and so I will give them to you together. Many Americans get 

up and go to work every day. More of them would like to be able 

to get up and go to work today, but Americans get up and go to 

work every day. They work hard and they contribute to the success 
42 

of our country. For every dollar of income from wages, these working Americans, they will end up, quite often, paying as much double the tax rate: double the tax rate of investors receiving income 

from dividends or capital gains. So to me this hardly seems fair. 

Since there is such a significant tax benefit, even a bias I would 

say, extended to investors over working Americans, is there some 

equitable, qualifiable benefit to the economy and job creation inherent in every dollar investors receive from dividends or capital 

gains, versus the dollar that is earned in wages? So what is the impact the federal deficit and this tax inequity and the benefits provided to investors over workers? 

My second question I would like you to kind of summarize the 

different options because people have asked you a lot of questions, 

so you have some scenarios that you can talk about that you have 

presented to us. Again, all the Bush tax cuts are allowed to expire 

at the end of 2012, what is the effect on the economy and the federal deficit if only the upper end Bush tax and income earners over 

a million are allowed to expire, or if all the Bush tax cuts were extended for the next 10 years, what is the effect on the economy, 

what is the effect on the federal deficit? I have been struggling 

with this, you know, a worker who earns a dollar versus an investor who gets a benefit? 

Mr. ELMENDORF. Congresswoman, as you know, in setting tax 

rates Congress takes a number of considerations into account. The 

equity issues are part of that, so is the effect on the economy and, 

you know, the economic effects are not necessarily correlated with 

what you or others might view as the justice of the situation, so 

it is really sort of a separate issue, and I am not qualified to speak 

to the equity issues, except in my own personal role. 

When we do analysis of the effects of changes in tax rates, higher 

tax rates generally discourage the thing that is being taxed. Higher 

tax rates on work on balance, reduce work effort. Higher tax rates 

on the returns of saving, on balance reduces the amount of saving, 

and we incorporate those effects in the estimates that we do. I do 

not think there is a right answer from a economics perspective of 

what the relative tax rates should be because it is this combination 

of what the economic effects and value judgments again. We can 

do work about the effects of changes in the particular sorts of 

taxes, as can our colleagues and staff in the Joint Committee on 

Taxation, but I do not have comparisons of different sorts of things 

to use here. 

On the second question you asked, the economic effects of extending all of the expiring tax provisions would be a little larger than 

the economic effects of extending all the expiring tax provisions, except for the top tax rates. So in the short-term the lower the taxes 

are in general and the higher spending is in general, that tends to 

boost the economy as I have said. Now an analysis we have done, 

before we have said that the effects of lowering the top tax rates 

is smaller on the economy in the short-term than the effects of 

changes in tax rates further down the income distribution because 

higher income people tend to spend a smaller share of the money 

that they have, and what the economy needs in the short-term is 

more spending. So the effects of extending the expiring tax rates 

at the top will be smaller, dollar for dollar, in the short-term in 
43 

stimulating the economy, than the effects of extending the other 

tax cuts. 

In the longer term it is more complicated because in the longer 

term what matters, importantly, as I said, is not the demand for 

spending, it really is the supply of saving and the work effort and 

so on, and in the longer run it is more complicated actually to look 

at the effects of different sorts of changes in the tax rates, and we 

have some examples of this in the testimony I did for the Senate 

Budget Committee a year and a half ago, or so, and we talk more 

about that, but it is more subtle in the longer term. 

Chairman RYAN. Thank you. Ms. Black. 

Ms. BLACK. Thank you Mr. Chairman, and thank you Dr. Elmendorf for being here today. I want to turn our attention back to a 

subject that has been mentioned several times in the previous 

questions about trust funds, but more specifically about Social Security. In understanding trust funds and I think you have done a 

good job in the introduction to this particular section and I want 

to lift up one paragraph that is in there on Page 121 when you say, 

‘‘A trust fund receives cash receipts that are not needed immediately to pay benefits or cover other costs, the Treasury uses the 

extra income to reduce the amount of new federal borrowing that 

is necessary to finance the government-wide deficit, and the reverse happens when revenues for trust fund falls short of the expenses in a given year.’’ So I think that helps us to understand a 

little bit more about how the trust fund works. Then I want to turn 

everyone’s attention to Page 122, and there just above the Social 

Security trust fund statement or section you say, ‘‘Without legislative action, that there are three trust funds are projected to be exhausted during that period,’’ and that period you are talking about 

is 2013 to 2022: Social Security Disabilities, Insurance trust fund, 

Medicare hospital trust fund, and the highway trust fund. 

Now, looking at Social Security trust fund, we know that it is 

running a cash deficit, and payments are going out for benefits that 

exceed the Social Security payroll taxes that are coming in, and of 

course, if this trend were to continue we would need to redeem the 

Social Security trust fund’s assets to make payments. Do the Social 

Security trust funds represent real assets that government can 

draw upon? 

Mr. ELMENDORF. So as we say Congresswoman, in the paragraph 

following the one you read, the balance in the trust fund is an 

asset for the individual program, but a liability for the rest of the 

government, and the resources to redeem a trust fund securities in 

some future year must be generated through taxes, income from 

other government sources, or borrowing from the public in that 

year. Therefore, trust funds have an important legal meaning in 

that their balances are a measure of the amounts the government 

has a legal authority to spend for certain purposes, but they have 

little relevance in an economic or budgetary sense. 

Ms. BLACK. You say on Page 124 ‘‘By 2022 the trust fund for the 

Old Age and Survivor’s Insurance is projected to show a deficit.’’ 

What then? What then do we do? Do we go into the securities? Are 

there actual securities there that can be redeemed to pay for the 

benefit? 
44 

Mr. ELMENDORF. Well, there are actual securities there, the trust 

fund is the legal owner of a very large pile of honest to God government securities, but the resources to honor those has to come from 

some other place, as we have discussed, so when the trust fund 

starts to give securities back to the government, the rest of the government, and ask for cash, that cash has to come from some source 

in that year. 

Ms. BLACK. And again, help me understand where they come 

from. You mentioned borrowing. 

Mr. ELMENDORF. Basic sources of funds to the government on a 

unified basis all the time is the revenue that is collected, the taxes 

or fees or something else, and borrowing. 

Ms. BLACK. So at the end of the day, it almost is a shell game 

where we just move this money around and it appears that in trying to understand when we tell people that are paying a tax, a payroll tax, and at the other end they expect a benefit, the dollars really that are being put in there, are not necessarily the dollars that, 

at the end of the day, are going to be redeemed because there is 

a lot of shifting and moving of the money? 

