Bipartisan Fiscal Commission Third Meeting


Uploaded by whitehouse on 30.06.2010

Transcript:
Senator Alan Simpson: Thank you all.
Let me just say a word about the passing of a giant in these last
days, Senator Byrd.
This place, the Senate, will miss him greatly.
He was an institutional memory.
There was no one like him in any sense.
Some of my remarks were in the New York Times yesterday,
but I have to tell you the wonderful anecdote.
My father was in the Senate, and Byrd loved my father.
And he said when I came here, he greeted me warmly.
He said, "Your father is a wonderful man, patient,
caring, civil, trusting, a delight and a good humor."
And I said, "Thank you."
And then about a year later I got in a real dust-up
with Robert Byrd -- never called him Bob,
I didn't do anything like that -- Robert Byrd.
And he said, "Alan, I was thinking of your father again.
You're not like your father."
(laughter)
Senator Alan Simpson: At all. I said, "Well, thank you, Robert."
Anyway, a wonderful man.
He became a very special friend.
And well, thank you again for being here.
It's a special group, one I appreciate,
and I know Erskine too.
Erskine and I have established a high level of trust,
and I think the Commission is establishing trust.
And that's something that's very sadly missing in this village,
certainly since I was first here in '79 where we actually
trusted each other.
A word was your bond, and if you broke that,
you knew who not to trust again.
But you started with trust, instead of starting with no
trust and then working toward trust, and that's harder to do.
So Erskine and I have established that.
Appreciate your staying in the game, staying in the room.
It is a strange situation.
We're not out to do in somebody or out somebody.
I have received some lovely communications
in these last weeks.
I never had an unlisted number, which was a sick idea,
especially in these days, but never did
have an unlisted number.
Had some great calls coming in recently.
I thought the one was creative, it said, "Hey, banjo butt,
what are you up to?"
I've never been called banjo butt.
That was a classic.
And then, "You look like a crane in a swamp."
I thought that was pretty crude.
Some guy said, "Anybody ever tell you,
you look like Al Simpson?"
I said, "Yeah, they do."
He said, "Makes you kind of mad, don't it?"
(laughter)
Senator Alan Simpson: So I get through that and that's how it works.
But certainly flash words abound, flash words abound,
and that's how it works in D.C. The word "cut" is now
communicated only with Social Security.
Cut, Social Security.
Balance the budget on the backs of seniors.
Nail the rich. Cheat the poor. Hurt doctors. Help lawyers.
Let's see.
There's such a great list.
And for me, I am portrayed as an ornery old grump who is a
Republican covering for a president who is using him.
That's a cheerful note to that.
You want to be sure to scratch that one down.
And so raising taxes, oh, that one is just -- sends a surge
through the groups.
And then the latest one from some worthy is that
the cat food commission.
Now, I'd never heard that.
But from my Army days in the infantry when someone would make
a statement as bizarre as that, we would confer upon them the
order of the green weenie with oak leaf clusters.
You could drill rock through the head of people like that.
And so I wanted to find out -- I do want to meet the person that
called it the cat food commission.
Be a joy for me to do that.
Enough.
So let's move on in the charged world of emotion, fear,
guilt and racism.
That's how things work here.
Either pass or kill a bill with a deft blend of emotion, fear,
guilt or racism.
I played that game, didn't play the game,
tried to ward off that game.
But that's how Washington works.
But I can't tell you how much I, and I'm sure Erskine,
appreciate just being here and listening,
and some of it is eye popping.
But today we're going to have quite a session and we will say
to people, really don't just come to tell us why we're crazy
and why we're wrong, but tell us what you would do to help
us restore structural reform to a country I assume we all
love very dearly.
So with that, I'll defer to the numbers man.
He submits numbers to me; it's like reading
an Egyptian newspaper.
But go ahead.
