THE CONGRESSIONAL BUDGET OFFICES

LONGTERM BUDGET OUTLOOK

HEARING
BEFORE THE

COMMITTEE ON THE BUDGET

HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION

HEARING HELD IN WASHINGTON, DC, JUNE 23, 2011

Serial No. 11210

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COMMITTEE ON THE BUDGET

PAUL RYAN, Wisconsin, Chairman
SCOTT GARRETT, New Jersey
CHRIS VAN HOLLEN, Maryland,
MICHAEL K. SIMPSON, Idaho
Ranking Minority Member
JOHN CAMPBELL, California
ALLYSON Y. SCHWARTZ, Pennsylvania
KEN CALVERT, California
MARCY KAPTUR, Ohio
W. TODD AKIN, Missouri
LLOYD DOGGETT, Texas
TOM COLE, Oklahoma
EARL BLUMENAUER, Oregon
TOM PRICE, Georgia
BETTY MCCOLLUM, Minnesota
JOHN A. YARMUTH, Kentucky
TOM MCCLINTOCK, California
JASON CHAFFETZ, Utah
BILL PASCRELL, JR., New Jersey
MICHAEL M. HONDA, California
MARLIN A. STUTZMAN, Indiana
TIM RYAN, Ohio
JAMES LANKFORD, Oklahoma
DEBBIE WASSERMAN SCHULTZ, Florida
DIANE BLACK, Tennessee
GWEN MOORE, Wisconsin
REID J. RIBBLE, Wisconsin
KATHY CASTOR, Florida
BILL FLORES, Texas
HEATH SHULER, North Carolina
MICK MULVANEY, South Carolina
PAUL TONKO, New York
TIM HUELSKAMP, Kansas
KAREN BASS, California
TODD C. YOUNG, Indiana
JUSTIN AMASH, Michigan
TODD ROKITA, Indiana
FRANK C. GUINTA, New Hampshire
ROB WOODALL, Georgia

PROFESSIONAL STAFF
AUSTIN SMYTHE, Staff Director
THOMAS S. KAHN, Minority Staff Director

(II)

CONTENTS
Page

Hearing held in Washington, DC, June 23, 2011 .................................................

Hon. Paul Ryan, Chairman, Committee on the Budget ................................
Prepared statement of ...............................................................................
Hon. Allyson Y. Schwartz, a representative in Congress from the State
of Pennsylvania .............................................................................................
Prepared statement of ...............................................................................
Douglas W. Elmendorf, Director, Congressional Budget Office ....................
Prepared statement of ...............................................................................

(III)

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THE CONGRESSIONAL BUDGET OFFICES

LONGTERM BUDGET OUTLOOK
THURSDAY, JUNE 23, 2011

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, Price, Stutzman, Black,
Ribble, Flores, Huelskamp, Amash, Woodall, Schwartz, Doggett,
Blumenauer, Yarmuth, Pascrell, Wasserman Schultz, Tonko, Bass.
Chairman RYAN. Welcome all to this very important hearing. The
purpose of our hearing today is to discuss what can be done to
avoid a debt-fueled economic collapse in this country. Our witness
today is Doug Elmendorf, Director of the Congressional Budget Office. I want to thank you Doug for your professionalism and your
hard work and those of our associates at CBO, and for appearing
before our committee yet again today.
Yesterday the CBO released its long-term budget outlook. This
report throws harsh light on the challenges we face and it sounds
an alarm that too many in Washington have been ignoring for far
too long. The federal government will race across a dangerous tipping point this year. According to CBO, total U.S. debt will reach
100 percent of GDP. Our debt will have eclipsed the size of our entire economy.
Economists who have studied sovereign debt tell us that letting
total debt rise above 90 percent of GDP creates a drag on economic
growth and intensifies the risk of a debt-fueled economic crisis. The
CBO is candid about the increasing likelihood of this crisis and the
report quotes, Such a crisis would confront policy makers with extremely difficult choices and probably have a very significant negative impact on the country.
This quote demonstrates CBOs flair for the understatement. A
sudden fiscal crisis would be a complete catastrophe for this country. Families and businesses would bear the full brunt of the painful consequences. If the nation ultimately experienced a panic run
on its debt, policy makers would be forced to make the immediate
and painful fiscal adjustments, like the Austerity Programs that
have stoked the riots in Greece. This would mean massive tax increases on working families and steep benefit cuts that hit our
most vulnerable citizens the hardest.
The CBO is a non-partisan agency, so it does not take a position
on what would be required to prevent this crisis; but we can draw
(1)

2
our own conclusions on the evidence in this report. For one thing,
this report makes clear that exploding government spending, not
insufficient revenue, is driving us toward this crisis point.
If we simply keep revenues at their historic revenue, or average
as a share of GDP, then government spending driven by an aging
population and rising health care cost will cause federal debt to
grow to unsustainable levels. Yet again CBO makes it clear that
Medicare and government health care programs are driving the
debt; and driving these programs themselves into bankruptcy. Attacking solutions to save these programs threatens both the health
security and economic security of the American people. If we try to
chase ever higher spending with ever higher taxes, the CBO is very
clear about the consequences. It estimates that GNP will be 2 percent lower in 2035 than it would be otherwise. That number represents hundreds of billions in dollars of lost income for American
families and businesses on top of much higher taxes they would
have to pay.
The House Republicans have passed a budget, the Path to Prosperity; which answers CBOs warnings and averts the crisis before
us. The House passed budget tackles the explosive growth in
spending. It saves critical programs like Medicare and puts our
budget on a path to balance without resorting to job destroying tax
hikes. Meanwhile, the president has not put forward a credible
plan; a credible budget and it is been 785 days, let me say that
again, it has been 785 days since the Senate passed any budget at
all.
We have a leadership deficit in Washington, and our window for
solutions is closing quickly. Instead of tuning out CBO and others
who are working to inform us of this danger, lets work together
now before it is too late to put Americas budget on a sustainable
path, grow the economy, and leave the next generation with a better country than the one we inherited.
Thank you, and with that I would like to yield to Vice Ranking
Member, Ms. Schwartz.
[The prepared statement of Chairman Paul Ryan follows:]
PREPARED STATEMENT

OF

HON. PAUL RYAN, CHAIRMAN, COMMITTEE

ON THE

BUDGET

Welcome all, to this important hearing. The purpose of todays hearing is to discuss what can be done to avoid a debt-fueled economic collapse in this country.
Our witness today is Doug Elmendorf, director of the Congressional Budget Office.
I thank you Doug for your professionalism and hard work at the CBO, and for appearing before this committee today.
Yesterday, the CBO released its Long-Term Budget Outlook. This report throws
harsh light on the challenges we face, and sounds an alarm that too many in Washington have been ignoring for far too long.
The federal government will race across a dangerous tipping point this year: According to the CBO, total U.S. debt will reach 100 percent of GDP. Our debt will
have eclipsed the size of our entire economy.
Economists who have studied sovereign debt tell us that letting total debt rise
above 90 percent of GDP creates a drag on economic growth and intensifies the risk
of a debt-fueled economic crisis.
The CBO is candid about the increasing likelihood of this crisis, and the report
states: Such a crisis would confront policymakers with extremely difficult choices
and probably have a very significant negative impact on the country.
This quote demonstrates the CBOs flair for understatement. A sudden fiscal crisis would be a complete catastrophe for this country. Families and businesses would
bear the full brunt of the painful consequences.

3
If the nation ultimately experienced a panicked run on its debt, policymakers
would be forced to make immediate and painful fiscal adjustments, like the austerity program that has provoked riots in Greece. This would mean massive tax increases on working families and steep benefit cuts that hit our most vulnerable citizens the hardest.
The CBO is a non-partisan agency, so it does not take a position on what will
be required to prevent this crisis.
But we can draw our own conclusions from the evidence in this report.
For one thing, this report makes clear that exploding government spending, not
insufficient tax revenue, is driving us toward this crisis point.
If we simply keep revenues at their historical average as a share of GDP, then
government spendingdriven by an aging population and rapidly rising health care
costswill cause federal debt to grow to unsustainable levels.
Yet again, CBO makes clear that Medicare and government health care programs
are driving the debtand driving these programs themselves into bankruptcy. Offering empty promises and false attacks instead of real solutions threatens the
health and economic security of the American people.
If we try to chase ever-higher spending with ever-higher taxes, the CBO is clear
about the consequences: It estimates that GNP would be 2 percent lower in 2035
than it would be otherwise.
That number represents hundreds of billions of dollars in lost income for American families and businesses, on top of the much higher taxes they would all have
to pay.
The House of Representatives has passed a budget, The Path to Prosperity, which
answers the CBOs warning and averts the crisis before us. The House-passed budget tackles the explosive growth of spending, saves critical programs such as Medicare, and puts our budget on a path to balancewithout resorting to job-destroying
tax hikes.
Meanwhile, the President still hasnt put forward a credible budget, and it has
been 785 days since the Senate passed any budget at all.
We have a leadership deficit in Washington, and our window for solutions is closing quickly.
Instead of tuning out CBO and others who are working to inform us of the danger, lets work together now, before its too late, to put Americas budget on a sustainable path, grow the economy, and leave the next generation with a better country than the one we inherited.
Thank you, and with that, I yield to the Ranking Member, Mr. Van Hollen.
Ms. SCHWARTZ. Thank you Mr. Chairman, and I look forward to

this hearing, and not because it will be easy to hear or because it

is new, but because it is a reality of what our nation is facing and
demands our attention. I did want to say that Ranking Member
Mr. Van Hollen is at the White House. He apologizes to Dr. Elmendorf for not being here, but he is working, of course, with the vice
president, the White House, the Senate and the Republicans here
in the House on the issue of the debt ceiling, which I know we may
talk some more about and see if they cannot come to some agreement about a balanced approach of spending cuts and revenue increases to be able to move forward. We will see. We do not know.
We will see.
I appreciate the opportunity to just make a few comments about
where we stand, what we will hear today and about how we move
forward.
For me, and I think many of you know this, I have been on the
Budget Committee for some time; the federal budget is a statement
of our priorities and our values as a nation. It is about three
things: it is about being fiscally responsible and reducing our debt;
meeting our obligations to our seniors, our families, and our future;
and making target investments to grow our economy. To put our
country back on a strong financial footing we need a balanced approach, and that includes spending cuts from every aspect of the
budget, smart investments to ensure our economic competitiveness,

4
and fair tax reform that will increase revenue. We do not need just
political rhetoric or strict ideology. Everything must be on the table
and compromise is critical; finding that common ground is very important.
Democrats are committed to deficit reduction. I feel like I should
repeat that, but Democrats are committed to deficit reduction. The
CBOs fiscal outlook reinforces the need for action. The question is
not, if we reduce the deficit, because we must; it is how?
We need to reduce the deficit, reach primary balance, and begin
to repay our debt; and to do so we must do so in a way that does
not endanger our current, fragile economic recovery. The consequences of inaction are clear; higher levels of debt, higher interest payments on that debt, drastic tax increases, severe reductions
in spending, and economic stagnation or worse.
CBO forecast has surged in the public debt this year that will
rise to 69 percent of GDP by the end of fiscal year 2011. This shortterm deficit was made worse by the deep economic recession we
have just been through and our necessary response to it, as well
as reduced revenues from the Bush tax cuts and increased costs of
two unfinanced wars and unpaid-for spending in Medicare Part D.
In the long-term, the deficit is made worse by dramatic changes
in demographics in this country; I believe the CBO is going to point
this out in particular. Our population is aging 50 million more
Americans over 65 years in the next decade. The ratio of workers
to retirees moved from three to one, to two to one in the next 40
years, meaning fewer wage earners to support cost of government
and the cost of retirees.
Debt is projected by CBO to rise to 84 percent or as much as 187
percent of GDP by 2035. This is simply unsustainable. A long-term
balanced deficit reduction plan is absolutely necessary. The presidents Fiscal Commission, Erskine Bowles-Alan Simpson Commission, as it is referred to, and the Bipartisan Policy Center, the
Domenici-Rivlin which it is often referred to, both strongly acknowledge the need to do both cutting spending and raising revenue. And the Democrats proposed budget for fiscal 2012 tackles
the deficit responsibly by both spending cuts and revenue increases. These include reductions from elimination of duplicative
spending, fraud, waste, and abuse; streamlining government to
make it more efficient; and eliminating or reducing programs that
do not work while protecting those that are vital to the nation. It
includes the implementation of health care reform to save $1.2 trillion in health costs over 20 years; and it increases revenue by ending tax cuts for the very wealthiest Americans, saving $800 billion
over the years; and ending corporate tax breaks that bring in billions more.
And the Democratic budget makes smart, strategic investments
in education, innovation, infrastructure, and research and development; which will strengthen our economic competitiveness and promote private sector job growth and expand our economy. This is
balanced, fair and responsible approach and it is a clear contrast
to the Republican budget.
The Republican budget takes a sledgehammer to non-defense discretionary spending with careless cuts that do not acknowledge the
impact on Americans or our recovering economy. The Republican

5
budget jeopardizes food safety, highway expansion; it undermines
education and scientific research; and reduces our best hopes for a
future prosperity.
Second, the Republican budget ignores defense spending. It is imperative that we meet our commitment to our troops, our military
preparedness, and our security as a nation, but the growth in DOD
spending has got to be taken into account. It is after all 20 percent
of our spending. In the years between fiscal year 2008 and fiscal
year 2012 we will spend more on defense than any period in the
last 60 years. This includes the Reagan Cold War build-up in the
1980s, Vietnam and Korean wars. As we ask our government agencies to become more efficient, so must the Department of Defense.
Third, the Republican budget undermines our promise to Americas seniors. Make no mistake; the Republican budget will end
Medicare for seniors. It will not reduce costs by turning Medicare
into a voucher program; it will simply shift that burden on to our
seniors, and again, I believe we will talk more about that as we go
along. The fact is that a Republican plan will actually increase the
costs of seniors health care, and that increase will be an increase
borne by individual seniors not by all of us.
CBO estimates the Republican budget will cost a 65-year-old an
additional $6,000 in out-of-pocket costs, and by 2030, it could be as
high as $12,000. And if Republicans continue their assault on
health reform, the cost burden for seniors will not only increase,
but it will also reduce coverage and benefits. Going back on the
promise that we made to our seniors and disabled in America is
wrong. It is not only morally reprehensible, it is fiscally irresponsible.
Finally, fifth, our Republican colleagues refuse to address the
need to raise revenue, which is essential to balancing our budget.
Just as we cut unnecessary federal spending, we must also cut special tax provisions that add to our deficit. Tax expenditures add
over $1 trillion to our deficit annually. Yet, Republicans continue
to protect tax breaks for the few. And I will just mention two: the
Big Five oil companies made $1 trillion in profits in the past 10
years. They are on pace in 2011 to have their most profitable years
ever, even as the price of gas at the pump goes up for all of us.
Yet, the Republican budget continues to protect billions of dollars
in tax breaks every year, for the Big Five oil and gas companies.
We should stop this and save taxpayers billions. We cannot afford
another 10 years of deficit-financed Bush tax cuts and expect our
fiscal outlook to change for the better. Revenues must be a part of
the solution, plain and simple.
We need sensible, reasonable, and strategic solutions to our nations budget challenges. It is clear that the House Republican
budget takes one-sided approach. We need a balanced approach
that meets our commitments to our nation, which is fiscally responsible and will strengthen our economy in the short and the long
term. And I look forward to your testimony and the questions and
answers.
[The prepared statement of Allyson Schwartz follows:]