Mr. ELMENDORF. How much people get out depends on the decisions of the Congress about future benefits. As you know, in CBO’s 

work, we focus very much on the unified federal budget. The Social 

Security trust fund and others are accounting mechanisms and 

they have a useful role, I think, as accounting mechanisms, but in 

our analysis of the budget situation and our projections of the future budget, we focus on the outlays for programs and the collection of money without focusing on which particular account something is being kept track of in. We do talk about the trust funds 

in this appendix that you have read, but we think a more useful 

way for you and your colleagues to think about the fiscal policy 

choices, is not through the trust fund lens as much as in terms of 

the overall activities of the government, in both providing benefits 

and services, and in collecting revenue. 

Ms. BLACK. I think, to make a point here, and I know my time 

is up, but I need to make the point here is that at the end of the 

day the money has to come from somewhere, and the money, if it 

starts to run out, has to come from somewhere, and i.e. many times 

that is borrowing more money and increasing our deficit. 

Chairman RYAN. Thank you. Mr. Ryan. 

Mr. RYAN OF OHIO. Thank you Mr. Chairman, thank you for all 

that you do for us and welcome to your family that is here. 

Mr. ELMENDORF. Thank you. 

Mr. RYAN OF OHIO. So, how many jobs do you guys estimate the 

stimulus bill created? 

Mr. ELMENDORF. As a path over time, our estimate is that in 

2010, for example, that it added between .7 and 3.3 million people 

in employment. In 2011, that it added between .5 and 2.6 million 

people in employment. In 2012, those numbers are smaller because 

the budgetary effects of the Recovery Act are waning. 

Mr. RYAN OF OHIO. The money is coming out of the economy, or 

not going into the economy. 

Mr. ELMENDORF. Not going into the economy. 

Mr. RYAN OF OHIO. Right. 

Mr. ELMENDORF. Yes. 
45 

Mr. RYAN OF OHIO. So we have CBO telling us that the stimulus 

has created millions of jobs here officially on the record. What was 

the change in GDP growth from, say, January and February prior 

to the stimulus bill? We know we were bleeding 600,000, 700,000 

jobs a month. What was the change in GDP growth, say from that 

January and February to now, for example? 

Mr. ELMENDORF. Well, as you know, GDP was falling very sharply at the beginning of 2009 and it reached its trough around the 

middle of the year, economists call that the end of the recession; 

recession is a technical term that means the declining period when 

GDP is declining. Since then GDP has been growing. 

Mr. RYAN OF OHIO. By how many points from the bottom in that 

summer to the growth that we saw in the last quarter? 

Mr. ELMENDORF. So I am sorry, I do not know that off hand. 

Mr. RYAN OF OHIO. What did it grow last quarter, 2.8? 

Mr. ELMENDORF. Yes. 

Mr. RYAN OF OHIO. What was it in that summer? Do you remember, the negative? 

Mr. ELMENDORF. I do not remember what it was in the first half. 

Mr. RYAN OF OHIO. Okay, but we have had significant change. 

We have had jobs created. So one of my colleagues said earlier, you 

know, what is better, private investment and private investment 

trumps federal spending, and I do not think there is anybody here 

who would not rather have the private sector coming in, making 

investments, creating jobs; that is what we are all trying to figure 

out how to make that happen, and what environment needs to be 

in place in order for that to happen from deficits to investments 

that we make. But the issue really, at that point, was that there 

was not private investment, correct? 

Mr. ELMENDORF. Yes, I think there was a very sharp reduction 

in household spending on the consumer goods, in housing construction, in business investment, and as private demand faltered, part 

of what happened in response to that was an automatic change in 

the government budget. Tax revenues fall when income falls, and 

spending rises when incomes are down, but also then the government acted through the Recovery Act and other measures, and we 

think that the Recovery Act provided some additional demand, 

some from government purchases, but some by lowering taxes in a 

way that boosted private demand. 

Mr. RYAN OF OHIO. Did you run any models on what the world 

would have looked like had we not passed the stimulus package? 

At that point you guys had to have been saying, if you do a stimulus package that is 800 billion, if you do one that is 1.5 billion, 

or one 1.5 trillion, or if you do nothing, what was the model looking 

like of the do nothing scenario? 

Mr. ELMENDORF. We did estimates in the winter of 2009 of the 

effects of the versions of the Recovery Act as they were being considered, and I think we published a chart at some point that 

showed a decline in the level of GDP that was very severe in the 

absence of the Recovery Act, and the decline that was still severe, 

but not as severe, in the presence of the Recovery Act. In a sense, 

one can take our estimates that we published now of the effects of 

the Recovery Act and subtract off those effects from the realized 
46 

GDP growth and employment levels, to get a sense of what we 

think would have happened in the absence of the Recovery Act. 

Mr. RYAN OF OHIO. Okay, great. I just want to make that point. 

I mean, no one here is happy with where we are at today, believe 

me, I represent Youngstown, Ohio; we have the poorest city in the 

country. No one is happy with where we are at, but I think it is 

important for us to say wait a minute, there was no private investment, this had had some significant effect, CBO is telling us millions of jobs, a turnaround in GDP growth. 

Last quick question, so now we are debating these value judgments of raising taxes on hedge funds, billionaires, millionaires, 

whatever, versus federal spending. What increases the GDP more 

significantly, a tax cut for a millionaire or higher, versus a federal 

investment in, say, building roads and bridges and fixing the combined sewer overflow problem we have in the country? 

Mr. ELMENDORF. Over the next few years, Congressman, we 

think that higher income people spend a small share of the incremental income or wealth they have from a tax cut, does not provide 

very much stimulus to the economy relative to giving money to people who will spend a larger share of that money, and that includes 

sending money in the form of infrastructure investment. The big 

issue in that case, as I mentioned before, is the delay from your 

actions to the money actually flowing. 

Chairman RYAN. Thank you. Mr. Ribble. 

Mr. RIBBLE. Thank you Mr. Chairman. I do have a couple slides, 

I wonder if we can get those brought up. Dr. Elmendorf, thanks for 

being here, I know that it has been a long morning already. I appreciate your patience; you have been kind with your time. I want 

to take a look at two slides very briefly, and then just kind of get 

you to comment on them. 

This one shows consumer spending dating back to 2001. We can 

see the recession period in there, the drop-off in at consumer 

spending, but even that drop-off, it dropped off back to about 2007 
47 

levels, which was at the end of the housing boom, one of the largest 

growth periods in the nation’s economy, and then subsequently it 

has turned around and began to grow again. I guess the thing that 

pops in my mind is we hear a lot about consumer spending. If consumer spending is the ticket to job growth, and consumer spending 

is up and up fairly dramatically from 2007, I wonder why we do 

not have jobs. 

Mr. ELMENDORF. It is the sum of the demands for goods and 

services that drive overall employment; so it is adding up what is 

happening in consumer spending and business investment, and 

housing investment and the federal and state and local governments purchases of goods and services and net export. 