Erskine Bowles: If it makes you feel any better, Senator,
last weekend I got a call, it was an anonymous call,
and somebody said, "If you would put those ugly looking glasses
you wear on Al Simpson, you two could be twins."
(laughter)
Erskine Bowles: So we're a couple of cranes up here.
Thank you all for being here this morning.
I had a couple of things I wanted to say.
Last weekend, the leaders of the G20 gathered in Toronto,
which I know all of you paid attention to,
to discuss what I found to be literally the same questions
that we're dealing with as a group of 18 here
for our own country.
And the questions were really how can we protect what is a
very, very fragile economic recovery while at the same time
making the commitment to slow, stop and then reverse the rising
level of debt that Al and I certainly believe jeopardizes
our grandchildren's future and our country's
standard of living.
The G20 approved two goals.
The first one I felt was very modest for our country,
and that was to cut the deficit in half by 2013.
When you're sitting at a deficit to GDP ratio of over 10%,
to get down to 4.6%, which was the latest forecast I saw,
you know, is no great accomplishment.
The second goal, though, is in line with what we agreed to do
by signing on to this commission,
and that was to stabilize the debt as a percent of GDP by
2015, and our charter calls to bring the deficit to GDP ratio
down to 2.8% by 2015, and that's going to be a heavy lift.
That's $250 billion in deficit savings that we've got to find
in the year 2015.
And that's going to take work on our part.
I was personally glad to see that President Obama made it
clear that no one should be surprised next year when he
brings forward recommendations that have real budget cuts in them.
I expect we will make those recommendations to him.
Recommendations that he has said will reduce the cost of
entitlements and help restore our nation's
long-term fiscal strength.
I do think there is no conflict in the two worries that people
have about our effort.
None of our recommendations take place until fiscal 2012.
And if our economic recovery is not well on its way by then,
we've got a lot of big problems as a nation we've got to face.
And so we should be able to tackle the second part of this,
and that is to stop, reduce and then reverse this
ever-increasing amount of debt that's building up that will
destroy our nation.
Today we have an interesting agenda.
I'll start from the end.
I know all of you are going to be here with us for what Al has
called the granite butt session.
But from 1:00 to heaven's knows when,
I have a 9:00 flight that I'd really like to make.
Senator Alan Simpson: Cancel it.
Erskine Bowles: But from 1:00 to whenever we finish,
Senator Simpson and I will host a public listening session.
We've had over 90 people sign up, the young, old,
everyday folks, people from think tanks, advocates,
from across the spectrum are going to come speak to us.
I think the good thing is these are people who really care and
care deeply about our mission and about our country.
And I'm excited about hearing their ideas.
And that's what we're looking for,
ideas of how we can accomplish the goals the President has
laid out for us.
For those of you who can't stay, you can watch it on our website
and send your own ideas for how we can reduce the deficit to
www.fiscalcommission.gov.
Later this morning, we will hear a progress report from the three
working groups, which have been working really hard and in a
totally nonpartisan manner, and I think
we're making some progress.
And we'll also take some time to discuss our priorities,
our principles, and our game plan for the months ahead.
But first, we're going to get a chance to hear from the Director
of the Congressional Budget Office who will announce this
morning's CBO's new long-term budget outlook.
What's clear to me from just glancing at it is that if we
don't restore some fiscal sanity around here as a nation,
we are going to go broke.
I know that's not a word people like to use,
but it happens to be true.
We face the most predictable economic crisis in history.
And if we stay on automatic pilot,
the debt we are accumulating will be like a cancer.
It will definitely destroy this country from within.
The first bipartisan agreement we reached in this committee,
commission, and I think it was a good one,
was to use CBO numbers.
They inspire trust and confidence on both sides
of the aisle.
And I want to thank you, Doug, and I want to thank your team
for the impartial help that you have given to us as a group.
It's been invaluable.
And I'd now like to turn it over to Director Elmendorf.