6
PREPARED STATEMENT OF HON. ALLYSON Y. SCHWARTZ, A REPRESENTATIVE
CONGRESS FROM THE STATE OF PENNSYLVANIA

IN

Chris Van Hollen is not present at todays hearing because he is at the White
House participating in the Biden Budget Talks.
I am looking forward to testimony not because it will be easy to hear or because
it is new but because it is the reality of what our nation is facing and what demands
our attention
The federal budget is a statement of our priorities and our values as a nation.
It is about three things: being fiscally responsible and reducing our deficit, meeting
our obligations to our seniors, our families and our future, and making targeted investments to grow our economy.
To put our country back on strong financial footing we need a balanced approach
that includes spending cuts from every aspect of the budget, smart investments to
ensure our economic competitiveness and fair tax reform that will increase revenue.
We need more just political rhetoric and strict ideology. Everything must be on
the table and compromise is critical.
Democrats are committed to deficit reduction. The Congressional Budget Offices
fiscal outlook reinforces the need for action. The question is not if we reduce the
deficit, because we must, it is how. We need to reduce the deficit, reach primary
balance, and begin to repay our debt. We must do so in a way that does not endanger our current fragile economic recovery. The consequences of inaction are clear:
higher levels of debt, higher interest payments on that debt, drastic tax increases,
severe reductions in spending, and economic stagnation or worse.
CBO forecasts a surge in public debt this year that will rise to 69 percent of GDP
by the end of fiscal 2011. This short-term deficit was made worse by the deep economic recession and our necessary response to it, as well as reduced revenues from
the Bush tax cuts and increased costs from two unfinanced wars and unpaid-for
spending in Medicare Part D.
In the long-term, the deficit is made worse by a dramatic change in demographics
in this country: our population is aging with 50 million more Americans over 65
years in the next decade and the ratio of workers to retirees moving from 3:1 to
2:1 in the next 40 years, meaning fewer wage earners to carry the cost of retirees.
Debt is projected by CBO to rise to 84% or as much as 187% by GDP by 2035. This
is simply unsustainable.
A long-term balanced deficit reduction plan is absolutely necessary. The Presidents Fiscal Commission (Erskine-Simpson) and the Bipartisan Policy Center
(Domenici-Rivlin) strongly acknowledge the need for both cutting spending and raising revenue. The Democrats proposed budget for fiscal 2012 tackles the deficit responsibly with both spending cuts and revenue increases. These cuts include: reductions from elimination of duplicative spending, fraud and waste, streamlining government to make it more efficient, and eliminating or reducing programs that dont
work while protecting those that are vital to our nation. It includes the implementation of Health Care Reform to save $1.2 trillion in health costs over 20 years. It
increases revenues by ending tax cuts for the wealthiest American saving $800B
over years, and ending corporate tax breaks that bring in billions more.
The Democratic budget makes smart, strategic investments in education, innovation, infrastructure, and research and development. These investments will
strengthen our economic competitiveness, promote private sector job growth, and expand our economy. This is a balanced, fair, and responsible approach, and it is a
clear contrast to the Republican Budget.
First, the Republican budget takes a sledgehammer to non-defense discretionary
spending with careless cuts that do not acknowledge the impact on Americans or
our recovering economy. The Republican budget jeopardizes food safety and highway
expansion; undermine education and scientific research and reduces our best hopes
for future prosperity.
Second, the Republican Budget ignores defense spending. It is imperative that we
meet our commitment to our troops, our military preparedness, and our security as
a nation but the growth in DOD spending has got to be taken into accountIt is
after all 20 percent of our spending. In the years between FY08 and FY12 we will
spend more on defense than any period in the last 60 years. This includes the Regan
cold war build-up in the 1980s, Vietnam and Korea Wars. As we ask other government agencies to become more efficient, so must the Department of Defense.
Third, the Republican Budget undermines our promise to Americas seniors. Make
no mistake; the Republican Budget will end Medicare as we know it for seniors. We
will not reduce costs by turning Medicare into a voucher program; it will simply
shift that burden on to our seniors. The fact is the Republican plan will actually
INCREASE the cost of seniors health care. This increase that increase will be borne

7
by individual seniors. CBO estimates that the Republican plan will cost a 65 year
old an additional $6,000 in out-of-pocket costs. By 2030, it could be as high as
$12,000. If Republicans continue their assault on health care reform, the cost burden for seniors will only increase, while coverage and benefits decrease. Going back
on the promise we have made to our seniors and disabled Americans is wrong. It
is not only morally reprehensible, it is fiscally irresponsible.
Finally, fifth, our Republican colleagues refuse to address the need to raise revenue, which is essential to balancing our nations budget. Just as we cut unnecessary federal spending, we must also cut special tax provisions that add to our deficit. Tax expenditures add over $1 trillion dollars to our deficit annually. Yet, Republicans continue to protect tax breaks that benefit a few. For example, the Big
Five oil companies made $1 trillion in profits the past 10 years, and they are on
pace for 2011 to be their most profitable year yet. Yet, they continue to receive billions of dollars in tax breaks every year even as the price of gas rises. This should
stop and save taxpayers billions. The federal government is also subsidizing the ethanol industry with $6 billion in tax earmarks. We should, as the Senate did, vote
to end these tax expenditures. We cannot afford these tax earmarks or another 10
years of deficit-financed Bush tax cuts and expect our fiscal outlook to change for
the better. Revenues must be a part of the solution, plain and simple.
In conclusion, we need sensible, responsible and strategic solutions to our nations
budget challenges. It is clear the House Republican budget takes a one-sided approach. We need a balanced approach that meets our commitments as a nation, is
fiscally responsible, and will strengthen our economy in the short and long term.

Chairman RYAN. Good. I will just say that we see it a little differently, but Dr. Elmendorf, the time is yours.
STATEMENT OF DOUGLAS W. ELMENDORF, DIRECTOR,
CONGRESSIONAL BUDGET OFFICE

Mr. ELMENDORF. Thank you Mr. Chairman and Congresswoman

Schwartz. To you and all the members of the committee, the budget outlook of the United States is daunting, both during the next
decade and over the longer term. As the economy recovers from the
severe recession and the policies adopted in response, and as the
recession phases out, budget deficits will decline markedly in the
next few years. However, the retirement of the Baby Boom Generation portends a significant and sustained increase in the share of
the population eligible for Social Security, Medicare, and Medicaid
benefits. Moreover, per capita spending for health care will probably continue rising faster than spending and other goods and services.
In addition, the recession and accompanying policies are leaving
a legacy of greatly increased government debt. Between the end of
fiscal year 2008 and the end of the current fiscal year, debt held
by the public will surge from roughly 40 percent of GDP, close to
its 40 year average, to nearly 70 percent of GDP: the highest since
shortly after World War II. Therefore, we face the budget pressures
of an aging population and rising health care costs from a significantly worse starting point than was envisioned just a few years
ago. CBO analyzed the long-term budget outlook under two scenarios that embodied different assumptions about future policies.
Although there are great uncertainties about future economic conditions, demographic trends, and other factors, we think that the
broad implications of our analysis would be the same under reasonable alternative assumptions.
Here are our findings: Under one scenario, our extended baseline
scenario, debt held by the public would increase slowly from its already high level relative to GDP, reaching about 85 percent by

8
2035. That scenario adheres closely to current law; it can be summarized in three broad categories.
First, spending on the major health care programs and Social Security is projected to grow substantially from 10 percent of GDP
today to 15 percent 25 years from now. Most of that increase will
be for spending on the major health care programs: Medicare, Medicaid, CHIP, and subsidies to be provided through insurance exchanges; which would grow from less than six percent of GDP
today to nine percent in 2035. Spending on Social Security is also
projected to rise but much less sharply.
Second, in this scenario, given the assumptions that underlie our
baseline projections, government spending on everything, other
than interest payments on the debt and the programs I have just
mentioned, this includes National Defense and a wide array of domestic programs, that category of spending would decline to the
lowest share of GDP since before the Second World War.
And third in this scenario, exploration of the tax cuts enacted
since 2001, the growing reach of the alternative minimum tax, the
tax provisions of last years health care legislation, and the way in
which the tax system interacts with economic growth, would all result in steadily higher revenues. Revenues would reach 23 percent
of GDP by 2035, much higher than has been seen in the past. That
significant increase in revenues and decrease in the relative
amount of other spending would offset much, though not all, of the
rise in spending on health care programs and Social Security. So
even with revenues at historically high levels, debt would continue
to rise.
However, the budget outlook is much bleaker than that under an
alternative fiscal scenario, in which federal debt would grow much
more rapidly, exceeding 100 percent of GDP by 2021 and approaching 190 percent by 2035. That scenario, which more closely approximates current policies incorporates several changes to current
law that are widely expected to occur or that would modify some
provisions of law that might be difficult to sustain for a long period.
Most important are the assumptions about revenues, under this
scenario we assume that the tax cuts enacted since 2001 will be extended, that the reach of the alternative minimum tax will be restrained, and that over the long run tax law will evolve further so
that revenues remain near their historical average of 18 percent of
GDP. This scenario also incorporates assumptions about Medicares
payment rates for physicians, that they will remain at current levels rather than declining by a third at the end of this year as under
current law, and that some policies enacted last year to restrain
growth in health care spending by the federal government will not
continue in effect after 2021.
In addition, the alternative scenario includes an assumption that
spending on all other activities will not fall quite as low as under
the extended baseline scenario; although it will still fall close to its
lowest level in the entire post-war period.
It is important to note further that these projections do not incorporate the harmful effects that rising debt would have on economic
growth and on interest rates. Incorporating economic feedbacks as
we do in the second chapter of the report, debt under this alter-

9
native scenario would be well over 200 percent of GDP in 2035, if
such a thing could come to pass.
The implications of this analysis are clear, there is a substantial
mismatch between what the government would have to spend to
maintain existing programs in their current form and the revenues
that tax payers are accustomed to providing. To keep deficits in
debt from climbing to unsustainable levels, policy makers will need
to increase revenues substantially as a percentage of GDP, decrease spending significantly from projected levels, or adopt some
combination of those two approaches. Making such changes while
economic activity and employment remain well below their potential levels would probably slow the economic recovery. However,
the sooner that long-term changes to tax and spending policies are
agreed upon, and the sooner they are carried out once the economy
recovers, the smaller will be the damage to the economy from growing federal debt. Thank you.
[The prepared statement of Douglas Elmendorf follows:]
PREPARED STATEMENT OF DOUGLAS W. ELMENDORF, DIRECTOR,
CONGRESSIONAL BUDGET OFFICE
Chairman Ryan, Congressman Van Hollen, and Members of the Committee, thank
you for inviting me to testify today about the Congressional Budget Offices (CBOs)
2011 Long-Term Budget Outlook, which the agency released yesterday.1
Recently, the federal government has been recording budget deficits that are the
largest as a share of the economy since 1945. Consequently, the amount of federal
debt held by the public has surged. At the end of 2008, that debt equaled 40 percent
of the nations annual economic output (a little above the 40-year average of 37 percent). Since then, the has shot upward: By the end of this year, CBO projects, federal debt will reach roughly 70 percent of gross domestic product (GDP)the highest percentage since shortly after World War II. The sharp rise in debt stems partly
from lower tax revenues and higher federal spending related to the recent severe
recession. However, the growing debt also reflects an imbalance between spending
and revenues that predated the recession.
As the economy continues to recover and the policies adopted to counteract the
recession phase out, budget deficits will probably decline markedly in the next few
years. But the budget outlook, for both the coming decade and beyond, is daunting.
The retirement of the baby-boom generation portends a significant and sustained increase in the share of the population receiving benefits from Social Security, Medicare, and Medicaid. Moreover, per capita spending for health care is likely to continue rising faster than spending per person on other goods and services for many
years (although the magnitude of that gap is very uncertain). Without significant
changes in government policy, those factors will boost federal outlays sharply relative to GDP in coming decades under any plausible assumptions about future
trends in the economy, demographics, and health care costs.
According to CBOs projections, if current laws remained in place, spending on the
major mandatory health care programs alone would grow from less than 6 percent
of GDP today to about 9 percent in 2035 and would continue to increase thereafter.2
Spending on Social Security is projected to rise much less sharply, from less than
5 percent of GDP today to about 6 percent in 2030, and then to stabilize at roughly
that level. Altogether, the aging of the population and the rising cost of health care
would cause spending on the major mandatory health care programs and Social Security to grow from roughly 10 percent of GDP today to about 15 percent of GDP
25 years from now. (By comparison, spending on all of the federal governments programs and activities, excluding interest payments on debt, has averaged about 18.5
percent of GDP over the past 40 years.) That combined increase of roughly 5 percentage points for such spending as a share of the economy is equivalent to about
$750 billion today. If lawmakers ultimately modified some provisions of current law
1 See

Congressional Budget Office, CBOs 2011 Long-Term Budget Outlook (June 2011).
programs are programs that do not require annual appropriations by the Congress; the major mandatory health care programs consist of Medicare, Medicaid, the Childrens
Health Insurance Program, and health insurance subsidies that will be provided through the
exchanges established by the March 2010 health care legislation.
2 Mandatory