Mr. RIBBLE. Good. Let me just bring another slide up. I am going 

to talk along the same lines. Let’s go ahead and I will let you continue. I have got one more slide if we can bring that up. 

All right, we have talked a lot, and my colleague did, Mr. Ryan 

from Ohio just mentioned it, you just mentioned in your comment, 

about private investment. I know that you are an economist, but 

I am going to ask you to put on your psychology hat, and can you 

possibly tell me because I spent 30 years in the private sector running my own business creating jobs in this country. I know that the 

political class here in Washington likes to claim they claim jobs, 

Democrats claimed all these jobs and Republicans create all these 

jobs. I find it a little insulting. I thought I actually helped create 

them myself in my company, but private investment is way off. 

Why do you suppose that is? 

Mr. ELMENDORF. Well, investment is one of the more cyclically 

sensitive parts of the economy. So in general, business investment 

falls sharply in recessions and then rebounds sharply in recoveries, 

but it is true that in this particular downturn, business investment 

fell to an especially low level; we show a picture of that ourselves 

in our outlook I think. And there are a number of factors here, and 

it is hard to disentangle them. We are actually doing some work 
48 

now trying to disentangle various factors that have led to the slow 

recovery, and when that work is finished we will of course supply 

it. 

Mr. RIBBLE. Let me tell you what small business owners and job 

creators are telling me back in my home district. They are telling 

me that they have absolutely no confidence that the political class 

in Washington, D.C. can solve these problems. Until they have a 

sense that we can solve the problems, until they have a sense that 

Democrats and Republicans can lay down their swords, maybe put 

aside preconceived impressions of reality, I have to defend this type 

of economic model, they have to defend their type of economic 

model and we are going to hold on to it until we die, business is 

not going to invest money because they do not trust us. I would call 

on all my colleagues to just lay down the sword and try to fix this 

thing, and inject some confidence back into the economy because I 

will tell you, the other thing I hear from them is that the government has gotten too much in the way. They feel that a $16 trillion 

debt, it scares the living daylights out of them. They feel that a 

regulatory environment that places thousands and thousands and 

thousands of pages and new rules on them every single year is a 

burden on them; and they feel that oppressive tax rates that continue to take from them money that they could use to create more 

and more jobs is a risk to them; and I hear this over and over 

again, not from just one or two. 

I am going to close with one other comment, and one other question. I was really pleased to see that you brought your daughters 

with you today; I wish my own two children were here with me 

today and my grandchildren were here today. You have done a 

wonderful job, I am sure they are very proud of you. Do you think 

that their future is brighter today than it was $4 trillion of debt 

ago? 

Mr. ELMENDORF. A lot has happened in the country since our 

debt was $4 trillion smaller, Congressman, and I think some aspects of that have been good for their future and some not, but that 

is a personal judgment in any case. 

On the matter of business investment, I am not at all surprised 

that the uncertainty about future government policies is weighing 

on business. There is a recent paper, actually co-written by a member of our panel of economic advisers, that shows that uncertainty 

about government policies is especially high now, and given the 

tempering nature of so many parts of the tax code, such lack of 

clarity about what will happen in health care policy, in financial 

regulatory policy and so on, we think that is weighing on business 

investment decisions, but I would just say quickly, that I think the 

surveys of business suggest that the biggest factor weighing on 

their hiring and investing is uncertainty about the future demand 

for their products, and that is a sort of circular exercise, which is 

that if some businesses spent more and hired more, that would bolster demand for other business to work, and that would have a virtuous circle, but I think the biggest source of uncertainty that businesses face is their sales. 

Mr. RIBBLE. And I completely agree with you, and I will tell you 

that regulations and taxes are affecting that demand. Thank you. 

Chairman RYAN. Mr. Huelskamp. 
49 

Mr. HUELSKAMP. Thank you Mr. Chairman. Mr. Director, I appreciate your time today. I was looking through the report and on 

Page 36 you actually discuss participation in the labor force, and 

you note the employment rate in the fourth quarter of 2011 would 

have been one-quarter percentage point higher than the actual rate 

8.7 percent. Trying to understand this, so when you factor in the 

number of people who quit looking for work, our effective unemployment rate is really to 10 percent? 

Mr. ELMENDORF. Yes, I guess that is right. I cannot find the specific place, but yes. It is often the case in downturns that some people who lose jobs keep looking and some stop looking, at least for 

a while, but I think that effect has been particularly pronounced 

in this downturn, of course the rise in unemployment and the duration of high unemployment has been particularly pronounced as 

well. 

Mr. HUELSKAMP. Yeah, it has been very difficult, but again, 10 

percent effective unemployment rate, that still does not factor in 

the underemployed, that is correct, that does not include those? 

Mr. ELMENDORF. I think that is right. 

Mr. HUELSKAMP. Okay. If we factor those in, what percentage do 

we have of unemployed or underemployed? 

Mr. ELMENDORF. I am sorry, I do not have that. That is an important concept, Congressman, I just do not have those numbers at 

hand. 

Mr. HUELSKAMP. It certainly is and so I appreciate that. To follow up on that, my other question is turning to taxes, you have two 

scenarios, but if I do back of the envelope estimate is that if Congress does nothing we foresee at least a $5 trillion tax increase if 

the Bush/Obama tax cuts of 2001, 2003, and 2010 all expire, is that 

about $5 trillion over that 10 year window? 

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

Mr. HUELSKAMP. Okay, and the net economic impact of a $5 trillion tax increase would be positive or negative? 

Mr. ELMENDORF. Well, in the short run we think that that tax 

increase would have a negative effect on the economy. By the end 

of the decade, we think that that tax increase scheduled in current 

law would have a positive effect on the economy, and the reason 

is because the increase in tax rates embodied in current law has 

opposing effects on GDP over the medium-term and long-term. The 

lower tax rates do encourage additional work effort and saving in 

a way that we capture in our models, and that are good for the 

economy, but the tremendous amount of extra borrowing crowds 

out private investment, and that is bad for the economy. In our 

modeling, using a range of assumptions, the effects of the extra 

debt dominates the effects of the lower tax rates by the end of the 

decade. 

Mr. HUELSKAMP. Even in the latter part of your comment about 

crowding other investments, you would say that even in light of 

Mr. Bernanke’s statement that we are going to have massively low 

borrowing cost for the foreseeable future, and does that not play a 

significant role in trying to predict what would occur, and that is 

a question I will ask Mr. Bernanke openly in the next day or so? 

Mr. ELMENDORF. Yes, and I am curious to hear his answer. Certainly the low borrowing cost is part of what we have in our base-
50 

line projections, but it still may be the case, and we think it would 

be the case that relative to what would happen with a debt that 

was this big, having a debt of this big will raise interest rates, so 

that increase was coming from a lower baseline level than as often 

been the case, but we think that extra demand for credit will still 

push up the cost of credit. 