Director Doug Elmendorf: Thank you very much, Mr. Bowles,
Senator Simpson, and members of the Commission
for the invitation to talk with you today,
and also for the trust that Mr. Bowles expressed
in our analysis.
The CBO has just released the latest in its series of reports
on the long-term budget outlook.
Today's report updates the report we released last June.
The projections in this report are based on the 10-year budget
projections we issued in March, but include CBO's estimate of
the impact of the significant health care legislation enacted
earlier this year.
That estimate is unchanged from the one that CBO and the staff
of the Joint Committee on Taxation released when that
legislation was being considered.
Budget projections, as you know, are increasingly uncertain,
as they extend farther into the future.
So this report focuses largely on the next 25 years.
However, because considerable interest exists in the longer
term outlook, some information about the next 70 to 75 years is
also included in the report and available on our website.
I plan this morning to summarize the key features of our analysis
and then my colleagues and I will be happy to
take your questions.
Because this report was just released and you have not had a
chance to look at it very much, I will talk some at greater
length than I would in a normal sort of testimony.
As you know, the federal government has recently been
recording the largest budget deficits as a share of the
economy since the end of World War II.
As a result of those deficits, the amount of federal debt held
by the public has surged.
At the end of 2008, that debt equaled 40% of the nation's
annual economic output as measured by GDP,
a little above the 40-year average of 36%.
Since then, debt held by the public has shot upward.
We project that federal debt will reach 62% of GDP by the end
of this fiscal year, 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 severe recession
and turmoil in financial markets.
However, the growing debt also reflects an imbalance between
spending and revenues that predates those
economic developments.
As the economy recovers and the policies adopted to counteract
the recession and the financial turmoil phase out,
budget deficits will probably decline markedly
in the next few years.
But over the long run, the budget outlook 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 quite 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.
Given that outlook, let me begin by discussing the figures
for the major health care programs and Social Security.
We can go to the second slide.
CBO projects that if current laws do not change,
federal spending on major mandatory health care programs
will grow from roughly 5% of GDP today to about 10% in 2035,
a quarter century from now, and will continue
to increase thereafter.
Those programs include Medicare, Medicaid,
the Children's Health Insurance Program,
and the subsidies that will be provided through the insurance
exchanges established under the recently enacted legislation.
To put that in context, an increase of 5 percentage points
of GDP would be equivalent this year to more than $700 billion
of additional spending.
As I noted, CBO's projections include all of the effects of
the health legislation, which is expected to increase federal
spending in the next ten years and for most
of the following decade.
By 2030, however, CBO expects that the legislation will
slightly reduce federal spending for health care,
if all of its provisions are fully implemented.
Let me note parenthetically that if all of its provisions are
carried out, the legislation will also increase federal
revenues and on net reduce budget deficits over the
2010-2019 period and in subsequent years as CBO
indicated in the estimate we prepared in March.
Returning just to spending, enactment of the legislation
did not cause CBO to change its estimates of longer term growth
rates for spending on the government's health care
programs beyond 2030.
The uncertainties involved in projecting such growth rates
many decades in the future are just too great.
But we did assume that the reduction in the level of
spending in 2030 would persist and that assumption yields lower
projections of health care spending in the longer term,
even without any changes in those longer term growth rates.
Under current law, spending on Social Security is also
projected to rise over time as a share of GDP,
albeit much less dramatically.
CBO projects that Social Security spending will increase
from less than 5% of GDP today to about 6% in 2030 and then
stabilize at roughly that level.
CBO will be releasing soon a report on a number of
different policy options for changing Social Security.
That report focuses on how the options, if implemented,
would affect Social Security's finances and alter the
distribution of benefits paid to and taxes paid by people in
various groups distinguished by household income and
year of birth.
Among the options considered are a variety of ways of
reducing benefits and raising payroll taxes.
All told, CBO projects the aging of the population and rising
costs of health care will cause spending on the major mandatory
health care programs and Social Security to grow from roughly
10% of GDP today to about 16% of GDP 25 years from now,
if current laws are not changed.