10
that might be difficult to sustain for a long period, that increase would be even larger.
LONG-TERM SCENARIOS

In its report released yesterday, CBO presents the long-term budget outlook
under two scenarios that embody different assumptions about future policies governing federal revenues and spending. Neither of those scenarios represents a prediction by CBO of what policies will be in effect during the next several decades,
and the policies adopted in coming years will surely differ from those assumed for
the scenarios. Moreover, even if the assumed policies were adopted, their economic
and budgetary consequences would undoubtedly differ from those projected in the
report because outcomes also depend on economic conditions, demographic trends,
and other factors that are difficult to predict. The report focuses on the next 25
years rather than a longer horizon, because budget projections grow increasingly uncertain as they extend farther into the future.3
THE EXTENDED-BASELINE SCENARIO

One long-term budget scenario used in CBOs analysis, the extended-baseline scenario, adheres closely to current law. Under this scenario, the expiration of the tax
cuts enacted since 2001 and most recently extended in 2010, the growing reach of
the alternative minimum tax, the tax provisions of the recent health care legislation, and the way in which the tax system interacts with economic growth would
result in steadily higher revenues relative to GDP. Revenues would reach 23 percent
of GDP by 2035much higher than has typically been seen in recent decadesand
would grow to larger percentages thereafter. At the same time, under this scenario,
government spending on everything other than the major mandatory health care
programs, Social Security, and interest on federal debtactivities such as national
defense and a wide variety of domestic programswould decline to the lowest percentage of GDP since before World War II.
That significant increase in revenues and decrease in the relative magnitude of
other spending would offset muchthough not allof the rise in spending on health
care programs and Social Security. As a result, debt would increase slowly from its
already high levels relative to GDP, as would the required interest payments on
that debt. Federal debt held by the public would grow from an estimated 69 percent
of GDP this year to 84 percent by 2035 (see Figure 1). With both debt and interest
rates rising over time, interest payments, which absorb federal resources that could
otherwise be used to pay for government services, would climb to 4 percent of GDP
(or one-sixth of federal revenues) by 2035, compared with about 1 percent now.

3 Because considerable interest exists in the longer-term outlook, figures showing projections
through 2085 are presented in Appendix B of CBOs 2011 Long-Term Budget Outlook, and associated data are available on CBOs Web site (www.cbo.gov).

11

THE ALTERNATIVE FISCAL SCENARIO

The budget outlook is much bleaker under the alternative fiscal scenario, which
incorporates several changes to current law that are widely expected to occur or that
would modify some provisions of law that might be difficult to sustain for a long
period. Most important are the assumptions about revenues: that the tax cuts enacted since 2001 and extended most recently in 2010 will be extended; that the
reach of the alternative minimum tax will be restrained to stay close to its historical
extent; and that over the longer run, tax law will evolve further so that revenues
remain near their historical average of 18 percent of GDP. This scenario also incorporates assumptions that Medicares payment rates for physicians will remain at
current levels (rather than declining by about a third, as under current law) and
that some policies enacted in the March 2010 health care legislation to restrain
growth in federal health care spending will not continue in effect after 2021. In addition, the alternative scenario includes an assumption that spending on activities
other than the major mandatory health care programs, Social Security, and interest
on the debt will not fall quite as low as under the extended-baseline scenario, although it will still fall to its lowest level (relative to GDP) since before World War
II.
Under those policies, federal debt would grow much more rapidly than under the
extended-baseline scenario. With significantly lower revenues and higher outlays,
debt held by the public would exceed 100 percent of GDP by 2021. After that, the
growing imbalance between revenues and spending, combined with spiraling interest payments, would swiftly push debt to higher and higher levels. Debt as a share
of GDP would exceed its historical peak of 109 percent by 2023 and would approach
190 percent in 2035 (see Figure 1).
Many budget analysts believe that the alternative fiscal scenario presents a more
realistic picture of the nations underlying fiscal policies than the extended-baseline
scenario does. The explosive path of federal debt under the alternative fiscal scenario underscores the need for large and rapid policy changes to put the nation on
a sustainable fiscal course.

12
THE IMPACT OF GROWING DEFICITS AND DEBT

CBOs projections in most of the 2011 Long-Term Budget Outlook understate the
severity of the long-term budget problem because they do not incorporate the negative effects that additional federal debt would have on the economy, nor do they include the impact of higher tax rates on peoples incentives to work and save. In particular, large budget deficits and growing debt would reduce national saving, leading
to higher interest rates, more borrowing from abroad, and less domestic investmentwhich in turn would lower income growth in the United States. Taking those
effects into account, CBO estimates that under the extended-baseline scenario, real
(inflation-adjusted) gross national product (GNP) would be reduced slightly by 2025
and by as much as 2 percent by 2035, compared with what it would be under the
stable economic environment that underlies most of the projections in the report released yesterday.4 Under the alternative fiscal scenario, real GNP would be 2 percent to 6 percent lower in 2025, and 7 percent to 18 percent lower in 2035, than
under a stable economic environment.
Rising levels of debt also would have other negative consequences that are not incorporated in those estimated effects on output:
Higher levels of debt imply higher interest payments on that debt, which would
eventually require either higher taxes or a reduction in government benefits and
services.
Rising debt would increasingly restrict policymakers ability to use tax and
spending policies to respond to unexpected challenges, such as economic downturns
or financial crises. As a result, the effects of such developments on the economy and
peoples well-being could be worse.
Growing debt also would increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the governments ability to manage its
budget and the government would thereby lose its ability to borrow at affordable
rates. Such a crisis would confront policymakers with extremely difficult choices. To
restore investors confidence, policymakers would probably need to enact spending
cuts or tax increases more drastic and painful than those that would have been necessary had the adjustments come sooner.
To keep deficits and debt from climbing to unsustainable levels, policymakers will
need to increase revenues substantially as a percentage of GDP, decrease spending
significantly from projected levels, or adopt some combination of those two approaches. Making such changes while economic activity and employment remain
well below their potential levels would probably slow the economic recovery. However, the sooner that medium- and long-term changes to tax and spending policies
are agreed on, and the sooner they are carried out once the economy recovers, the
smaller will be the damage to the economy from growing federal debt. Earlier action
would permit smaller or more gradual changes and would give people more time to
adjust to them, but it would require more sacrifices sooner from current older workers and retirees for the benefit of younger workers and future generations.

4 GNP differs from GDP primarily by including the capital income that residents earn from
investments abroad and excluding the capital income that nonresidents earn from domestic investment. In the context of analyzing the impact of growing deficits and debt, GNP is a better
measure because projected budget deficits would be partly financed by inflows of capital from
other countries.

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[The complete CBO report may be accessed at the following
Internet address:]
http://cbo.gov/ftpdocs/122xx/doc12212/06-21-Long-Term_Budget_Outlook.pdf

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Chairman RYAN. Thank you Dr. Elmendorf. I have some questions regarding your analysis of the House Republican budget
Medicare Premium Support Plan that I want to get into, and then
a little bit about the OMB budget, the presidents budget; and then
I will let my colleagues get into the actual report here.
In that analysis you show a significant gap between the costs patients would have absorbed under premium support compared to
traditional Medicare, Ms. Schwartz went into this a little bit. Your
analysis shows traditional Medicare continuing to operate well beyond 2020 when the programs trust fund becomes insolvent. At the
same time you report, before today, it says, Once the hospital insurance trust fund is exhausted the centers for Medicaid and Medicare services will no longer have the legal authority to pay health
plans and providers.
In a separate analysis you warned, A growing level of federal
debt would also increase the probability of a sudden fiscal crisis.
Yesterday the trustees in Ways and Means confirmed in a hearing
that Medicare as we know it ends in 2023, and that is a quote. So
I have got three basic questions on this part.

30
If Medicares trust funds are empty and paying for Medicares
unfunded promises requires tens of trillions of dollars to be transferred from general revenue, where will these funds come from
number one? Number two, how would Medicare be financed amidst
a fiscal crisis? And is it plausible that Medicare could continue to
provide current benefits indefinitely, as your analysis assumes, in
comparing it to our premium support plan?
Mr. ELMENDORF. So on the first question Mr. Chairman, if the
trust fund runs out of money then the only way that benefits will
be continued at the level specified in current law is if general revenue were used for that purpose, and that revenue can only come
from higher taxes or lower spending in other programs.
Chairman RYAN. Or more borrowing?
Mr. ELMENDORF. Or additional borrowing and that leads to the
second part of your question, which is what happens in a fiscal crisis if the government becomes unable to borrow at affordable rates,
as we have seen some other countries end up in that position. Then
there would probably need to be very stark changes in the whole
range of government spending programs.
Chairman RYAN. In the immediate term at the time.
Mr. ELMENDORF. Right away, when that situation arises. If the
government cannot turn to capital markets to obtain the funds that
it needs and it tries to then balance the budget almost literally
overnight, then the disruption to the federal governments policies
and to the economy and society can be immense.
Chairman RYAN. So this is unsustainable?
Mr. ELMENDORF. The path that the budget is on at our current
policies is most definitely unsustainable.
Chairman RYAN. And the Medicare baseline itself?
Mr. ELMENDORF. So, Medicare, the part A of Medicare, funded
through the trust fund is on an unsustainable path, and in our own
projections the fund is actually exhausted in 2020, a few years earlier than the actuaries.
Chairman RYAN. Okay. So, lets get down to the providers side
of this. I have been on Ways and Means, on the Health Subcommittee for a long time, and have gone through a lot of provider
issues. Historically Medicare, and both parties have been working
on this, Medicare is starting to control costs by paying providers
less than private plans?
Mr. ELMENDORF. Yes.
Chairman RYAN. The presidents health care law cut providers by
$500 billion, not to advance Medicares solvency but to fund another open-ended entitlement program. On top of that, physicians
are set to be cut by an additional 29.4 percent of this January, I
believe it is 29.4.
Mr. ELMENDORF. Yes.
Chairman RYAN. Do your projections assume providers will continue to accept Medicare patients at the same rate that they do
now under the traditional program? Because lets remember, Medicare already pays providers 80 percent of what they will receive in
the private market. By 2030, this will fall to about 40 percent. So
do your projections assume providers will continue to accept Medicare patients at the same rate they do now under the traditional
program? And does your analysis assume, despite the additional

31
provider cuts coming in current law, that this will have no effect
on the quality or access of care?
Mr. ELMENDORF. The way I would put it Mr. Chairman, is that
we do not model the behavior of physicians. We do not model the
access to care or quality of care.
Chairman RYAN. So you assume it stays on as is?
Mr. ELMENDORF. And that is the point that we noted in the letter
analyzing your proposal. That is a gap in our tool kit, and a gap
that we are trying to fill. Under the current circumstances we do
not model, either in the regular baseline projections or in our analysis of last years health legislation or your proposal, the effects
that might happen under current law or alternatives.
Chairman RYAN. So therein lies the issue here. Your analysis effectively assumes that no matter how much the government pays
providers for health care services, providers will continue to deliver
the same quality care and access. That is the gap you talk about.
While you accept the premise that the imposition of price control
has actually reduced costs, strikes me that your analysis does not
appear to take into account that choice and competition, despite
working nearly every [inaudible] in our economy, and even within
Medicare where applied, will put downward pressure on health inflation.
Is the takeaway here the only way to get a grip on skyrocketing
health care costs, is through strict price controls and heavy government rationing? Is that what we are to conclude from all of this?
Mr. ELMENDORF. No, I do not think that is a fair interpretation
of our analysis Mr. Chairman. As you pointed out yourself, Medicare pays less to providers today than private insurers pay. So it
is, I think, an open question as to how much lower payments can
go in Medicare relative to private insurers without hindering the
access to care or quality of care to Medicare beneficiaries in an important way.
Chairman RYAN. But in your analysis you just do not feel like
you have the toolkit to model that? Is that what you are saying?
Mr. ELMENDORF. We do not have the toolkit to model that. We
also noted in our letter that we do include the effects of competition
in the current private insurance market in accessing the gap today
between the cost in Medicare and the cost of treating a similar patient we estimate outside of Medicare. But we do not in the analysis incorporate any effects of competition that might arise over
time from the additional price pressures that are built into your
proposal and from the additional flexibility that the insurers have
relative through traditional Medicare to adjust the way that the insurance [inaudible].
Chairman RYAN. Okay. So to be clear on that point, Medicare
Part D which is something we have looked at, has come in at 40
percent below cost projections, now while those savings can be attributed to lower than expected enrollment, CMS calculated that
nearly 85 percent of the program savings were, A direct result of
competition and significantly lower Part D plan bids. I mean the
premium; I remember we had an amendment in Ways and Means
to lock the premiums up at a rate that would be about 25 percent
higher than they actually are today. The reforms on our budget are

32
modeled on these kinds of reforms. Seniors choose from a set of
guaranteed Medicare approved coverage options.
So when analyzing projected costs under the House passed budget, did you take into account the effect that choice and competition
would have on the growth rate of health care cost? And do you assume people will continue to utilize health services at the same
rate as they do now? Meaning, what I got out of what you just said,
is that you are not really gleaning those kinds of lessons from the
experience we have from the Part D results.
Mr. ELMENDORF. So we are not applying any additional effects of
competition on this growth rate over time, in our analysis of your
proposal; and we do not have again the tools, the analysis that we
would need to do a quantitative evaluation of the importance of
those factors. I think interpreting the Part D evidence, and interpreting other evidence in the world is complicated.
At the time of the Part D estimate, that we made which was
above the ultimate cost, prescription drugs spending throughout
our health care system was rising very rapidly. We expected it to
slow. It slowed much more abruptly throughout the health care
system than we had anticipated at the time. Part D shared in that
slowdown. That is, again, a health care system wide phenomenon.
The extent to which that was passed through to Medicare Part D,
in a way that it is different that it would have been under an alternative structure for Part D, is a more subtle analytic question. And
if one looks at other examples where one tries to compare more traditional health care programs to systems where there is competition among private insurers, the comparisons are not so straight
forward. There are, as we show on our report, there are periods of
history when costs in the public programs are growing faster than
costs in the private insurance, and there are periods where the opposite can be seen.
If one looks at the FEHBs, the Federal Employees Health Benefit
Program, premiums in that program have risen fairly rapidly along
with premiums in the rest of the health care system, roughly, despite the competition that occurs there.
But interpreting this evidence is tricky. We have a public health
care programs that have evolved over time with a lot of policy
changes. It is not a clean run of a certain set of policies. We have
a private health care system that has been affected by developments in the public health care system, that is affected by the tax
treatment of employer sponsored health insurance. So it is not a
clean run of a purely private system either. So what we are trying
to do, but this is a long project for us, is to glean the lessons from
these different parts of our historical experience to try to address
the central policy issue you raise, which is the power of a publics
defined benefit health care system versus a system where the government makes defined contribution the competing private insurers
try to give you some more analytic reporting.
Chairman RYAN. And that is what I want to encourage to you.
Look you guys, and Joyces whole shop over there does such great
work, but if we stick with the analytical tool we have, or the lack
of tools we have, then the only conclusion is price controls. And I
think economic evidence throughout history shows us what happens there. So, I think we have got some work to do to really ana-