Mr. HUELSKAMP. And another question, I appreciate that. I ask 

my staff regularly when they think the debt limit increase will be 

needed, and they have been saying it would be kind of March, but 

with the new higher deficit figures, another trillion dollars for the 

fourth year in a row, just unbelievable. What is your latest estimate for when the federal government will run out of money without using extraordinary means like is continually discussed? 

Mr. ELMENDORF. So we do not try to track Treasury’s cash flows 

on a monthly basis, so we are not the people to come to for a specific prediction at any point of when a date might be. 

Mr. HUELSKAMP. I would say going to the Treasury for a specific 

prediction would be problematic as well. On the day they said they 

would run out of cash in August 2nd, they actually had another 10 

days worth of resources. I appreciate that, but just big picture, will 

we get to 2013 or will we run out of money before a new president 

takes office? 

Mr. ELMENDORF. So under current law, we think that, yes, the 

government can get to 2013 without raising the debt ceiling or 

going to the extraordinary measures that you mentioned, but that 

is quite uncertain. It depends on our economic projection; it also depends, of course, on the actions that Congress takes. 

Mr. HUELSKAMP. Okay. I appreciate, and lastly, one quick question: last summer we had an exchange about which government 

programs created economic growth, went back and forth with your 

office, I know that is difficult to pull out, and looking at the effective unemployment rate of 10 percent, and the anemic economic 

projections, is it fair to say the tremendous run-up in government 

spending of 2009 did not benefit the economy in the long run? 

Mr. ELMENDORF. The extra government spending from the Recovery Act in 2009 boosted the economy in the short-term, but we believe yes, unless there are offsetting changes made, that pay off the 

extra debt that was incurred, the economy will be worse off as a 

result by the time we get back to potential output and full employment later in the decade. 

Chairman RYAN. Mr. Rokita. 

Mr. ROKITA. Thank you, Mr. Chairman. Dr. Elmendorf welcome, 

thank you for being here. You and I always seem to talk about this 

time in the day. Part of being a new member, that is the last name 

with the letter ‘‘R.’’ 

Mr. ELMENDORF. Happy to be here. 

Mr. ROKITA. I heard your testimony with the chairman, when 

you had a discussion about un-sustainability, and I heard you just 

say it is not Medicare, and I want to clear this up because this was 

my impression, it is not Medicare that is causing the un-sustainability, we have a mix of policies that need to be worked on. 

Mr. ELMENDORF. Yes, I said what made the alternative fiscal scenario unsustainable in the long run, is the combination of policies, 

it is the growth, certainly, of Medicare, other federal health pro-
51 

grams, Social Security set against taxes that remain close to their 

historical average share. 

Mr. ROKITA. So I want to be clear, for the record, for my own understanding, for the American people, that you are not saying that 

we do not have to reform Medicare or are you? If we were to adjust 

all the other parts of that mix, and not touch Medicare, is this 

country okay in the long run? 

Mr. ELMENDORF. So, in our projections from last summer for 

2035, we have Medicare being about two percent of GDP larger 

than it is today, so that alone can be accommodated through other 

changes in policy. I do not think Medicare has to be changed over 

the next 25 years that we focus on here, but something has to be 

changed from current policies. 

Mr. ROKITA. So seniors going on Medicare now might use it for 

the next 25 years, so I need a longer term view than that. I want 

to talk about my 2-year-old, my 4-year-old, I want to talk about 

their kids. 

Chairman RYAN. Will the gentleman yield for a second? So just 

looking at the CBO’s long term budget outlook, to answer your 

question because we have it right here, Medicare, Medicaid, the 

health care entitlements, plus the interest on debt at that time, 

will equal federal revenues. That means no other program in the 

federal government outside of the health care programs and the interest on the debt will be paid for by any revenues in 2034. 

Mr. ELMENDORF. That is right, but as you know, the debt service 

that we are paying at that point arises from the combination of 

policies we have had in the intervening years. So again, I think it 

is a judgment that you all need to make about whether you want 

to have a country with historical levels of revenues and changes in 

Social Security, Medicare programs to come down to that level, or 

the programs as they are currently structured, and increases in 

revenues to come to up that level, or some combination of policies. 

Mr. ROKITA. I just think when you are talking about a program 

that is going to be 14 percent of GDP and has no interest in 

plateauing from there; it is going to keep going and going; you have 

got to if you are going to have an honest discussion with us, the 

American peoples, understand that this is part, the centerpiece, 

perhaps, of the problem. 

Mr. ELMENDORF. Again, Congressman, I think I have been very 

clear here and in many other times that it is the aging of the population and the rising cost of health care that is putting this unbelievable pressure on the federal budget, but there are different 

ways to respond to that and it is not our place to endorse. 

Mr. ROKITA. Yeah, I understand that you said that a few times 

too, but when you say mix of current policies, you are endorsing 

something. That is what I want to be clear about, that Medicare 

reform is part of this mix, and that it has to be reformed or not. 

So that is what I want to get to. 

Mr. ELMENDORF. Right, so I do not think that one can say that 

any single piece has to be reformed; it is the combination of policies 

that have to be pursued. 

Mr. ROKITA. All right, well thatis on record. All right, let me go 

here. When Ms. Castor was asking you some questions about growing out of this deficit, I want to be clear for the record that you 
52 

mean to say that we can have policies that create growth, whatever 

we agree them to be, that could help reduce the deficit, that has 

nothing to do with reducing the debt. By definition, if you do not 

wipe out the deficit year to year, you cannot start attacking the 

debt; so you cannot grow your way out of the debt we are in, and 

the debt that is coming down the road alone. Just by growing the 

economy, all the dials not touched, you cannot grow your way out 

of this debt. In a first world mature economy. 

Mr. ELMENDORF. In our baseline, our current law projections, 

debt continues to rise because we continue to have deficits, as you 

are saying, it falls slowly relative to GDP because the debt is rising 

more slowly than GDP by the second half of the decade under these 

current law projections. 

Mr. ROKITA. But if you are eliminating the deficit, you are not 

reducing the debt. 

Mr. ELMENDORF. You are not reducing the dollar value of the 

debt. 

Mr. ROKITA. So growth alone will not do this. Regarding the extended payroll tax cut, I understood that the cost of the tax cut, 

if extended this year, would be about $100 billion, and you indicated that that is better for the near term economy than the Bush 

tax cuts. 

Mr. ELMENDORF. Dollar for dollar that we estimate that lower 

payroll taxes has a stronger stimulative effect than a broad based. 

Mr. ROKITA. And you also would agree that of that $100 billion 

has be paid for by future generations? But for our near term economic bump, other future generations need to pay for that? 

Mr. ELMENDORF. Well, or this generation a few years later, but 

yes, it has to be paid for by somebody. 