By comparison, spending on all of the federal government's
programs and activities, excluding interest payments
on debt, have averaged 18 and a half percent of GDP
over the past 40 years.
To put U.S. fiscal policy on a sustainable path,
lawmakers would have to substantially reduce the growth
and outlays for those programs relative to the amounts that
CBO is projecting or else match that growth with the equivalent
declines in other federal spending,
corresponding increases in federal revenues or some
combination of the two.
Today's report, like last year's,
presents the long-term budget picture under two scenarios that
embody different assumptions about future policies governing
federal revenues and spending.
The extended baseline scenario adheres closely to current law.
In contrast, the alternative fiscal scenario 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.
Among other things, that alternative scenario assumes
extension of most of the 2001 and 2003 tax cuts,
continued relief from the alternative minimum tax,
increases in the rates that Medicare pays to physicians,
and elimination after 2020 of some of the cost-reducing
provisions of the health care legislation.
Neither of these scenarios represents a prediction by CBO
of what policies will be in effect during the next several
decades, and I hope evidently not a recommendation from CBO
what policies that Congress might adopt.
The scenarios are intended, instead,
to illustrate the effects of different policy assumptions.
And as you will see, the differences in the
outcomes are stark.
Under the extended baseline scenario,
the expiration of most of the tax cuts enacted in '01 and '03,
the growing reach of the AMT, and the way in which the tax
system interacts with economic growth,
would result in rising average tax rates.
Those rising rates combined with the tax provisions of the recent
health care legislation would push total revenues to 23% of
GDP by 2035.
That's the middle row of that table,
much higher than has typically been seen in recent decades,
and to larger percentages thereafter.
At the same time, government spending on everything other
than the major mandatory health care programs,
Social Security and interest on the debt,
that is activity such as national defense and a wide
variety of domestic programs, would decline to the lowest
percentage of GDP since World War II.
That significant increase in revenues and decrease in the
relative importance of other spending would offset much,
though not all, of the rise in spending on health care programs
and Social Security.
As a result, debt would increase from its already high levels
relative to GDP, as would required interest payments
on that debt.
Federal debt held by the public would grow from an estimated 62%
of GDP this year to about 80% by 2035.
Interest payments, which absorb federal resources that could
otherwise be used to pay for government services,
currently amount to more than 1% of GDP.
Under this scenario, they would rise to 4% of GDP or 1/6 of all
federal revenues by 2035.
And under this scenario, federal debt would continue to rise,
even with a very substantial increase in the amount of
taxes that people would pay.
But the budget outlook is much bleaker under
the alternative fiscal scenario.
In this scenario, CBO assumed that Medicare's payment rates
for physicians would gradually increase,
which will not happen under current law,
and that several policies enacted in the recent health
care legislation that would restrain growth in health care
spending would not continue after 2020.
In addition, under the alternative scenario,
spending on activities other than the major managed rate
health care programs, Social Security and interest,
would fall below the average level of the past 40 years
relative to GDP but not as low as under
the extended baseline scenario.
More important, CBO assumed for this scenario that most of the
provisions of the 2001 and 2003 tax cuts would be extended,
that the reach of the AMT would be kept close to its historical
extent, and that over the longer run,
tax law would evolve further, so that revenues would remain
at about 19% of GDP, a little above their historical average.
Under that combination of policy assumptions,
federal debt would grow much more rapidly than under the
extended baseline scenario.
With significantly lower revenues and higher outlays,
debt would reach 87% of GDP by 2020, CBO projects.
After that, the growing imbalance between revenues and
non-interest spending combined with spiraling interest payments
would swiftly push debt to unsustainable levels.
Debt as a share of GDP would exceed its historical peak of
109% by 2025, in just 15 years, and would reach 185%
of GDP in 2035.
Moreover, these projections understate the severity of
the long-term budget problem, because they do not incorporate
the substantial negative effects that accumulating
additional federal debt would have on the economy.