33
lyze this; any plan, put ours aside for the moment, any plan who
addresses fiscal crisis obviously must address health care programs.
Mr. ELMENDORF. Yes.
Chairman RYAN. And health inflation, and measuring any of
these plans against what is really a fiscal fantasy, which you are
acknowledging, an unsustainable trajectory is really not an accurate measurement or comparison, because it is comparing some
plan against a future which we now know cannot continue.
And so, I think we all have to do more work to try and figure
out how to really truly address these issues. I will leave it at that
because I wanted to get into the budget only to say we got your
reanalysis of the presidents budget. I will not go back into that,
but the president gave a speech on April 13, where he outlined a
new budget framework that claims $4 trillion in deficit reduction
over 12 years. Have you estimated the budget impact of this framework?
Mr. ELMENDORF. No, Mr. Chairman. We do not estimate speeches; we need much more specificity than was provided in that speech
for us to do our analysis.
Chairman RYAN. All right. I will leave it at that. Ms. Schwartz.
Ms. SCHWARTZ. Thank you. Let me also take a slightly different
approach, obviously, on Medicare. One is that we are concerned
about this long-term fiscal health of Medicare, it is one of the reasons we passed a law last year in order to use every idea that exists out there for containing costs, and insuring quality and access
for seniors. You have looked at some of this and have acknowledged that while it may be difficult to quantify all of the cost savings that exist, you acknowledge that there are cost savings. I
think both you and the Medicare trustees have talked about that
at a minimum it is going to save money over the long run, what
we did in the Affordable Care Act; and it does extend the fiscal
health of the trust fund for a number of years. It could do even better than that if much of the work that is being done in payment
and delivery system reform to reduce unnecessary tests and duplication and waste as well as to coordinate care and improve, again,
the efficiencies in the health care system. It is not just about future
service reimbursements. It is actually changing the way we do this
so the debate does not become, simply, how much do we reimburse
doctors, particularly relative to the private sector. So, can you just
say yes or no that that is true?
Mr. ELMENDORF. Yes, there were important changes made in the
structure of Medicares payments to providers, a whole collection of
changes and experiments in last years legislation. I would note
that some people were frustrated at our analysis of that, quite comparably to the Chairmans frustration at our analysis of this years
proposal from him, that we do not have the tools, perhaps, to capture the full effects of certain changes and we are working in that
area as well to build a stronger toolkit to provide you with better
information.
Ms. SCHWARTZ. But I do appreciate as some of these regulations
come out that CBO has been able to respond and say this is what
we believe, whether it is ACOs can save hundreds of billions, or
some of the other actions we are taking in patients and medical

34
homes or pay for performance for hospitals, that actually has a cost
savings that you have been able to analyze.
Mr. ELMENDORF. Yes, so we certainly have estimated some savings and, again, I think that for some of the more unusual experiments, we are struggling ourselves with developing tools that could
enable us to provide even better analysis of them.
Ms. SCHWARTZ. That is right. I just want to make it very clear
of course, that what we did in the Affordable Care Act was to set
out a path, and this is a path, it is not going to happen in 10 minutes; it is a path for us to be on to get better value for our dollars
and to assure access to the highest quality care for our seniors and
the benefits they might have.
I do want to focus on the other piece of what we are talking
about in Medicare, in particularly the Republican proposal for as
they call it a premium support voucher. Well they do not call it
voucher, its premium support, which is basically the same thing.
Chairman RYAN. Would you like to yield on that? I am happy to
go into this if you want to.
Ms. SCHWARTZ. No, it is fine. No I completely understand how
you would equate it to the federal employees and to the Congress.
Chairman RYAN. There is a difference between premium support and vouchers and CBO is very clear about that.
Ms. SCHWARTZ. I am sure he will answer then. Let me ask the
question; one of the things that seems clear, and I think is understood, and I wanted you to clarify this, is that if we are going to
give seniors a certain amount of money, a capped amount in order
for them to be able to go and buy private insurance in the marketplace, as costs rise who pays for the additional costs? You have
been very clear about this, both initially and over time, so could
you just answer that question?
Mr. ELMENDORF. In a defined contribution system where the governments contributions are set as under Chairman Ryans proposal, then whatever extra amount private citizens need to pay to
obtain the services, they would pay themselves.
Ms. SCHWARTZ. Right. Have you estimated about how much that
would be for the average senior?
Mr. ELMENDORF. What we have showed in our letter analyzing
the plan was the effects for a typical 65-year-old buying a standardized health insurance benefit, and we estimated that in 2022 for
example, under the baseline scenario a 65-year-old would pay 27
percent of the cost of this standardized benefit. Under the proposals seniors would pay 61 percent of the cost of that benefit.
Ms. SCHWARTZ. Can you give a number about what that is? I
have read that it is about $6,000 that the average senior, a 65year-old would expect to pay and it could go up as much as $12,000
over time.
Mr. ELMENDORF. So I do not have a dollar figure and I am told
by my colleague that we did not provide a dollar figure.
Ms. SCHWARTZ. The point I am making here of course is that the
Republican proposal that is been voted on and supported by just
about every Republican in the House, does shift the burden of additional costs to the seniors, to individual seniors.
Mr. ELMENDORF. Yes, by our estimates it shifts a good deal of additional burden and also shifts risk regarding the ultimate costs.

35
Ms. SCHWARTZ. Right. So the notion that seniors will be able to
get the same benefits, and would be able to buy it all depends on
whether they have an extra $6,000 or $12,000 a year to pay for
them? Or whatever it might cost. It is their choice. And I understand Republicans see it as this choice, we see it as if you cannot
afford it, it is not much of a choice.
Mr. ELMENDORF. So their ability to buy that package of benefits
depends on the resources they have available and, of course, on our
estimates being correct as well about those costs.
Ms. SCHWARTZ. That is right. The other point I want to make
and I think you have made this as well, is that if we are all concerned, and we are, and I think you just had this dialogue with Mr.
Ryan about how we contain the rising growth in costs. Is it a responsibility that they can be shared by public programs and private insurers, it is one of the paths we are trying to move on health
reform: How do we actually get better value, and contain the rising
costs. Businesses in my district, nationally, and individual families
have seen a 100 percent increase in premiums; and it is double
digit increases every year over the decade, it is been double what
you pay for health premiums. Under the Ryan proposal, the Republican proposal, they are no cost containment built in except for the
individual senior not being able to afford to buy the insurance. But
there is not anything that actually moves the system to improve
quality, reduce costs over time, and eliminate wastes. Is that correct? Can you speak to that about the costs, and containment piece
the lies in the private sector to do it through what people can afford to buy?
Mr. ELMENDORF. So let me make two observations. The first is
that as I understand the Chairmans proposal, traditional Medicare
would continue roughly along the lines in current law, and because
people only move into this new system, as they turn 65 under this
proposal, a good deal of the patients in Medicare, and an even larger share of the spending in Medicare remains in the traditional
Medicare system, for decades to come.
Ms. SCHWARTZ. Yes, well, if they move 65-year-olds would be in
a very different system, they would not be in, if you want to call
it traditional Medicare, anymore after a certain point. It would go
side by side for a while.
Mr. ELMENDORF. I am just saying that for the next 20 years, by
2030 even, more than half of Medicare beneficiaries are still receiving traditional Medicare; 45 percent are receiving the premium
support payments, so it is a gradual transition and the programs,
and again as I understand the proposal, the programs in place in
traditional Medicare would remain. The second observation is that
the proposal, rather than directing specific sorts of experiments on
changes as was done in last years health legislation, would rely on
the price pressure affecting competing private insurers to rely on
them for those steps instead.
Ms. SCHWARTZ. But does that mean then that all the cost containment provisions that are built in to the law that we have now,
if it should be repealed, will then go by the wayside, and we will
not see those cost containments. You call them experiments, but a
lot of work has been done in the health care system and I apologize
this is not your expertise, you said you have not drilled down in

36
all this, there is a lot of important and good work that is being
done across the country that is actually getting better value for the
dollars. We are trying to scale that up for more seniors.
Mr. ELMENDORF. Yes. So I do not mean to belittle this in any
way by using the word experiment. What I am trying to signal is
that the successful experiments at getting greater value, and there
have been a number of them, have tended to be fairly localized;
and the question of how they can best be extended across the country is something that both Medicare and private insurers are wrestling with.
Ms. SCHWARTZ. That is right an all payer system would be great.
Mr. ELMENDORF. Both Medicare and private insurers are trying
to find different ways of being providers and so on. So I do not
mean to belittle that but just to say that there will be a certain
amount of trial and error, again for both public and private insurers. Whatever the system is of insurance we need our health care
system to become more efficient and I think the crucial policy question is whether a more public or a more private system applies
more of the useful kinds of pressure and avoids more of the detrimental kinds of pressure as you would judge that?
Ms. SCHWARTZ. Well, as I believe my time is up but I think this
is a conversation that we have tried to advance that we will contain the rising growth and cost in Medicare. Because we are serious about that as well, that this needs to be done in order to sustain a Medicare as we hope to, but turning over to a private sector,
it has not been very good at containing costs either for businesses
or for families, or for seniors for sure, that that actually is a model
we cannot rely on. The fact that the federal government pays about
46 percent of the costs of health care in this country if you look at
all the different programs. We could and should be, in our view, a
force for improving quality and insuring access. I think that is one
of the big debates that we are having of course.
Chairman RYAN. It is, I am going to take my Chairmans prerogative and join this, not get in a tit-for-tat, but I want to just try
and help answer the questions you asked the director. To show you
what is kind of our thinking and why we propose what we propose,
because you are right, we got to figure this out on Medicare. Medicare is the biggest driver of the debt in the future, and the Affordable Care Act does attempt to do that. We disagree with the way
in which it attempts to do that. Now when you say there is not cost
containment, there are two ways of doing this; do you put the patient in charge or do you put the bureaucracy in charge? We think
a patient centered system is a better way to go. Now when you put
the bureaucracy in charge, lets take a look at where we are headed
right now.
Accountable care organizations, the idea in theory is a very good
idea, but look at what is happening. CMS is putting this rule out
there; nobody is going to participate in it. So lets have a system
that is decentralized and not government centralized. Lets not go
with price controls because price controls it might make the numbers add up on paper but it will just deny access to people. And
so, what we have found is that when we continue to underpay providers which the trustees are telling us, providers are going to get
about 66 cents on the dollar from Medicare now, going down to 33

37
cents on the dollar, we cannot assume that they are going to keep
taking Medicare. And so, I or we, do not think that that is the
proper approach. More to the point, we do not think unelected unaccountable bureaucrats, technocrats, no matter how smart they
are can figure out how to micromanage 17 percent of our economy.
We believe that providers competing against each other, insurance
companies, hospital, physicians, competing against each other for
our business, as empowered consumers is a better way to go, and
we have a lot of evidence that shows that.
Now two, the point that his analysis does not include, it does not
include the fact that we have proposed to risk adjust subsidies. As
a person gets sicker in Medicare, we want them to have a higher
subsidy to protect them against ticker shock. It also does not include the fact that we have proposed to add an additional $7,800
to begin with, which keeps growing every year, to low income seniors, to subsidize and cover their out-of-pocket costs. There is only
so much money to go around, and our point is we should not subsidize wealthy people, as much as everybody else; and we should
subsidize low income people even more than everybody else. That
is the way we think tax payer dollars ought to be deployed, and
we want the patient to be the nucleus of the health care system,
in Medicare and everywhere else, instead of some board of 15 technocrats giving Caesars thumbs up or thumbs down on whether
this will work or not; or who gets paid, what, where, when, and
how much. We do not think that will work because we have lots
of evidence already that it does not. With that I yield.
Mr. ELMENDORF. Mr. Chairman, so you are certainly correct in
saying that in numbers that I have quoted, and are featured in our
report, did not include the effects of the additional support for
lower income people as we noted in our letter.
Chairman RYAN. Correct.
Mr. ELMENDORF. I do not understand though your point about
risk adjustment. What we reported was the cost for a typical 65year-old, we understand and included in our model.
Chairman RYAN. Right. The illustration does not suggest that a
sicker person will get higher income. You are doing an average; it
is an average so it does not take into consideration the fact that
a person who has higher core morbidities, higher risks, get a higher subsidy.
Mr. ELMENDORF. To cover the higher cost, so they end up getting
health insurance coverage.
Chairman RYAN. Right. I can take up more time on that but our
analysis now. Mr. Flores.
Mr. FLORES. Thank you Mr. Chairman. Dr. Elmendorf, thank
you for being here today; your introductory comment I thought
pretty well said it all. And that is that the budget outlook is
daunting. I agree with you; it is unfortunate we have been left in
this situation from the last four years of a Congress that was controlled by the other side that racked up $6 trillion in debt. I want
to talk about three things and Figure 2.1 of the materials that you
handed out today; you have some GDP growth charts. Can you tell
me quickly what the GDP growth assumptions were in the extended baseline scenario and in the alternative fiscal scenario?