Mr. ROKITA. Right. With a small amount of time I have left, John 

Maynard Keynes, what do you believe he got right and what do you 

not subscribe to? 

Mr. ELMENDORF. I think it is a widespread view among macroeconomists today that over the medium or long run, economies are 

what we call classical or neoclassical, so that the constraint on output and incomes is the supply of the factors of production, labor 

supply saving and so on, but also, I think, a view of most economists who are thinking about business cycles, is that in the shortterm, then a very important determinant of the level of output and 

the level of employment is the demand for goods and services, and 

that is, at its heart, a Keynesian idea. The actual models we use, 

the way this is structured has evolved a tremendous amount in the 

75 years, but that view that in the short run the economy has what 

people think of as Keynesian properties, in the medium and long 

run it does not have those Keynesian properties. That is, I think, 

a consensus view that you will find in leading textbooks. Not everybody shares it, I do not want to say that, but I think it is a consensus view that you will find in leading textbooks and a lot of the 

writings of people over the past few years, with a range of political 

views and a range of views about whether the right way to proceed 

in the country is to change taxes or spending and so on. 

Mr. ROKITA. And my time is expired. Thank you. I will call the 

office from time to time. 

Mr. ELMENDORF. Please do. 
53 

Chairman RYAN. Thank you, Mr. Woodall. 

Mr. WOODALL. Thank you, Mr. Chairman, and thank you Dr. Elmendorf for staying with us throughout the morning. Just so you 

know, I tremendously appreciate the work you and your team does; 

I know we are here to talk about your latest body of work, but I 

want to talk a little bit about a publication you all do every so 

often, the Historical Effective Federal Tax Rates, just love this publication. As I turn to your most recent addition, I see this: that if 

you were in the bottom 40 percent of income earners in this country, you actually profit from the American income tax system. That 

almost half this country, and I am not talking about the refund 

check you get in April, I am talking about the tax code, the tax collection system in this country sends you more money than you send 

to it. The privilege of being American citizen is profitable through 

the income tax code for the bottom 40 percent of all Americans. I 

do not think we think about that, we all think that we are paying 

our fair share, that somebody else needs to pay a share. You know, 

I am a proponent of the fair tax, that is HR 25 here in the House, 

it abolishes the entire income tax code, and I look to your report 

that tells me for 40 percent of Americans, the income tax does not 

collect taxes, it distributes largesse. As evidence, the income tax 

code has lost its way. 

I also look at your Trends in Federal Tax Revenues and Tax 

Rates, love that publication as well, and what I see, particularly 

when I combine with figure 4.1 from your economic outlook today, 

I look back during the Carter years, the Ford years, the 1970s, 

where the highest ordinary income rate in this country was 70 percent. The income tax rate was 70 percent in this country, but I look 

at your CBO baseline of revenues, and I see that revenues during 

that time were right there at historical averages, maybe a little 

lower. I fast forward to 1986 and the income tax reformsthat Tip 

O’Neill and Ronald Reagan put into place, I see the lowest ordinary 

individual income tax rates on record, but then I go to your figure 

4.1 again, the CBO baseline, and I find out that during those years 

revenues were a little higher than the average revenues. So the 

higher tax rates lead to lower revenues, and the lower tax rates 

correspond to higher revenues; and as a freshman I appreciate you 

being able to educate me in that way. 

What has really gotten me confused, though, is going back to figure 4.1, I see you have a CBO baseline projection and alternative 

fiscal scenario, and the alternative fiscal scenario assumes that 

President Bush’s tax cuts, President Obama’s tax cuts, all of those 

tax cuts stay in place. Is that correct? 

Mr. ELMENDORF. All the expiring tax provisions are extended 

with the exception of the payroll tax. 

Mr. WOODALL. So according to what I see here in figure 4.1, if 

we leave every single tax cut in place, in fact if we even bring back 

the tax cuts that expired in 2011, revenues will still be higher than 

the 50 year historical norm. We leave every tax cut in place, federal revenues will be higher in this 10 year window than the 50 

year norm, am I reading that chart correctly? 

Mr. ELMENDORF. By the end of the decade they would be higher 

than the average of the previous 50 years, yes. That is right Congressman. 
54 

Mr. WOODALL. But I have heard my colleagues talk about that 

revenue is an important component of our deficit crisis, and that 

the deficit is caused by these tax cuts, so I go to your CBO baseline 

proposal that assumes all of these tax cuts expire, and what I see 

is that if we allow these tax cuts to expire, federal revenues as a 

percent of GDP will rise to the highest levels in 50 years? Is that 

right? I only see a 50 year window here; it is the highest level on 

the chart. Is that correct? 

Mr. ELMENDORF. It is the highest on the chart, I cannot speak 

to the longer history off-hand. 

Mr. WOODALL. So if we allow those tax cuts to expire, and we 

allow federal revenues to rise to the highest level in 50 years, are 

we able to start paying down debt? 

Mr. ELMENDORF. If the tax cuts expire, as under current law, 

and you keep to current law in spending, then the debt continues 

to rise. 

Mr. WOODALL. So the highest tax rates over the last 50 years do 

not pay down any debt, but do they eliminate our annual deficits? 

Mr. ELMENDORF. No, again, if the rest of current law remains in 

place, then we continue in our current law baselines, those continue to deficits. 

Mr. WOODALL. If we allow all the tax cuts to expire, if we allow 

federal revenues to rise to the highest level in the last 50 years, 

we do not pay down a penny in debt, we do not eliminate our national deficit and we continue to accumulate that. What that tells 

me, Dr. Elmendorf, is that clearly revenues are not the challenge 

in this scenario, it is spending that is the problem and I know that 

folks back home are wondering when we allow revenues to rise to 

their highest levels in 50 years, what they are getting for that 

money. 

Mr. ELMENDORF. But the short answer to that, Congressman, is 

there will be far more people collecting Social Security checks in 

2022 than any point in the past 50 years. There will be far more 

people collecting Medicare benefits in 2022 than in the preceding 

50 years. More elderly people collecting benefits for long-term care 

through Medicaid than in the preceding 50 years. So the American 

people are receiving benefits whether you and they view those benefits as worth that cost is the judgment that you and they have to 

make. 

Mr. WOODALL. Well, I guess that goes to my colleague and Mr. 

Rokita’s point, if we can allow revenues to rise to the highest level 

in 50 years, and that still does not solve the problem, we better 

focus on the spending side of the ledger. I appreciate your bringing 

that to us today, thank you again for spending so much time with 

us. 

Mr. ELMENDORF. Thank you, Congressman. 