For the purposes of the budget projections,
CBO assumes stable economic conditions after 2020,
in particular a constant inflation adjusted interest
rate on federal debt and steady growth rates for
inflation adjusted wages and output.
That approach was chosen for practical reasons but it omits
the important pressures that a rise in debt as a share of GDP
would have on real interest rates and economic growth.
It also omits the impact that higher tax rates and the
increasing value of government benefits would have on
incentives to work and save.
These are important omissions, omissions that we are working
to address in other work that we are doing.
Today's report does analyze separately the economic effects
of rising federal debt.
We expect to release longer versions of
that analysis next month.
In brief, several sorts of effects seem most important.
To start, large budget deficits would reduce national saving,
leading to higher interest rates,
more borrowing from abroad and less domestic investment, which,
in turn, would lower income growth in the United States.
The effects of such crowding out are much
larger under the alternative fiscal scenario than under
the extended baseline scenario.
Those effects will be quite significant within
the next decade.
Let me explain that the top line,
the dark line labeled stable economic conditions,
are the economic assumptions that underlie the budget
projections, the steady growth rates.
The slightly lower dashed line is slightly less GDP due to less
investment under the extended baseline scenario because of
the higher debt.
But the alternative fiscal scenario with much higher debt
leads to significantly less saving and investment.
That line stops where it is across the page because it's
based on a rule of thumb of how people respond to
changes in debt.
Once the levels of debt move beyond the historical
experience, we are reluctant to apply that rule of thumb,
it can be done mechanically but we're not confident that
its results are meaningful.
And that is the point at which we stop drawing that line.
But you can picture it falling further beyond that point.
In addition, growing debt would reduce lawmakers' ability to
respond to economic challenges and other international
challenges and other challenges that arise.
Moreover, higher debt would increase the probability of a
fiscal crisis in which investors would lose confidence in the
government's ability to manage its budget and the government
would be forced to pay much more to borrow funds.
Let me make three final points.
First, there is no intrinsic contradiction between providing
additional fiscal stimulus today while the unemployment rate is
high and many factories and offices are underused
and imposing fiscal restraint several years from now when
output in employment will probably be close
to their potential.
For example, one could increase spending or reduce taxes in 2010
and 2011 and offset the budgetary costs through
spending cuts and revenue increases in 2014 and 2015,
essentially paying back later the extra debt that would
be incurred now.
Whether that combination of policies would be desirable
is Congress' decision, of course, and as always,
CBO does not make policy recommendations.
But it is important to understand the difference
between the effects of government borrowing for limited
periods when the economy is weak and the effects of government
borrowing over indefinite periods when economic activity
and employment have recovered.
Running larger deficits when the economy is weak generally
increases output in employment, relative to what would occur
with smaller deficits or a balanced budget although the
magnitude of those cumulative effects depend critically on the
nature of the tax and spending policies that are used.
In contrast, running larger deficits over sustained periods
when economic activity and employment have recovered
from downturns has significant negative economic consequences,
as I've already discussed.
Moreover, even temporary deficits produce increases
in debt that have harmful consequences in the long run
unless the government runs smaller deficits later to
retire that additional debt.
Second, the long run fiscal imbalance under the alternative
fiscal scenario is large, and eliminating that imbalance would
require significant changes in tax or spending policy or both.
Suppose that your objective for fiscal policy was to finish the
next 25 years with a ratio of debt to GDP that is the same as
it was at the end of fiscal year 2009 that is 53%,
still high by U.S. historical standards.
CBO projects that this goal would be achieved by an
immediate and permanent reduction in spending or
increase in revenues of nearly 5% of GDP,
the equivalent of almost $700 billion in this year's
federal budget, or some other changes over time
of equivalent magnitude.
If that change came entirely from revenues,
it would amount to roughly a one-quarter increase in revenues
relative to the amount projected for 2020 and later years.