38
Mr. ELMENDORF. Well, so Congressman, we set for the underlying path, the benchmark to use for the most of the budget projections, a stable economic future. Then we analyzed, as you have
seen, the effects.
Mr. FLORES. Just give me some numbers real quick.
Mr. ELMENDORF. So under the alternative fiscal scenario, GNP
would be 7 to 18 percent lower in 2035, than it would be under our
benchmark that assumes steady debt to GDP ratio.
Mr. FLORES. And what is steady? I mean, not debt to GDP, but
what do you look at in terms of real GDP growth percentage per
year, long term?
Mr. ELMENDORF. So the real GDP growth that we have is 2.2
percent on average per year, from 2022 to 2085.
Mr. FLORES. And that is lower than what we have experienced
historically, long term I believe, is it not?
Mr. ELMENDORF. It is lower articulately because of slower growth
of the labor force. It is related to the population aging that we see.
Mr. FLORES. Lets talk about tax payer behavior. Now that is my
second subject. If, you talked about the fact that taxes would rise
to 23 percent of GDP under the extended baseline scenario I believe, is that correct? What you said, do you model tax payer behavior in a situation like this? In other words, do you live in Maryland,
or Virginia, or D.C.?
Mr. ELMENDORF. I live in Maryland.
Mr. FLORES. Okay, so if Maryland doubled its tax rates tomorrow, would you move?
Mr. ELMENDORF. My kids just finished their sophomore year in
high school Congressman. If I move I am in peril of my life.
Mr. FLORES. Okay, you would be looking at it though right?
Mr. ELMENDORF. But our analysis does incorporate the effects of
changes in marginal tax rates. That is an important area that we
have actually enhanced our analysis of in the past few years, and
that, the differences in marginal tax rates as well as the differences in debt are included in the GDP.
Mr. FLORES. And that factors in to the lower than average GDP
growth? So there is an impact on revenue by raising these rates because you have put a break on the economy as you move forward?
Mr. ELMENDORF. Yes, under the extended baseline scenario. I
read you the numbers for the alternative scenario where there is
more or less steady marginal tax rates and rising debt.
Mr. FLORES. Where I am trying to go, and I think you have concurred with this is to the extent that you have assumed that tax
revenues is percentage of GDP are higher than the 18.3 percent
long-term average. It has a dampening impact on economic growth,
correct?
Mr. ELMENDORF. So one thing I would emphasize is the marginal
tax rates as you have said before that really matter for economic
growth not just the level of revenues, it is how that money is raised
so our modeling captures the effects of the marginal tax rates the
disincentive to work or to save.
Mr. FLORES. Right, good, okay. The next question has to do with
provider behavior. I mean again, everything that happens in the
economy is because an individual or a company behaves in a certain way based on the conditions that are thrown at it by its gov-

39
ernment or by some other exogenous factor. When you look at provider behavior, if we were to cut the pay of everybody in CBO by
two-thirds, would that impact the behavior of people wanting to
work for CBO or move to your position?
Mr. ELMENDORF. I am afraid it would Congressman, yes.
Mr. FLORES. Okay, so essentially what the chainsaw that was applied to provider reimbursements under the Obama Care if you
will, does impact provider behavior; and your modeling does not assume any change in that behavior, right?
Mr. ELMENDORF. That is right. We do not capture, again this is
an issue we are trying improve, but our modeling does not capture
in any sophisticated way the possible ramifications of that.
Mr. FLORES. So looking not theoretically but a likely realistic outcome is, if we cut what the reimbursement rates are to providers
by two-thirds, we are going to have a lot fewer providers hence less
health care.
Mr. ELMENDORF. That is a possibility Congressman, but I do not
think it is at all guaranteed. There are a lot of experts in the
health care system who say there is an awful lot of inefficiency, in
the way things currently are being managed, and that by changing
the organization of the health care system, that a lot of efficiencies
can be achieved, and thus that providers can continue to cover
these lower, more efficient level of costs with lower payments.
Mr. FLORES. But you just said it would not work at the CBO, if
I cut your pay by two-thirds.
Mr. ELMENDORF. So I think the issue there is what the possibilities are for improving the efficiency of the system. And we have
said ourselves, in our analysis of the health reform legislation last
year, that how long those cuts could be sustained for was uncertain. And that is why we present an alternative scenario here, in
which those cuts are not sustained for a very long period, but I do
not think it is at all obvious that those cuts cannot happen for
some period of time. We do not know how far they can go, partly
because we do not know what the possibilities really are for improving efficiency in the health care system, not just as a theoretical matter but practically speaking what kinds of efficiencies
can be achieved not in particular places but across the system as
a whole.
Mr. FLORES. Could the CBO operate with two-thirds fewer people? Would you be able to stream out enough efficiencies to provide
the same product you do today?
Mr. ELMENDORF. No, we could not Congressman.
Mr. FLORES. Okay well, I suggest that the same is true for any
health care system, and that is a very important part of the U.S.
economy. Thank you. Yield back my time.
Mr. DOGGETT. Thank you very much. I think one word around
which this Congress is focused so far this year is cuts; immediate,
far-reaching cuts. The Education Committee has met and voted to
eliminate dozens of education programs. Another Republican group
has said Pell grants which allow folks to go to college are just another form of welfare and that we cannot sustain the level of financial assistance we have. Votes have been taken to eliminate federal
support for community policing and fire fighters. And of course, it
is seldom a week that goes by that there is not some proposal to

40
cut health care. Putting aside for a moment, the far reaching consequences of denying educational opportunity, and health care, and
adequate law enforcement, I want to direct your attention to the
comments of the Chair of the Federal Reserve yesterday, Dr.
Bernanke, who said, In light of the weakness of the recovery, it
would be best not to have sudden and sharp fiscal consolidation in
the near term. I do not think that sharp, immediate cuts in the deficit would create more jobs. Do you agree with Dr. Bernanke?
Mr. ELMENDORF. Yes I do Congressman, and we have said the
same thing ourselves on a number of occasions.
Mr. DOGGETT. I thought that was the case. So while we want
more efficiency, and we want to address these long-term costs, if
these cuts are too dramatic they not only will deny educational opportunity and health care security but they will cause us to lose
more jobs and have less economic growth?
Mr. ELMENDORF. Again, the specifics would depend on the specific policies, but our analysis implies that cuts in government
spending or increases in taxes during the next few years would by
themselves reduce output in employment relative to what would
otherwise happen. At the same time credible reductions in future
deficits would boost output in employment in the next few years
because they would hold down interest rates, and probably increase
business and household confidence.
Mr. DOGGETT. And I certainly agree with you on both points. On
the long term, I guess the only problem is the specifics. So let me
go to one of those specifics and I want to try to quote back exactly
what you said to Ms. Schwartz, that I believe plans similar to what
Chairman Ryan has advanced with reference to Medicare will
shift a good deal of burden and risk to seniors. Now it is great
to talk in theory about putting the patient in charge. We have had
the patient in charge with regard to seniors on Medicare in the
past with prescriptions, and I guess we can put them in charge
again and that may reduce consumption of health care because
there will be some seniors that will say I rather eat than go see
the doctor, or buy another prescription. I am going to keep cutting
my pills in half. That is the patient as nucleus. While you may reduce some consumption that way, in Medicare; what I hear you
saying is that we have an overall problem about rising health care
costs that affects at different amounts at different times both the
Federal Employee Plan, Medicare, Medicaid, the Veterans Administration, and the private sector; and that if all we do is shift more
of the burden, a good deal of the burden, and more of the risk to
seniors and we have not found a way whether it is through experiments or something else to address the problem of rising health
care costs, we may have relieved some of the burden on our debt
and on our tax payers but we have not relieved the burden indeed
we have increased it on some of the most vulnerable people in our
society at the time that they are trying to achieve a decent level
of retirement security. Would you agree with that?
Mr. ELMENDORF. Well, Congressman, certainly if the Congress
chooses to shift the burden to all or some members of an age group
or other demographic group, then that is addressing the governments budget constraint by tightening other peoples but I would
just emphasize that almost anywhere I can think of to address the

41
governments budget constraint involves tightening somebodys
budget constraint. That, as I said, we are collecting, we are used
to collecting, a certain amount of revenue relative to GDP, which
has varied over time but has not shown much trend around this
18 percent mark; the same time we have government programs
that provide certain sorts of benefits to older Americans, Social Security, Medicare, and Medicaid, and we have a whole lot of other
tasks for the government, National Defense, Homeland Security,
Veterans Care, and on and on, that have over time occupied a certain share of GDP. We cannot have all those same things together
in the future. We cannot repeat the past in the federal budget because of the aging of the population and rising health care costs.
Mr. DOGGETT. Certainly we cannot; but we can avoid, as you say,
shifting a good deal of the burden and risk to seniors without addressing the broader issue of health care costs. Thank you very
much.
Chairman RYAN. Mr. Huelskamp.
Mr. HUELSKAMP. Thank you Mr. Chairman. Doctor, thank you
for joining us here today. Quick question, how many years have
you been director at the CBO?
Mr. ELMENDORF. Almost two and a half years Congressman.
Mr. HUELSKAMP. Two and a half years, and director, we have
had discussions today of the House Republican budget plan and I
am a freshman; how long has it been since you have actually analyzed a Congressional Democrat budget plan?
Mr. ELMENDORF. Well, so Congressman, I do not want to sound
too technical but we do not really analyze budget resolutions usually. Budget resolutions come from the Budget Committees, in fact
for Chairman Ryans proposal we analyzed the longer term impact
of that proposal, as we have analyzed the longer term impact of
other proposals he has had. We do not really do an estimate of a
budget resolution, it is not a bill, it is not a law.
Mr. HUELSKAMP. So, the Senate Democrat Proposal, out of their
Budget Committee, when was the last one you analyzed that came
out of their committee?
Mr. ELMENDORF. I think Congressman, that the last budget resolution voted on by the Senate Budget Committee was in 2009.
Mr. HUELSKAMP. 2009, been a little over two years? Or did they
even have one in two years?
Mr. ELMENDORF. So I believe they did in 2009 because the reconciliation instructions that came out of that budget resolution
turned out to be quite important in the final act of the health legislation.
Mr. HUELSKAMP. Did that pass the Senate?
Mr. ELMENDORF. Yes, I believe, I guess I am not sure Congressman.
Mr. HUELSKAMP. And then the House Budget Committee, that
time, did they pass a budget proposal?
Dr. ELMENDORF. I guess we are not completely sure Congressman. Again, it is a piece that we do not look at directly.
Mr. HUELSKAMP. I was trying to figure that out. I have heard
that there has not been anything passed for a couple years, and
that is pretty amazing to me. What I want to talk about though
is a question on your economic assumptions. You talk about pages

42
26 through 28, the impact of more borrowing, higher tax rates, and
its impact on economic growth; and economists pretty well agree
that if you increase spending by issuing more debt it is going to
impact the private economy negatively, increasing spending by
raising taxes will do the same. So under most economic assumptions it would seem that the only reasonable alternative is still
grow the economy and tackle the deficit is actually reducing spending now? Is that correct?
Mr. ELMENDORF. Well, Congressman, there are tradeoffs here, so
higher marginal tax rates do reduce economic activity to some extent under the views of most economists. But certain forms of government spending are important for economic growth, and reducing
those could be damaging to economic growth.
Mr. HUELSKAMP. Excuse me, doctor, but in your analysis, this is
pages 26 to 28 talked about increasing taxes will hurt economic
growth.
Mr. ELMENDORF. Marginal tax rates.
Mr. HUELSKAMP. Yes.
Mr. ELMENDORF. Yes.
Mr. HUELSKAMP. As it is been suggested by the president. Additionally, by borrowing more debt it has a similar impact on the
economy.
Mr. ELMENDORF. Yes.
Mr. HUELSKAMP. And so, explain to me that while reducing
spending is not the only alternative.
Mr. ELMENDORF. So again, Congressman, for a dollar reduction
in the deficit if one cuts some form of spending that was not itself
an investment in economic growth, that would be better for the
economy than if one raised a dollar through an increase in marginal tax rates.
Mr. HUELSKAMP. So is Medicare spending an economic growth
driver?
Mr. ELMENDORF. I do not think it is an important driver in the
long term.
Mr. HUELSKAMP. How about Social Security?
Mr. ELMENDORF. I do not think it is an important driver in the
long term.
Mr. HUELSKAMP. How about the Department of Defense budget?
Mr. ELMENDORF. Again, there are some pieces of it that have
mattered.
Mr. HUELSKAMP. We have just eliminated two-thirds, or threefourths of the budget, doctor, is economic growth drivers on the
spending side? We have to be spending. You just eliminate twothirds of it, so the remaining third drives economic growth?
Mr. ELMENDORF. Just saying Congressman, that there are pieces
of federal spending that have been important in economic growth.
I do not have an exhaustive list of that, and we are not good at
modeling those effects.
Mr. HUELSKAMP. But you do make a statement that, and you did
not identify that in the report, I would appreciate a follow-up if you
could identify the particular programs that you believe drive economic growth. Mr. Bernanke refuses to identify those. Refuses to
face the possibility that we have a debt crisis, and that if we do
not face that very soon and quickly, and suggest that we cannot cut

43
spending, that somehow we can borrow on tax and that is going to
work out. Obviously your report does not say that, so I would ask
that as a follow up if you could provide that determination if you
would, of the type of spending CBO believes will help drive economic growth, because we are working with that now. And I would
appreciate that distinction.
Mr. ELMENDORF. I will be happy to work with your staff Congressman and provide the information you are interested in.
Mr. HUELSKAMP. Thank you Mr. Chairman. Yield back my time.
Chairman RYAN. Mr. Yarmuth.
Mr. YARMUTH. Thank you Mr. Chairman. Dr. Elmendorf, nice to
see you again; thank you for your testimony and your work. Earlier
Mr. Flores mentioned in passing $6 trillion worth of additional debt
over the last four years attributed to Congressional activity, have
you done an analysis of the factors that contributed to additional
$6 trillion in debt? How much would have been attributable to Congress actions and how much to policies that were already in place?
Mr. ELMENDORF. So Congressman, we have done analyses sometimes of the swing in the budget deficit from what CBO is projecting about a decade ago to what has come to pass and as it turns
out I think I have that table with me. I often do not remember to
bring it but I have it with me; and as you I think know Congressman there have been a collection of policy actions taken over the
last decade that have significantly worsened the current budget
picture. There has also been a collection of developments in the
economy that were not predicted by CBO that have also led to
worsening of the budget situation.
Mr. YARMUTH. Okay. Would you say that a majority of the additional accumulated debt over the last four years was because of
Congressional activity or because of existing policies; Bush tax
cuts, and wars initiated in the earlier years?
Mr. ELMENDORF. So relative to our baseline projections in January 2001, so a little over 10 years ago, the deterioration in budget
outcomes in 2008, 09, 10, and 11; those are what [inaudible] use
as the four years, are due much more to legislative changes than
to the economic and technical surprises. And those legislative
changes include both reductions in tax revenue and increases in
spending.
Mr. YARMUTH. Yeah. Okay, we will leave it there. There is been
a fair amount of conversation already about the impact of increase
in marginal tax rates. When you make those statements, conclusions that they reduce economic activity, do you assume an increase in marginal tax rates across the entire population? Do you
break it down as to the impact on economic activity of raising the
marginal tax rates on people making over $250,000, and then people making over $1 million? And is there a difference in the impact,
economic impact of those increases?
Mr. ELMENDORF. So, Congressman, we do look at the effects on
a variety of income categories. I do not know exactly what they are
off-hand. And we try to apply historical evidence about what we
think the responsiveness would be, and you can see some of this
analysis testimony we did for the Senate Budget Committee last
fall that different ways of extending the expiring tax provision, and
some of those scenarios we studied we assumed that all of the ex-