Chairman RYAN. Thank you. Let me just conclude by just going 

to the outstanding work you do in your summer long-term budget 

outlook, which the June budget outlook, and I just simply want to 

impress upon the point that I think members here are trying to 

make, which we tried, at the beginning of the hearing. In 2034, 

using your numbers, spending on entitlement health care programs 

plus interest exceeds all federal revenues in 2034. In the end of the 

century, 2085, Medicare goes from where it is now, approximately 
55 

three percent of GDP to 14 percent of GDP. All health care entitlements, Medicare, Medicaid, CHIP and the exchange subsidies, just 

those programs right there exceed our revenue trend, so before the 

end of the century, before our kids and our grandkids are raising 

their families, all federal revenue that comes into the government 

will not be enough to cover our health care entitlements. Sure, I 

know you cannot give us policy recommendations or you do not give 

us policy recommendations or value judgments, it is obvious in 

your numbers that this path is unsustainable. I mean, we cannot 

just be a government that only provides health care benefits. We 

have national defense, we have education concerns, we have environmental concerns, we have Social Security, and so the sooner we 

recognize that the path we are on is ruinous, which is what you 

are showing us in these long-term numbers, the tax rates that you 

tell us that we need to have, if we want to finance this through income taxes: the bottom tax bracket is 25 percent, the middle income tax bracket is 66 percent, the top tax rate is 88 percent, we 

will not have an economy. Your own model breaks down, I think, 

in 2027 because of debt burdens. So I think we need to be a little 

more candid about the absolute un-sustainability of it and it is not 

simply a question of cutting back a little bit here on discretionary 

spending or trimming this program over here; this is all so 

unsustainable. It is the fault of both political parties and the sooner we recognize that the better off we are going to be, not only in 

keeping commitment to people who have organized their lives 

around these programs, but for our economy as well, and that is 

the point we are trying to make. 

Mr. ELMENDORF. Mr. Chairman, as you know, you are fonder of 

our very long-term projections than we are when we talk with our 

panel of health advisers for their guidance in setting the very long 

term projections. They do not really talk with us about it, they 

think it is a silly question to ask, so we do provide them out the 

full 75 years, as the Social Security, Medicare actuaries do, we do 

the same thing for our long-term Social Security, Medicare projections, but if you look back 75 years ago, and picture what people 

in 1935 would have done in trying to project health spending in 

2010, you can see why that is a very perilous business. So we try 

to focus, as we have, in this long-term budget outlook, on the next 

25 years. What I think is there is an absolute trade-off between 

putting revenues above their historical average share of GDP and 

cutting Social Security and the federal health care programs. 

Chairman RYAN. Are they being cut in real terms in what we are 

talking about, are rates of growth going down? 

Mr. ELMENDORF. Let’s actually be careful. Cut relative to what 

will occur under current law, and we said this, as you know, time 

and time again, that the Congress will need to either raise revenues well above what has been the historical average share of 

GDP, or make fundamental changes in the large entitlement programs, or some combination, even if one reaches for a combination, 

the changes to both revenues and these large entitlements will 

each need to be large because the scale of the problem, the gap between the revenues we are used to sending to the government and 

the benefits that we are used to getting from the government is 

getting so large. 
56 

Chairman RYAN. And the largest one is the health care entitlements, correct? 

Mr. ELMENDORF. The fastest growing programs are the health 

care entitlements. Medicare is a little smaller than Social Security 

even 25 years from now, but Medicare and Medicaid together are 

larger than Social Security by the end of the decade. 

Chairman RYAN. And this is why the point I tried to make earlier about getting better data in research and analytical tools on 

ideas and reforms on bending the cost curves of health care is really crucial because if we can get at the root cause of health inflation, 

that is one of the smartest, best things we can do to deal with this 

situation because I think as you have shown in your analysis the 

kinds of tax rates that this country would have to absorb, would 

be growth destroying if we actually went down that path. 

Mr. ELMENDORF. And, as you know, that work is a very high priority for us. 

Chairman RYAN. All right. Thank you. 

Mr. HONDA. Mr. Chairman, if I may just have a closing comment 

also? 

Chairman RYAN. Okay. I will get the last word, you know. 

Mr. HONDA. Well, you are the chair. There are a couple comments I will make that I just needed to just respond to in terms 

of highest income in past 50 years, or expenditures that we see on 

the chart. The charts are kind of static in that we have to take 

them in the context of other dynamics. I think this is what is trying to be impressed upon by Dr. Elmendorf. 

In terms of the highest income or highest expenditure in last 50 

years, 50 years ago I was probably making around $200 a month, 

take home, and today, 50 years later, I have the highest income 

that I could ever have imagined or ever dreamed of, but it is because of the way the economy has changed, the cost of living has 

changed, and things like that, so to compare yesterday from today 

has to be taken in context of a lot of information. So in terms of 

numbers and budget and projection and things like that, the 

science and the art, if you will, of budgeting and trying to make 

the right decisions for the future and for our country has to be a 

thoughtful process, through dialogue and debate, and I think that 

that is why I appreciate today’s session and, Mr. Chairman, you 

may have the last word. 

Chairman RYAN. Okay. No, I am just having fun with you, but 

I actually will. It is a technical question I am going to have to ask 

you for the record. According to the March 2011 baseline, limiting 

spending to gas tax levels would result in spending that would be 

in average of $13 billion per year below current levels. Has that 

changed under the new baseline? 

Mr. ELMENDORF. So that number is one, I think, is one I am not 

familiar with, but I can give you the current number. 

Chairman RYAN. Okay. 

Mr. ELMENDORF. We estimate, I think this is the answer to your 

questions which I was helpfully provided with late last night. 

Chairman RYAN. That is, I think, why we are asked to ask you 

this right now. 

Mr. ELMENDORF. Over the coming decade, we estimate on average annual outlays from the highway account, or the highway trust 
57 

fund, will be about $8 billion more than revenue and interest credited to the account, although of course that gap varies by year over 

the coming decade. 

Chairman RYAN. So that is the change from last year’s baseline 

to this year’s baseline? What is the delta? 

Mr. ELMENDORF. I do not have a number for last year, so I do 

not know what it used to be, all I know is what it is now. 

Chairman RYAN. Okay. 

Mr. ELMENDORF. And our current projection, on average, over the 

coming decade, between the outlays and revenues is $8 billion per 

year. 

Chairman RYAN. Okay, okay, all right. I think that answers my 

question. Thank you. 

Mr. ELMENDORF. Okay. Thank you all. 

Chairman RYAN. The hearing is adjourned. 