That would require, for example, roughly a one-half increase in
personal income tax revenue.
On the other hand, if the change came entirely from spending,
it would represent a cut of roughly one-fifth in primary
non-interest spending from the amount projected for 2020 and
a cut of one-sixth in the amount projected for 2035.
That would represent, for example,
the near elimination of all government programs except
for Social Security, Medicare, Medicaid and national defense.
Third, as indicated by the 5 percentage point of GDP
increase and projected spending I noted earlier,
growth in spending on health care programs remains the
central fiscal challenge.
In CBO's judgment, the health care legislation enacted earlier
this year made a dent in the problem but did
not substantially diminish that challenge.
We project that if all the provisions of the legislation
are implemented, it will reduce federal budget deficits during
the next two decades and beyond and it will reduce federal
health care spending at the end of the next two
decades and beyond.
Those are steps in the direction of a sustainable fiscal policy,
but they are small steps relative to the length of
the journey that will be needed to achieve sustainability.
In CBO's estimates, about half of the increase in federal
health care spending during the next 25 years is attributable to
population aging and about half is attributable to continuing
growth in health care costs per beneficiary.
The legislation from the spring includes many provisions
designed to restrain health care spending,
and information learned from the pilot programs and
demonstrations established by that legislation will be
particularly useful in developing and
refining future policies.
Particularly important to identifying implementing broadly
those initiatives that would most effectively constrain
health care spending hopefully without adverse effects on
people's health.
Successful policies will probably require significant
changes in the financial incentives facing providers
of health care and patients, especially incentives related
to the development and use of new treatments and procedures.
In conclusion, keeping deficits and debt from growing to
unsustainable levels would require raising revenues as a
percentage of GDP significantly above past levels,
reducing future outlays sharply relative to the CBO's
projections, or some combination of those approaches.
Making such changes while economic activity and employment
remain well below the potential levels would probably slow the
economic recovery, however the sooner that long-term changes to
spending and revenues are agreed on and the sooner
they are carried out once the economic weakness ends,
the smaller will be the damage to the economy
from growing federal debt.
Earlier action would require more sacrifices by earlier
generations to benefit future generations.
But it would also permit smaller or more gradual changes and
would give people more time to adjust to them.
Thank you, very much.
Speaker: I'm sorry, senator.
Senator Alan Simpson: Thank you, Doug. And let's open it up.
Yes, Jan, hum-hum.
Representative Schakowsky: So you began by saying, though,
that the estimate on health savings is unchanged under
-- so we're talking about from the second ten years
$1.2 trillion in savings.
Doctor Doug Elmendorf: Our estimate of the effects of
that health care legislation is unchanged and as we explained in
our cost estimate in March, we think the legislation reduces
budget deficits by about $140 billion over the next ten years.
Representative Schakowsky: Right.
Doctor Doug Elmendorf: And by an amount in a broad
range around one-half percent of GDP in the decade beyond that.
Representative Schakowsky: So when you talk about your
alternative budget you said eliminating and balance would
require significant changes in tax or spending policy -- let me
finish -- but what you really are affirming, I think,
is that if key elements of the health care bill were repealed,
then in fact the deficit would -- the debt would grow even more
and the deficit would grow even more.
Doctor Doug Elmendorf: So, of course, Congresswoman it depends on which elements of the
legislation were repealed.
As you know the legislation --
Representative Schakowsky: The key elements play into your alternative budget.
Doctor Doug Elmendorf: Again, so as you know,
certain components of the legislation increase spending
significantly, others reduce spending significantly.
What the alternative fiscal scenario does is to turn off
the forces that cause further reductions in spending in the
second decade, particularly these are payments,
the most important part of that is slower growth in payments to
Medicare providers under that legislation than would have
occurred under prior law.