44
piring provisions were extended. That did in fact occur in the end
of last year, in other scenarios we looked at extending only the tax
provisions up to a certain point in income distribution and not a
above that. I do not have those results at hand.
Mr. YARMUTH. Is it safe to say as a general proposition, that if
you raise the marginal tax rate from 35 percent to 39.6 percent on
people making over a $1 million a year, that that will not have a
huge drag on the economy versus extending the marginal rates on
the other 99 percent of the population.
Mr. ELMENDORF. Well, there a question about the total impact
and the impact per dollar of revenue. So there are many more people on the rest of the distribution. Much more income earned, and
thus changes in the marginal tax rates below that threshold will
have a larger aggregate effect on the economy. But per dollar revenue lost, the effects are generally larger at the top of the income
distribution because the changes in marginal tax rates, the lesser
revenue is given up in a sense relative to the change in the incentives. So in terms of the distortion to the economy per dollar revenue lost that is not smaller at the top than it is at the bottom.
But it depends on the precise nature of the tax policies.
Mr. YARMUTH. Okay, I look forward to discussing that further.
One last question, in the Republican budget that was passed by the
House there is an assumption, as I recall, that unemployment
drops to 2.8 percent by 2015 in that range and then stays at a, relative to todays terms and historic terms, a very low level. I believe
I am correct on that. If I am not I am sure the Chairman will.
Chairman RYAN. I will, correct you.
Mr. YARMUTH. But what kind of assumption do you make in your
baseline scenario as to what unemployment would be for the next
10 years or so?
Mr. ELMENDORF. So because the recovery is slow, we think the
unemployment rate will come down, only slowly and will over the
second half of the coming decade be down to about 514 percent of
the labor force.
Mr. YARMUTH. Okay, thank you.
Chairman RYAN. I will just answer the question, that is not an
assumption in the budget. CBO is the measuring stick we use.
There was an outside economic forecasting group that did its own
separate analysis of the budget, they subsequently revised that
analysis to a deal with that particular statistic which they said was
an anomaly and wrong; and they revised it to I think five percent
or something like that. Next is, Mr. Stutzman.
Mr. STUTZMAN. Thank you Mr. Chairman and thank you Mr. Elmendorf for being here. My question is, in your report you note the
federal government could not issue even an ever larger amounts of
debt relative to the size of the economy and definitely, do you believe that the current level of debt is harming the economy?
Mr. ELMENDORF. The current level of debt is reducing our output,
our incomes relative to what would be the case if we had a lower
level of debt. Leading aside the effects of this particular recession
which complicate that; but over the longer period of this sort of
analysis, higher levels of debt are certainly more damaging than
lower levels of debt.

45
Mr. STUTZMAN. Do you think that the discussion about tax increases keeps money on the sideline as well, without encouraging
economic growth?
Mr. ELMENDORF. I think Congressman, that uncertainty about
federal policy is diminishing household and business spending and
that uncertainty covers a whole set of policies. I think it covers tax
policy, it covers regulatory policy. Covers health policy, I should say
we think the more important source of uncertainty is household
and businesses uncertainty about their own incomes and the demands for their products, apart from government policy. But we
think government policy is probably playing some role.
Mr. STUTZMAN. And you know I agree with and I think what
families are doing is that they are doing what they can control and
that is cutting their own spending in their own budgets; controlling
their budgets. They cannot necessarily control the income revenue
because the job market is tough. They cannot go take on more debt,
because it is tough to borrow, and it is not necessarily wise to do
so. So, I hear in this committee, you know that we only want to
cut spending. I know you have been in this job for about two and
a half years or so, when was the last time Congress talked about
cutting spending and actually did cut spending in Washington?
Mr. ELMENDORF. Well, so as you know Congressman, the Appropriations Bill that was passed this past Spring reduced spending
to what would have occurred.
Mr. STUTZMAN. Before that. I do not keep a list of that to be honest. I think there is a whole variety of proposals that have been enacted into law that include combinations of spending cuts, spending
increases, tax cuts, tax increases, I am not even sure how I would
keep such a tally.
Well I just do not understand why does it seem like it should be
out of the realm of cutting spending, addressing everything; whether it is entitlements, whether it is discretionary, non-discretionary
spending, military. I mean I believe everything should be on the
table and from your analysis in the report is that we need to be
very cautious in, or that the debt that we hold is damaging or is
holding back the economy. I think everybody agrees that higher
taxes, just the discussion of it, holds money on the sideline. So cutting spending should be a part of the discussion. Did you score the
Affordable Health Care Act?
Mr. ELMENDORF. Yes, we did.
Mr. STUTZMAN. There was a report yesterday about a glitch
found in the bill that is going to send roughly three million middle
income Americans into Medicaid. Can you touch on that?
Mr. ELMENDORF. Yes, Congressman. So I do not know whether
it was a glitch in the drafting or an intent of the drafting but in
any case, our estimate of the bill incorporated the effects of that
provision as it was written.
Mr. STUTZMAN. Well, what do you think that is going to do to
three million middle income Americans trying to find confidence in
the economy, finding confidence in Washington. If we continue this
sort of, I mean, I am not blaming you because, but the intent obviously was there or for some reason it was there and now we are
finding out after the fact and what it is going to do to effect at least
three million Americans possibly.

46
Mr. ELMENDORF. So I should say, we do not have an estimate of
the number of people who are affected. We took the definition of
income eligibility into account in our estimate, but we do not have
any separate count of how many people were affected by that piece
of the definition, and in fact that is not really an answerable question it depends what else you might have changed other places in
the law. So I do not want to endorse the three million, I have seen
that number but that is not from us. All I can say is that we have
this in our estimate, is not a surprise to us that it is there.
Mr. STUTZMAN. So this glitch is not a surprise to CBO?
Mr. ELMENDORF. No, it is not. Again, I do not know if it is a
glitch or an intent but we read that piece to the legislation and
used that language in our estimate.
Mr. STUTZMAN. That is what it seems to be called and that there
is some backtracking by some folks here that this is a glitch and
that, Oh we did not recognize what happened here. You know,
that is I appreciate your answers because you have been very you
know balanced in I think approaching this because if we do not
start talking about cuts and you know your report obviously gives
us, I mean it is not so rosy a picture I do not believe and we have
a lot of work to do in that we have to control what we can control,
and that is cutting spending without doing further damage to the
economy. But I believe tax increases; more borrowing is detrimental to our long term outlook. Would you agree with that?
Mr. ELMENDORF. I believe that more borrowing is detrimental to
our long term outlook and I believe that higher marginal tax rates
are also detrimental to the long term outlook, and that is why we
tried to capture both those effects, where they were relevant in our
economic analysis in this report.
Mr. STUTZMAN. Okay. Thank you very much.
Chairman RYAN. Mr. Tonko.
Mr. TONKO. Thank you for joining us here today Dr. Elmendorf
and clearly these are days where your expertise is tremendously
needed so, again welcome. If I could just return briefly to Mr.
Yarmuths line of questioning. Is it reasonable to assume that education spending impacts economic growth?
Mr. ELMENDORF. Yes, I think so Congressman.
Mr. TONKO. And what about our investment or spending on basic
infrastructure, the roads, the bridges, the connections we need, the
infrastructure to move people and goods around the country?
Mr. ELMENDORF. So we have done some analysis of infrastructure investment, and obviously there were some aspects of that investment that have been more beneficial to the economy and some
that have probably not been beneficial at all; but on balance, sensible investments in public infrastructure, investments that pass
some sort of benefit cost test, enhance economic growth.
Mr. TONKO. Asked another way, is there any reason to believe
that we might see an economic dip if we do not do some of the investments in education and infrastructure?
Mr. ELMENDORF. So I think, well the term dip to me implies a
sort cyclical effect, and a sharp cut in spending or increases in
taxes in the short run would, as I have said before, I think cause
that sort of dip, but usually for people, conversations about education or infrastructure are thinking more of the longer term and

47
I think reductions in the amount of education that occurs in the
country, reductions in infrastructure that we build would be detrimental to long-term economic growth.
Mr. TONKO. And what about our unemployment, which I have
read has a return in economic activity, that somewhere we are between $1.60 to $1.70 on every dollar spent on our unemployment
insurance?
Mr. ELMENDORF. So we think that in the short run, in the situation of our economy now, where they are a lot of unemployed workers and underutilized factories and equipment; that putting money
into the spending stream through benefit payments or reductions
in taxes encourages more spending, and that leads to more output
and more employment. And in our estimates the effects of putting
money into unemployment insurance is especially powerful because
the people who receive it tend to spend a very large share of it
since they are people who have lost their jobs and in many cases
do not have other sources of income.
Mr. TONKO. It seems as though the economic activity that we
need to inspire would at least help those that are in that unfortunate realm. Can we bring up the charts that we have on the longterm debt. There we go. This chart is from Summary Figure One
I believe, in it you present, Dr. Elmendorf, two projections of where
our debt is headed in the next 30, maybe 35 years. Under both scenarios debt continues to grow relative to the size of the economy
but there is a tremendous difference between these two line
graphs. Where do we end up at the end of the chart in 2035 under
each scenario in this chart?
Mr. ELMENDORF. So under the extended baseline scenario, which
largely follows current law, we end up with debt at 84 percent of
GDP. Under the alternative fiscal scenario, which more closely corresponds to current policy settings, we end up with debt at 187 percent of GDP in 2035.
Mr. TONKO. Thank you. And can you briefly summarize the key
policy choices that differentiate the two scenarios?
Mr. ELMENDORF. Yes, so the biggest difference is on the revenue
side, under current law because of the expiring tax provisions, provisions of last years health legislation, just the natural interaction
of the tax code with economic growth, revenues rise quite a bit relative to GDP. Under the alternative fiscal scenario, we hold revenues, we assume that these expiring provisions are instead extended and keep revenues down closer to their historical average
share of GDP. So in 2035, revenues under the extended baseline
scenario are 23 percent of GDP and on the alternative fiscal scenario are 18 and a half percent of GDP. There are also differences
on the spending side, in both the health programs and the nonhealth, non-Social Security part of the budget. In the health programs we are principally assuming under the alternative scenario
that some of the cost control features of last years legislation do
not continue over the entire quarter century we are showing here,
and on the other non-health care, non-Social Security spending we
are assuming still a very substantial decline relative to historical
experience but not quite as stark an end of point as under the extended baseline scenario.

48
Mr. TONKO. To summarize one scenario sticks to current law and
puts the debt at about 80 percent of GDP in 20 or so years. While
the other scenario puts that debt at 180 percent of GDP by, among
other things, extending tax cuts for the wealthy and refusing to implement the Affordable Care Act. That sounds, to me, to be an
awful lot like the Republican agenda this year; and my concern is
that you know we are wasting month after month on policies supported by the majority that are merely digging us into a deeper
hole. Regardless of how you feel about that best strategy going forward, I think we can all agree that we need to do far better.
Chairman RYAN. Gentlemans time is expired.
Mr. TONKO. Thank you Chairman.
Chairman RYAN. I ask the gentlemen get back to him in writing
if he wants you to do so. Mr. Woodall.
Mr. WOODALL. Thank you Mr. Chairman. Thank you Dr. Elmendorf for being here. I want to talk a little bit about cost containment. I am one of the freshmen here. In all of the modeling that
you do, can you point me to some of the other areas where the government has been successfully involved in cost containment, other
industries, or other product lines, that I could look at to see our
success at cost containment?
Mr. ELMENDORF. So that is a good question, Congressman. I do
not know of other parts of the federal budget, other parts of the
economy, whether or not our government plays as large, parts of
the economy as large as health care, where the government plays
as large a part as it plays in health care.
Mr. WOODALL. For example I know we are spending more, a larger proportions of Americans are, on food stamps this year than
have ever been on food stamps historically. Are we involved in any
kind of cost containment, because I know the price of food with
that Ethanol tax credit and what not, the price of foods gone, food
inflation is rising dramatically. Any cost containment programs
going on?
Mr. ELMENDORF. Not that I am familiar with Congressman. Of
course, as you know, the principal reason why that cost of food
stamps is so high is because the economy is weak and many people
are out of jobs.
Mr. WOODALL. Well if there are no good cost containment examples, I know you were talking with Mr. Huelskamp earlier about
efficiencies in the market place and how to squeeze some efficiencies out. Are there any industry sectors you can point me to
where the government has really been a driver in creating efficiencies, because the private sector was not succeeding at that and
so we have really got a great efficiency program run by the government?
Mr. ELMENDORF. Well Congressman, so if one turns to, if you
have it in front of you, Table 3-1 in the report, it is on page 42,
we report excess cost growth in spending for health care, and if one
looks at that table one can see periods where in fact federal spending on health care and Medicare/Medicaid has increased more slowly than private health care spending. There are other periods
where the opposite has been true, as I said in response to an earlier question, so I think that just looking within the health care