[Questions submitted for the record and their responses follow:] 

CHAIRMAN RYAN’S QUESTIONS SUBMITTED FOR THE RECORD

AND THEIR RESPONSES

Changes in CBO’s Estimated Impact of the 2009-Enacted Economic Stimulus Legislation 

In a response to a question at our February 1, 2012 CBO Budget and Economic 

Outlook hearing, Director Elmendorf indicated that CBO estimates that the 2009- 

enacted economic stimulus legislation increased employment by between 0.7 million 

and 3.3 million people in 2010. The range he mentioned matches the low and high 

estimates for the legislation’s employment impact in 2010 (calendar year average) 

published in CBO’s November 2011 report on this subject (in the bottom portion of 

Table 1 on p 3.). I mention this because Table 1 in CBO’s preceding August 2011 

report displays an estimated employment increase of 1.3 million to 3.3 million people for 2010. In other words, as you know, CBO has significantly reduced the low 

estimate of employment increase due to the stimulus. More broadly, the November 

report (on page 8) confirms that CBO’s low estimates of the stimulus legislation’s 

effect on economic output and employment for each year are now smaller than its 

previous low estimates. A related footnote and Appendix in the November report reference a Valerie Ramey article ‘‘Can Government Purchases Stimulate the Economy?’’ published in the September 2011 volume of the American Economic Association’s Journal of Economic Literature as part of the basis for CBO’s reduced low estimates. The report’s discussion on this is helpful, but it is difficult to get a complete 

picture of the size of the changes in CBO estimates for real GDP, the unemployment 

rate, and employment for each of 2009-2012. To do this, it is necessary to compare 

the Table 1 estimates in the November report with those in the August report. 

Question: Can you provide a table that provides this comparison? In other words, 

a table that displays the low and high estimates and the differences between these 

estimates from the November 2011 and August 2011 reports of the stimulus legislation’s effect on real GDP, the unemployment rate, and employment for each of 2009- 

2012 (calendar year averages)? 

Answer: The first table below shows the change from August 2011 to November 

2011 in CBO’s estimates of the impact of the American Recovery and Reinvestment 

Act (ARRA) on output, the unemployment rate, employment, and full-time-equivalent employment. The related tables published in those reports are also reproduced 

below for your information. 

As discussed with additional detail on page 8 of the November 2011 report, CBO’s 

estimates of the impact of ARRA on output and employment differ from those CBO 

presented in August 2011 both because CBO adjusted its methodology for making 

such estimates and because CBO slightly revised its estimates of the timing of 

changes in federal spending as a result of ARRA. 

On the basis of its continuing review of relevant research, CBO has decreased the 

lower end of its range of indirect multiplier effects from 1.0 to 0.5, while leaving 

the upper end of the range unchanged at 2.5. The indirect multiplier effect is applied to the direct effect of all changes in federal taxes and spending due to ARRA. 

As a result, CBO’s low estimates of ARRA’s effects on output and employment were 

smaller in November 2011 than in August 2011. 
58 

DIFFERENCE BETWEEN THE AUGUST 2011 AND NOVEMBER 2011 REPORTS
59 

TABLE 1 FROM THE NOVEMBER 2011 REPORT
60 

TABLE 1 FROM THE AUGUST 2011 REPORT

Highway Trust Fund 

Question: The January 2012 baseline estimates the Highway Trust Fund (HWTF) 

is now set to become insolvent in 2013 instead of the second half of 2012. What is 

the reason for this brief reprieve and does it materially change the financial status 

of the Highway Trust Fund (including both the Highway and Transit accounts)? 

Answer: CBO’s January 2012 estimates of Highway Trust Fund (HWTF) spending 

and revenue include minor technical changes from our earlier estimates related to 

the expected pace of spending and the collection of revenues. For example, in August 2011, CBO estimated that the trust fund would have a balance of about $9 billion at the end of fiscal year 2012, while our January 2012 baseline reflects an estimated balance of $12 billion at the end of the current fiscal year. The changes between the August and January projections do not materially alter the fundamental 

disparity between projected revenues to the fund under current tax rates and projected spending if annual obligations are continued at the current level. Spending 

from the fund totaled about $45 billion in fiscal year 2011, while revenues deposited 

into the fund last year totaled about $37 billion. 

Question: On May 17, 2011, CBO Assistant Director for Microeconomic Studies, 

Joseph Kile, testified before the Senate Finance Committee stating that limiting 

spending in the Highway Trust Fund (including both the Highway and Transit accounts) to the amount that is collected in current taxes on fuel and other transportation activities would result in spending that would be about $13 billion per year 

below the current amount. Has this estimated average changed under the January 

2012 baseline? 
61 

Answer: No, that estimate has not changed appreciably. Under CBO’s January 

2012 baseline estimates, projected spending from the HWTF would be greater than 

the revenues credited to it by around $13 billion a year over the 2012-2022 period. 

But because the HWTF is not authorized to borrow additional funds or incur a deficit, that level of spending cannot be sustained in after 2013, according to CBO’s 

estimates of fund revenues and spending. 

Question: If Congress did limit spending to gas tax revenue in the Highway Trust 

Fund, how much lower, on average, would annual spending be below the current 

amount in the Highway Account? What about the Transit Account? 

Answer: Over the 2012-2022 period, spending from the highway account would need to be at least $9 billion lower each year and spending from the transit account 

would need to be at least $5 billion lower each year—relative to the baseline extrapolation that assumes that future annual obligations from those accounts remain 

constant in real terms. Those projected reductions in spending incorporate the need 

for the Department of Transportation to maintain a cash balance in the HWTF in 

order to meet obligations in a timely manner. 

Student Loans 

In 2007, the College Cost Reduction and Access Act (CCRA) became law which 

temporarily lowered, for four years, subsidized Stafford student loan rates from 

6.8% to 3.4%. Some in Congress are calling for a continuation of this lower rate that 

is set to expire later this year. I have some questions about this last-minute call 

for action. 

Question: Does the January 2012 baseline reflect this coming increase in interest 

rates? 

Answer: Yes, the January 2012 baseline reflects the scheduled increase in interest 

rates because that increase will occur under current law. 

Question: Did any of the ‘‘savings’’ associated with the shift to 100% direct lending 

in the Health Care and Education Reconciliation Act of 2010 come from the assumption that interest rates would rise to 6.8% later this year? If so, how much? 

Answer: None of the savings in CBO’s estimate of the budgetary impact of moving 

student loans to 100-percent direct lending came from the scheduled increase in interest rates. At the time that the Health Care and Education Reconciliation Act was 

being considered by the Congress, that scheduled rate increase was already included 

in the baseline for both the guaranteed loan and direct loan programs; thus, moving 

to 100-percent direct lending did not affect those interest rates. 

Question: Since most of the ‘‘savings’’ in the Health Care and Education Reconciliation Act of 2010 went to offset the cost of the Pell program and other new spending. Is it fair to say that the savings generated from the 6.8% interest rate have 

already been spent? 