49
system, the verdict on whether the private or public sector is better
at controlling costs is not self evident from this table.
Chairman RYAN. Would the gentlemen yield on that point? I am
looking at Table 3-1, I see of the four time periods you have measured, other meaning private health plans have lower cost growth
than Medicare. There is one of the four periods where Medicare is
lower, which was the period of Managed Care, than the private sector; all other is lower in cost growth than Medicare. Am I
misreading this chart?
Mr. ELMENDORF. Well, I am sorry Table 3-1.
Chairman RYAN. Table 3-1, yes table 3-1.
Mr. ELMENDORF. So these are overlapping periods, I would emphasize. So in the 1985 to 2007 period, the last 22 years I guess
leading up to this latest downturn, Medicare/Medicaid spending
growth was a good yield below spending growth in the private sector. And as I emphasized earlier I do not want to pick a particular
row out of this table.
Chairman RYAN. Yeah but then you have 1990 to 2007, it is 1.6
Medicare all other 1.5 percent.
Mr. ELMENDORF. That is right, so over the last 17 years, Medicares been slightly above all other, Medicaids been below that. So,
what I am suggesting is that drawing conclusions about which system is better, I think you cannot draw those straightforwardly out
of just a look at some historical tabulations like this. And that
what makes this analytic challenge that we face difficult.
Mr. WOODALL. And I am not so much trying to draw a conclusion
about which is better. I am trying to draw a conclusion about
where the efficiencies are created. I mean would you say that when
you have the government purchasing almost half the health care
in this country, we can just tell folks we are going to pay less. That
does not actually create efficiency, I mean. Does your modeling suggest that efficiency is why you see these numbers change? Or does
your modeling suggest it is just the legislative changes, because we
are not going to pay you? Are there successes that the government
is experiencing that the private sector is not experiencing on the
efficiency side? The price controls clearly they are far successful if
they are done by the government.
Mr. ELMENDORF. So I think whether one views paying providers
less as an efficiency measure or not, is a hard thing. I think there
are health analysts who point to the experience of European countries that pay providers less for health care than we do. And they
view that as an appropriate way to proceed. And we are not here
to make recommendations, as you know. So, I am not sure, I think
the word efficiency means different things to people in this context.
Mr. WOODALL. Let me go briefly to a different topic. You talked
about certain forms of government spending that are important to
economic growth. Did you actually mean certain forms of government spending? Or just certain forms of spending? Would you actually point to areas of spending that are more valuable if done by
the government, done by the federal government, than if done by
a state or local government or if done by an individual?
Mr. ELMENDORF. That is interesting and a hard question, Congressman. The point I was trying to make before was simply that
one should not view all forms of government spending as a drag on

50
the future economy because there are some pieces that have returns. Whether they could be done better or more effectively in different ways, I do not know. Some of these things are, to say national standards or consistency across the country. One might
think of the interstate highway system as an example of that. Others are more individual to particular parts of the country and
maybe could be done more effectively at that level.
Chairman RYAN. Thank you. Mr. Blumenauer.
Mr. BLUMENAUER. Thank you, thank you Mr. Chairman. I would
just like to follow up where we are in terms of government efficiencies. Have you done an analysis of the cost per patient for veterans health versus national averages in the private sector?
Mr. ELMENDORF. We have done analyses of the veterans health
care system, Congressman. That is a good example to raise. The
Veterans Health Care System at this point and time provides a
high quality care at low cost.
Mr. BLUMENAUER. At lower costs than the average. If we took
prescription Medicare drugs, where the Veterans Administration
actually negotiates prices; do they provide prices less than what
people are paying in the private market?
Mr. ELMENDORF. They do, I want to caution Congressman, about
the difficulties extrapolating from individual systems to the entire
health care system.
Mr. BLUMENAUER. I appreciate that but I just want to say, with
all due respect, that there are models that the federal government
is doing now that are providing higher quality at less cost. In terms
of food inflation, I would think part of that is that we are lavishly
subsidizing corn production to burn unnecessarily where the federal government and Congress, which has blinked and not fixed it,
and in fact we had a chance in this committee to vote against that,
contributes to food inflation. But I want to go back to something
that you said, that I had a little concern with, you mentioned in
the course of your testimony that having money for food stamps actually tends to get into the economy, has a higher multiplier effect
because people take it and they spend it very quickly. And then in
terms of reaction to my friend where you were saying Social Securitys not an economic driver. It would seem to me that that money
that goes into the hands of our senior citizens is almost analogous
to food stamps. The senior citizens in my district are much more
likely to spend that Social Security dollar than some of the lavish
subsidies that we have now that we have tried to trim back. I
mean, are you really saying that that does not have substantial
economic impact?
Mr. ELMENDORF. So, thank you for the chance to clarify this.
Mr. BLUMENAUER. Good, I am sure you wanted to.
Mr. ELMENDORF. The discussion we were having over here I
think was about a long-term economic growth path that we show
in Chapter Two of our report. And over the longer term, over the
medium term and longer term, what matters most for economic
growth is the supply of the factors of production. How many workers there are.
Mr. BLUMENAUER. Okay, you are talking about growth not immediate.

51
Mr. ELMENDORF. How much saving capital there is. In the short
term, particularly in an economy like ours now, with a lot of unemployed resources, then the principal determinant of the rate of economic growth is the demand for goods and services, and that is
why I have said and others have said, that cuts and spending today
and increases in taxes today, would tend to slow economic growth.
Mr. BLUMENAUER. Super, I appreciate the clarification. That is
very helpful for me. I guess I would like to just conclude in one
area that you referenced that other countries spend far less than
the United States, actually almost every developed country spends
dramatically less than the United States and if you are old fashioned, you look at things like life expectancy, child mortality, indicators that the rest of the world use to look at health care quality.
It appears that they provide on average better outcomes for far less
cost. I wanted to ask a question with that factual basis.
I do not think anybody disputes the numbers that we have been
provided although some may dispute what they want to say is the
best care, but I am just trying to get at the sense of is there something intrinsically, about the United States that would prevent us
from being able to take to scale reforms within the existing system.
I come from a state that is low cost, high quality for Medicare; and
if everybody practiced medicine the way they do in my community,
or in Wisconsin, we would not have the crisis we are facing. Is
there something intrinsic about the economic system that would
prevent us from being able to nationalize better quality different
practice patterns?
Mr. BLUMENAUER. I think there is a lot of potential in our system
to do much better than we are doing Congressman. I think the
question at hand has been what is the best institutional framework
to encourage those sorts of changes? As you point to a foreign
health care system, you are certainly correct they spend less money
than we spend, and have in many cases better health outcomes.
The thing I was going to be, wanted to be more careful about and
what you said was, what would have to measure of health care
quality, it is more complicated because they are a variety contributors to health, health care is part of that, so is lifestyle differences.
And in analyses of the treatment for specific sorts of conditions, in
this system or other health care systems, it is less clear.
Chairman RYAN. Ms. Black.
Mrs. BLACK. Thank you Mr. Chairman and Dr. Elmendorf, thank
you so much for being here today to give us this perspective of
long-term budget outlook. I want to follow up on what Congressman Stutzman was talking about and he was going more on how
debt is affecting individuals and families, and I would like to turn
the attention a little bit in a different direction, on private investment. Because a private investment, obviously as we invest in jobs
and different, new technologies and things of that sort, we grow the
economy and when economy grows there is a need for more jobs.
So, first I would like for you to talk a little about the crowding out
affect, explain that, and then go to what level does government
debt crowding out private investment become problematic?
Mr. ELMENDORF. So crowding out as you know Congresswoman,
refers to the phenomenon that if there is more government debt
being issued then a larger share of the private savings in the econ-

52
omy are devoted to holding that debt rather than going to investment and physical capital in plants and equipment that can make
us more productive over time. And that is one of the large costs of
rising debt is the cost that economists can best quantify so the cost
that we quantify in this report, they are other costs of rising debt
that we are not as good at quantifying that we write words about
in the report, the more debt you have the more interest payments
the government needs to make and that crowds out other kinds of
spending, and requires higher taxes. The more debt you have the
less flexibility you have to respond to emerging crises and the more
debt you have the greater the risk of fiscal crisis itself. And so the,
so for all of these reasons additional debt is a problem, for much
of these effects there is no particular tipping point, every extra dollar of debt is a little bit worse, everything else equal. The one for
which there may be a tipping point is this risk of a fiscal crisis,
one might get to some particular level of debt but as we wrote in
an issue brief last year, we do not think we can identify a particular level because it is not just the level of debt that matters,
it is the expected trajectory of the debt. It is the confidence of investors in the governing process in a country to make changes in
fiscal policy, its the underlying strength of the economy and so on.
So it is an awful lot of factors that matter, that is why we have
been I think appropriately unwilling to identify some particular
tipping point, and even in the well known work of Carmen
Reinhart and Ken Rogoff on this subject, they do not really find a
tipping point so much as they pick countries in a lot of debt and
so they do worse than countries with less debt. But whether there
is some threshold is not clear, and I think in fact if you talk with
them they would say that it depends on all the factors of the country as well.
Mrs. BLACK. And just along those lines, I want to note that Figure 2-2 in your report does seem to indicate that government barring will have a negative effect on the economy in as little as just
a few years and you do have that in your report, so I appreciate
that and I think that we, given the fact that there is no tipping
point as you say and there is no time limit where we can say ah
definitely this is going to happen and what I appreciated so much
is, we have had previous panel members who have indicated as
sort of like a pond that you are skating on where you skate around
the edges that are shallow and the ice is very thick and you feel
very safe, but none of us know when that ice starts to get thin, the
water starts getting deeper, and when we are going to fall through,
and we just have to look to some of those countries that have already been in that situation where that debt can tip us at a point
that would be unknown and could in many cases be very quick
without us being able to respond. So, then I assume with the short
period of time that I have left you would agree that the sooner that
we address this debt issue the more safe we are going to be and
the less likely we are going to be to look like those countries in Europe.
Mr. ELMENDORF. Congresswoman, I certainly think that the
sooner that policy changes are agreed upon the safer the country
will be in terms of the fiscal picture. The question of how quickly
to implement the policy changes you agree upon involves tradeoffs

53
that I cannot judge for you. The sooner that you act in terms of
implementing changes, the less debt is accumulated and the more
credibility is attached to the future cutbacks that have been discussed. On the other hand the sooner that government spending is
cut or taxes are raised, the less time that individuals and businesses, state and local governments have to adjust to the changes,
so the harder that transition will be for them and also changes implemented in the next few years will be hitting an economy that
is all ready quite weak and we think weakening it further. So,
there is a tradeoff in the sea of implementing these changes, I
think in some ways that reinforces the risk of going up high levels
of debt because one gets into a position where one is confronted
with less and less palatable choices and I think that part of what
you see in this tradeoff.
Mrs. BLACK. Thank you Mr. Chairman, I yield back my time.
Chairman RYAN. Mr. Pascrell.
Mr. PASCRELL. Thank you Mr. Chairman. Good morning. In the
health care reform, Mr. Elmendorf, lets get back to that issue since
it keeps on coming up, does it not. We passed what I consider to
be significant savings, you know one-third of that legislation was
devoted to Medicare and Medicaid; many of those savings were not
scored for understandable reasons. That is not the issue here. In
a large part, which is a large part of our deficit, we created innovative payments and delivery models. I am not telling you anything
you have not heard before. That was the whole purpose, when people say we did not bring any changes, the Democrats, God bless
you, who supported that legislation did not bring anything new to
the table about entitlements, they obviously did not read the bill.
But the majoritys plan to stop these models and move everyone
into the private market, oh that is a brilliant idea, pre-1964, very
effective. If we look at the private market costs rose in 2010, it is
interesting now you only went to 29 Mr. Chairman, my good friend.
2010 shows a very different situation. In 2010 costs rose 7.75 percent, the cost of health care compared to Medicare cost rose by 3.3
percent. That is in the Standard & Poors indices of 2010. That is
before three-quarters of the health care bill even went into effect,
or four-fifths. So the point about what costs more and how we can
save money, lets take a look at the facts.
And we will improve the legislation, but to do away with the legislation I think would be very hurtful to the economy and particularly those who are not covered. And particularly those who are losing their job, and we obviously Mr. Elmendorf did not get the forecast correctly about the economy in 2008, or 2006, or 2004, because
in 2001 and 2003, when we made those dramatic cuts, tax cuts,
and I am not singling out any group, but when those cuts were
made, what were the plans, what was the forecast of why we were
doing this, and what the results would be? And then what were the
results? Did we have the business investments that my good Ms.
Black talks about? Did we have an increase in jobs? No, in fact if
you look back over the last four decades, four decades, the only
president that has substantial increase in job investment and when
the economy stood strong was Bill Clinton. Carter did not do it, 3
percent increase and business investment under Jimmy Carter. 3.4
percent under Ronald Reagan, under Bush I and Bush II, President

54
Bush, President Bush II we got an increase about 3.5 percent, 3.6
percent. They actually did a better job than Ronald Reagan. And
under Bill Clinton 10.2 percent in those eight years he was the
president of the United States, business investment. So tax cuts
are not the panacea that we all are pretending it is. Is it Mr. Elmendorf?
Mr. ELMENDORF. Well, Congressman I think the variety of influences on the economy, the policies of presidents and congresses are
obviously important. A lot of other things are important as well. I
would be loathe to draw any strong conclusion from the period
averages that you suggest.
Mr. PASCRELL. They are pretty accurate.
Mr. ELMENDORF. I am not disputing the numbers I am just stating that to map those directly to the policies of those presidents,
I think involves leaving out all the other factors that matter.
Mr. PASCRELL. There are other factors are there not Mr. Elmendorf. So, when Obama raised his hand, when the president raised
his hand in January, 2009; he had no idea, we had no idea, of how
bad this economy was. Would you agree to that?
Mr. ELMENDORF. Yes I do Congressman.
Mr. PASCRELL. Thank you, for the record, Mr. Chairman.
Chairman RYAN. All right, thank you Mr. Pascrell. Mr. Garrett.
Mr. GARRETT. And I thank the Chairman. So taking a page out
of Mr. Pascrells comments I guess, but not with the same tone and
forcefulness. So it is hard to make these projections, that you make
over time.
Mr. ELMENDORF. It certainly is Congressman.
Mr. GARRETT. There you go. So, when you make these assumptions, or when you take in the assumptions to make these projections, what do you do, quickly, with regard to your assumptions
with regard to the overall capital market structure in this country,
euphemistically Wall Street and investments, and what have you?
How does that play into it?
Mr. ELMENDORF. So private saving matters, that is the is the
source of funds for investments, to the extent that is not crowded
out by additional debt, and we assume that private saving continues over time and away, that keeps interests rates about stable,
under a benchmark and then we do other things for the particular
policy scenario.
Mr. GARRETT. So within that for example, do you take in assessments so you study to look at to see where the capital markets,
where the proverbial trillion dollars on the sidelines, or whether
that is being invested or not, that sort of things that you look at?
Mr. ELMENDORF. For this sort of longer term analysis we are
looking more at 40 year or 30 year or 20 year averages, when we
look to our projections. For our near term economic projections, the
ones we are updating for August, we are most definitely looking at
the current state of capital markets.
Mr. GARRETT. So you hear Chairman Bernanke say, a week or
two ago, some statement where he said, he was asked by Jaime
DiMon, did they, the FED, look into and consider what the cost of
all Dodd Frank at all is on the market place and he said, no, it
is just too complicated for us to do. You heard that?
Mr. ELMENDORF. I have heard that.

55
Mr. GARRETT. But have you? Is it too complicated?
Mr. ELMENDORF. We have also not tried to quantify the effects
of that legislation on the system of the economy.
Mr. GARRET. A. Is that something that you are able to do? and
B. Is that something you should be doing?
Mr. ELMENDORF. I do not think we have the capacity to do it
Congressman. Ideally, yes I think it is an interesting question.
Mr. GARRETT. Well I mean, more than interesting, but does not
that sort of drive part of the cost as far as the economy going, as
going forward?
Mr. ELMENDORF. I think it is certainly a factor in economic
growth.
Mr. GARRETT. So then he said at a press conference I think it
was last week, he said he is seeing some sort of soft spots in the
economy, right. And he said he does not quite understand, he is
sort of clueless if you will as to why that soft spot. In other words,
he had his projections like you did too, going forward, doing all
those things with QE-1 and QE-2. He thought we were going to at
certain places on GDP and growth and unemployment but we are
not there. You saw that comment?
Mr. ELMENDORF. Yes.
Mr. GARRETT. Yeah, so could that be part of the problem though?
That if both you and he are failing to have that bit of information
as far as what the cost of regulation and implementation of it is
to the economy, that that could be explaining on some of our charts
of where the problems are?
Mr. ELMENDORF. It could be a factor Congressman. I mean they
are an awful lot of things that we do not have in our models and
our models do not model very well.
Mr. GARRETT. Capital markets I would think it would be a pretty
big factor in as far as, I mean that is one of their two responsibilities in job growth. Just quickly another point. That is true is it
not?
Mr. ELMENDORF. So capital market are important then Congressman, yes.
Mr. GARRETT. So I came in and I heard you say a couple of times,
I may paraphrase. You said sharp cuts right now and tax increases
now would slow economic growth or words to that effect.
Mr. ELMENDORF. Yes that is right Congressman.
Mr. GARRETT. Can you quickly define for me what are sharp cuts
in spending?
Mr. ELMENDORF. So I was trying to convey with the word sharp
was some sense of the magnitude of the cut or increase relative to
the size of the economy. So we have an economy even in its weakened state, has GDP of $15 trillion, policies that move that have
to be significant.
Mr. GARRETT. Can you define that for me?
Mr. ELMENDORF. No because there is no cut-off per say. It is a
question of degree.
Mr. GARRETT. If we cut $100 billion out of the 2012 budget is
that a sharp cut?
Mr. ELMENDORF. That is enough of a cut that it would affect our
projections for GDP growth over the next few years, yes Congressman.

56
Mr. GARRETT. A $100 billion would, to what extent?
Mr. ELMENDORF. Well it depends on exactly what you change
right, so the analysis that we have done of the Recovery Act and
of alternative policies for increasing output in employment show a
range of different effects depending on the specifics of the policy.
Which I think is the analysis you want us to be doing. Not just a
matter of dollars, it is a matter of what is in the policy.
Mr. GARRETT. What percentage is that, 100 of that $15 trillion
account?
Mr. ELMENDORF. So the economy is $15 trillion.
Mr. GARRETT. You are good with numbers.
Mr. ELMENDORF. One percent of that is $150 billion, so $100 billion is two-thirds of a percent to the economy. For some forms of
changes in government policy, the effect on the economy could be
less or more than that, but two-thirds of a percent is not trivial,
the downward revisions in Federal Reserves forecast that got some
coverage yesterday for this years economic growth are less than
that.
Chairman RYAN. So two-thirds, so about a .66 percent cut in
spending in your model slow down the economy right now?
Mr. ELMENDORF. Yes, I think all the models try to capture, even
the small effects, which I was trying to convey with the term
sharply.
Chairman RYAN. I find that interesting. Ms. Wasserman Schultz.
Ms. WASSERMAN SCHULTZ. Thank you Mr. Chairman, I want to
just follow up on that same line of questioning that Mr. Garrett
had. So if we are assuming that a $100 billion cut could affect the
growth of the economy demonstrates that what even seems like a
small percentage cut would have a significant impact. That seems
backed up Mr. Elmendorf by Chairman Bernanke who said in an
article in Politico today, that I do not think that sharp immediate
cuts in the deficit would create more jobs. It would be best not to
have sudden and sharp fiscal consolidation in the near term. So
we have more than one of our economic experts it seems pointing
to the danger of cutting too much too fast. So generally are you
concerned that the proposed, what I term reckless, but the proposed Republican budget cuts at the pace that they have proposed
them, and the amount and size that they have proposed them
would negatively impact our ability to recover?
Mr. ELMENDORF. So Congressman, I agree with Chairman
Bernankes statement. We have not done an economic analysis of
the Republican budget resolution. As I have said earlier on other
occasions, near term cuts in spending or increases in taxes, under
the current economic conditions would slow the economy. Credible
reductions in future deficits from future spending cuts or tax increases would boost confidence, lower interest rates, and thus
strengthen the economy today. So I think the effects of an overall
fiscal package on todays economy depends on the balance of, and
the timing of the changes and policies.
Ms. WASSERMAN SCHULTZ. So does it make more sense in terms
of making sure that we pace ourselves on trying to strike that right
balance to use a chisel when it comes to cuts, to make sure that
we have the right combination of investments and cuts, so we do
not upend the apple cart?

57
Mr. ELMENDORF. From our analysis there are tradeoffs in the
speed of the fiscal consolidation, it is a term of ours. The faster one
moves, the less debt is accumulated, the better that is in the long
run, and the more credible future promise cuts would be, which is
good for the short run. On the other hand, the faster that policy
moves, the less time people, businesses, other levels of government,
have to adjust and the bigger the hit on the economy, in the short
term. So there is a tradeoff there that all we can do is to try to
elucidate that tradeoff, but it is up to you and your colleagues to
judge how to proceed.
Ms. WASSERMAN SCHULTZ. Right, thank you. I want to shift to
Medicare in just the last couple of minutes that I have. CBOs analysis of the voucher payment in Mr. Ryans plan in 2022 says that
basically it is equal to what a 65-year-old would cost in traditional
Medicare. My question is, does that mean that at least in the first
year of the program, that the voucher does not really save the government any money? And doubles the out-of-pocket costs for the
first 65-year-olds to be covered under the plan? Am I understanding that correctly?
Mr. ELMENDORF. Congresswoman, we did not actually study the
proposal in the first decade. We do not usually study budget resolutions, we analyze the longer term implications as we have with
other plans of the Chairmans. And also we need to distinguish between federal costs and total costs. So by our analysis it is more
expensive to treat a 65-year-old through private insurance, than it
is to treat that person through Medicare today for a typical 65year-old. But the plan also, over time reduces the federal governments payments. So we show over time, the plan reducing federal
payments relative to the existing Medicare system, and but we also
show as you know beneficiaries paying more.
Ms. WASSERMAN SCHULTZ. Paying more; and just my final 30 seconds. Your analysis also on page 13 indicates that the reality of the
proposal is that some people would not actually purchase insurance
because of the extra cost that they would face, so does that mean
that we could actually see an increase in the rate of elderly who
are either uninsured or underinsured? And would have to spend a
substantial amount of their income on health care to make up for
the difference in what the coverage used to be?
Mr. ELMENDORF. Congresswoman, you might see an increase in
people running short. We were not able to analyze that and I think
that is a very important question, and one of a number of significant caveats to that analysis. We, in another context as you know,
we have studied participation decisions given a set of rules the government would put in place, we just have not been able to do that
for this proposal. It raises the risk of people, more older Americans
over the age of 65.
Ms. WASSERMAN SCHULTZ. And it changes the safety net that exists now under Medicare for seniors.
Mr. ELMENDORF. It is a very different world than the world that
exists under the traditional program today. Yes Congresswoman.
Ms. WASSERMAN SCHULTZ. Thank you Mr. Chairman. I yield
back.
Chairman RYAN. Right on time. Last speaker, Mr. Ribble.
Mr. RIBBLE. Doctor, it is good to see you again.

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Mr. ELMENDORF. Good to see you Congressman.
Mr. RIBBLE. Going back to my colleagues question on would we
lose more people in health care because they would not have the
money to buy the difference. If our plan actually directed funds
more toward lower and middle income, as opposed to wealthy millionaires and billionaires, would not we in fact maybe improve the
circumstance with those being insured?
Mr. ELMENDORF. If we were able to analyze the participation decision, you are absolutely right Congressman. We need to take into
account the levels of subsidies for different groups of Americans
and how that fits with their own resources, that is part of what
that analysis would be.
Mr. RIBBLE. And helping poor Americans and middle class Americans is a good idea.
Mr. ELMENDORF. Well it is not my place to make a value judgment, but certainly the additional subsidies for lower income people
would increase their participation relative to a world without the
subsidies.
Mr. RIBBLE. I would like to come, circle back to this mystical,
magical, $100 billion in cuts and the impact on the economy.
Mr. ELMENDORF. Yes.
Mr. RIBBLE. Assuming that the federal governments not actually
borrowing that money, where else does the federal government get
that money from?
Mr. ELMENDORF. Well, so it comes from either borrowing or tax
revenue Congressman.
Mr. RIBBLE. Sure, lets assume it is coming from tax revenue, either from a higher taxes or we are just taxing it. So how does taking money from one sector of the U.S. economy, i.e. the consumer,
and giving it to another sector of the economy, i.e. the government,
change the number of dollars circulating in the economy?
Mr. ELMENDORF. Well, I think the policy scenario that we were
talking about was a cut in spending that was not matched by an
equal cut in taxes. So it is a cut in spending that will lead to a
reduction and borrowing and that has various advantages as I have
said, but it is also true by our analysis and I think the analysis
of many economists with that reduction in spending is some American who is not getting a benefit payment or it is some American
business that is not getting a contract and that reduction in the
governments money pushed into the economic system reduces the
spending of the households or businesses that would otherwise get
it and with that reduction demand slows the economy relative to
what would otherwise happen.
Mr. RIBBLE. Unless of course we took the money from some consumer who might spend it on their own, based on their own free
choice. Maybe they buy it from a cool roofing contractor like my
company instead.
Mr. ELMENDORF. Well so again Congressman, it depends on the
policy scenario when its envisioning, but I think the question, if I
understood the question, it was a reduction in spending not
matched by reduction in taxes; and that means partly, it depends
what the nature of the spending cut is, but it means that somebody
is not getting a check that they would otherwise be getting either

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as a benefit payment or in payment for a service provided to the
government.
Mr. RIBBLE. And I might not also be getting a tax that otherwise
would have.
Mr. ELMENDORF. Well I think that the expectation of future
taxes, again in this scenario taxes are not being exchanged right
away, but peoples expectations of future taxes would probably be
different and that matters as well. And that is why I emphasize
that credible reductions in future deficits through lower spending
or high taxes would have confidence building effects on people. And
why our modeling incorporated the effects of tax rates on peoples
behavior.
Mr. RIBBLE. Because in your report you saw that long term budget, I am on page four, CBOs projection in the most of the 2011 long
term budget outlook, understates the severity the long term budget
problem because they do not incorporate the negative effects that
additional federal debt would have on the economy nor do they include the impact of higher tax rates on peoples incentives to work
and save. Which I think is significant. And then going on to the
next page, you say growing debt would also increase the probability
of a sudden fiscal crisis. And I wonder if you could talk to me because it is simple to look at what sudden is and what crisis is but
what does sudden and crisis mean to you. How fast is sudden, and
how big is the crises?
Mr. ELMENDORF. So first let me emphasize that in most of the
projections in the report, hold the economic conditions fixed for a
comparison across policies. We do in Chapter Two do an extended
analysis of the effects of these policies on the economy. Sudden fiscal crises in other countries, have come on in a matter of months,
or weeks, or days; and they have generally had very disruptive effects on those economies because governments are suddenly forced
to make the sorts of decisions that they had put off for the years
leading up to the crisis. And those threats of sudden adjustments
particularly at a moment when the economy is all ready under
siege if you will are particularly difficult and particularly painful
and particularly detrimental to economic conditions.
Mr. RIBBLE. And I will make just one final comment then I will
yield. You say also during which investors would lose confidence
on the governments ability to manage its budget and the government would thereby lose its ability to vouch at affordable rates. I
would dare say, based on the conversations Ive had with American
citizens in my district, that many investors and many Americans
have a relative lack of confidence in this government to make the
right choices.
Mr. ELMENDORF. That may be true Congressman but if one looks
to financial markets, the investors who are actually putting their
money on the table are not charging our government high rates
today, they are actually charging our government low rates at this
point and that illustrates the risk of fiscal crisis which is things are
fine until they are not anymore. And as we talk to people in financial markets, including in our panel of economic advisors meeting
a few weeks ago, the financial market participant were themselves
a little surprised that financial markets were not more concerned
that investors were not more worried. Their view was that most in-

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vestors do in fact think that policy actions will be taken to put the
governments budget on a sustainable path. And they at this point,
those investors have confidence in that.
Mr. RIBBLE. And I hope we warrant that confidence and Ill yield
back Mr. Chairman.
Chairman RYAN. Thank you. Thank you for indulging us. I know
you were hoping to get out of here by noon and, pretty close to that
so thank you. Hearing is adjourned.
[Whereupon, at 12:04 p.m., the Committee was adjourned.]