Answer: Public Law 107-139, which set a fixed interest rate of 6.8 percent on all 

newly disbursed Stafford loans (both subsidized and unsubsidized) beginning on 

July 1, 2006, was enacted in February 2002. Henceforth, following the law, CBO’s 

baseline included that 6.8 percent interest rate for all Stafford loans (guaranteed 

and direct) after July 1, 2006. The College Cost Reduction and Access Act (CCRA) 

temporarily lowered that rate for five years for new subsidized Stafford loans made 

to undergraduate students; under the CCRA, that lower rate does not apply to new 

loans disbursed on or after July 1, 2012. Therefore, all of CBO’s baseline projections 

following enactment of CCRA have reflected the scheduled increase in interest rates 

to 6.8 percent for new subsidized Stafford loans disbursed on or after July 1, 2012. 

Accordingly, none of the savings in the Health Care and Education Reconciliation 

Act of 2010 were related to that scheduled increase. 

Question: How much would it cost to continue the 3.4% interest rate for one year? 

What about for four more years? 

Answer: Under CBO’s January 2012 baseline, we estimate that extending the interest rate of 3.4 percent for one year would cost about $5.9 billion over the 2012- 

2022 period (with most of that cost falling in fiscal years 2012 and 2013). Under 

the January 2012 baseline, we estimate that extending the interest rate of 3.4 percent for four years would cost about $19 billion over the 2012-2022 period (with 

most of that cost falling in the first half of that period). 

Poverty Trap 

Question: This question pertains to antipoverty programs and their potential impact on work incentives. Outside analysis has shown that for lower-income individuals at certain segments of the earnings scale (i.e. between $15,000 and $30,000) 

there can be a financial disincentive to work. For instance, as these individuals earn 
62 

1See Stephen D. Holt and Jennifer L. Romich, ‘‘Marginal Tax Rates Facing Low and Moderate 

Income Workers Who Participate in Means-Tested Social Programs,’’ National Tax Journal, vol. 

60, no. 2 (2007), pp. 253-276. 2 CBO calculates disposable income using Pennsylvania’s state income tax rates and TANF 

rules because its income tax rates and rules for means-tested transfer benefits are similar to 

those found in other states. CBO also uses the median housing costs and median family incomes 

in Pennsylvania in estimating transfer benefits, where relevant. In Pennsylvania, households 

with gross incomes below 160 percent of the FPL are eligible for SNAP. 3Sharp drops in disposable income can occur when earnings rise above thresholds for eligibility for certain transfer programs, because once earnings exceed the threshold, the benefit 

ceases. If, however, benefits phase out completely before earnings reach the threshold, disposable income changes gradually as earnings cross that threshold. 

more income, their transfer payments and subsidies from the government (i.e. EITC, 

food stamps, housing vouchers, etc.) decline and their marginal tax rates jump. As 

a result, after-tax income plus government transfers and subsidies may actually 

stay flat or even fall for some individuals as their earnings increase. This disincentive to work and earn more has been dubbed ‘‘the poverty trap.’’ Can CBO do an 

analysis which shows (in chart form) earned income less taxes plus government 

transfers and subsidies for a few hypothetical households (e.g, a family of 3 and a 

single mother) as these households move up the earnings scale? 

Answer: Low-income individuals and families may be eligible to receive cash or 

in-kind assistance through various government transfer programs. In addition, they 

may also be able to claim refundable tax credits. With refundable credits, eligible 

individuals receive the entire amount of the benefit even if it exceeds the income 

tax liability they would have otherwise. Both transfer programs and refundable tax 

credits increase an individual’s or family’s resources. 

Over some earning ranges, the amount of a transfer or a refundable tax credit 

neither rises nor falls as income increases. But over other earning ranges, transfer 

or credit amounts do rise or fall. Because the refundable earned income tax credit 

(EITC) and the partially refundable child tax credit initially increase as earnings 

rise, those provisions reduce marginal tax rates for very low-income workers and 

may encourage work. However, to reduce the cost to the government of various tax 

credits and transfer programs, benefits often limit eligibility to individuals and families with incomes below a threshold or phase out as earnings continue to rise. 

Those phaseouts increase effective marginal tax rates and may reduce incentives to 

work—as do payroll taxes and, in some cases, state income taxes that people owe 

as their earnings rise. 

The phaseouts of transfer programs do not affect marginal tax rates of all lowincome families. Not all families are eligible for those transfer programs, and not 

all eligible families participate in the programs. Data from a nationally representative household survey show that the majority of working families headed by nonelderly and non-disabled individuals with incomes below 250 percent of the federal 

poverty level (FPL) do not receive a means-tested transfer—and, of those who do, 

the majority participate in only one program (see Table 1). Although program participation tends to be underreported in survey data, researchers using administrative data have also found low rates of participation in multiple programs among 

low-income working families.1

CBO calculated the relationship between a family’s earnings and its disposable income—the income it has after paying taxes and receiving government transfer benefits—as earnings increase from zero to 250 percent of the FPL. Figures 1 to 3 display that relationship for three hypothetical families in 2012: a single parent with 

one child, a married couple with two children, and a single person without children. 

In this analysis, taxes include federal income taxes, state income taxes, and the 

employee’s share of payroll taxes (calculated at the temporary lower rate in effect 

for 2012). The transfer programs used in the analysis include Temporary Assistance 

to Needy Families (TANF), Housing Choice Vouchers, and the Supplemental Nutrition Assistance Program (SNAP).2 Because participation in SNAP is more common 

than participation in TANF, the following examples show disposable income for families that participate only in SNAP (panel A of each figure) and for families that 

participate in all three programs (panel B of each figure). 

The figures show that: 

• For either a single parent with one child or a married couple with two children, 

transfer programs and refundable tax credits initially raise disposable income above 

earnings—especially for families with very low earnings who receive TANF and 

housing vouchers. The change in disposable income associated with an increase in 

earnings fluctuates because tax and transfer benefits phase in and phase out at 

varying rates across the range of earnings.3 For earnings between about 100 percent 
63 

and 150 percent of FPL, disposable income increases very little (and in some ranges 

not at all) as earnings increase, because tax and transfer benefits phase out. 

• As earnings rise above 150 percent of the federal poverty level, disposable income falls below earnings because income and payroll tax liabilities (before credits 

are included) exceed the sum of transfer payments, the EITC, and child tax credits. 

(After families stop receiving the transfer payments, either because they lose eligibility or benefits phase out completely, disposable income is the same as after-tax 

income.) 

• In contrast, because the EITC for a single person without children phases in 

at a lower rate and has a smaller maximum amount than for taxpayers with children, the EITC only slightly boosts disposable income above earnings. In particular, 

because of the temporarily lower payroll tax rate in 2012, the EITC exceeds payroll 

taxes over a narrow range of earnings. Taxpayers without children are eligible for 

SNAP and housing vouchers, which raises their disposable income, though their 

benefits from these programs are generally less than those of larger families. 

[Whereupon, at 12:35 p.m., the Committee was adjourned.] 

Æ