We and others have expressed concern that the depth of those
cuts, if implemented over the next two decades,
might not be sustainable and that's why in the alternative
scenario we wanted to illustrate,
in addition to other factors, what would happen if those
cuts were deemed by --
Representative Schakowsky: Well, it seems to me, though,
you have taken a hypothetical about
future congressional action.
Maybe we're underestimating your skills here.
We should use you as a prognosticator and, you know,
a fortune teller because you certainly could have adopted --
for example, what if we don't do spending now and there were a
double-dip recession, that would certainly affect the future.
So you picked one scenario.
I want to make a couple of points about this because I
think it is very, very important that we clarify
exactly what you're saying.
Is it not true that this legislation enacted more deficit
reduction than any other piece of legislation in more than a
decade assuming we follow this, the legislation that we passed?
Doctor Doug Elmendorf: I haven't thought carefully about all the legislation of
the past decade.
I think that's true if all the provisions of
the legislation are implemented.
For most legislation, of course, we don't look out
to the second decade.
We look at the ten, traditional ten-year budget window so --
Representative Schakowsky: So that's even more interesting.
So you not only look at a second decade,
but you make up a scenario to present that may or may not,
that may or may not take place.
You could have picked a number of different scenarios for an
alternative on health care.
But let me --
Doctor Doug Elmendorf: Can I clarify what I meant about
the second decade?
Our cost estimate for that legislation --
Representative Schakowsky: Right.
Doctor Doug Elmendorf: -- talked about that second
decade, the way most of our cost estimates do not.
So for most legislation there is no,
nothing equivalent to this half a percent of GDP savings in the
second decade to compare to.
So it's difficult to do that comparison with other
legislation which we have not looked at over
such a long period.
You're right that for the alternative scenario here we
have for the second decade and beyond picked a set of policies
that are not meant to be our prediction,
our prognostication of what the Congress will do.
But they're not chosen randomly.
They were chosen to reflect items of current,
aspects of current law that a number of analysts have
expressed skepticism about the sustainability of over time.
And that is some of the tax increases in current law and
some of the spending reductions in current law.
Representative Schakowsky: Well, you know,
did you take into account that we passed statutory pay-go that
we would have to enact?
I just think that the speculation about what
the Congress could do given the hard votes that have been taken,
the commitment to reducing the cost of health care,
the actual items that are in that legislation that were hard
fought to get, I frankly think is a departure by the CBO from
current past practices of just projecting out based on the
legislation and I think that it is irresponsible.
Thank you.
Doctor Doug Elmendorf: I'm sorry, excuse me,
I need to disagree with that.
It's completely traditional for CBO in the long-term budget
outlook to look at a set of alternative scenarios.
Last year's, last June's long-term outlook had an
extended base line scenario, an alternative scenario.
Previous outlooks had actually more alternative scenarios --
Representative Schakowsky: Well, that was -- that's different.
You have picked one that shows that there are zero savings in
the second ten years.
Erskine Bowles: We want to make sure we give everybody a chance
to ask questions, please.
And we did make a decision that we would use CBO's numbers.
They are considered impartial.
And we thank you.
Senator Simpson: I think that was a unanimous decision of this
commission that we would use CBO figures.
And I appreciate the necessity to do what the Congresswoman is
doing but I think there is the -- certainly an aggressiveness
there that has not set the tone here.
Erskine Bowles: Mr. Cote we will recognize next and then Congressman Ryan.
David Cote: First of all, thanks for actually ending up with a
conclusion on how we should think about this.
I actually found that helpful and that seems,
if that is a bit of a departure from what you have done in the
past, I for one did appreciate it.
So thank you.
I think it helps to guideline us some.
But just to make sure I understand, because it seems,
when I read about this stuff externally people want to point
to '01 tax cuts to stimulus spending,
to the health care legislation that Jan was talking about.
But if I understand what you're saying is, look,
this problem has been coming for a long time because what we're
talking about is a structural issue.
And fundamentally we have this demographic pig that has to work
its way through a 25-year python and that's what we
have to deal with.
Is that correct?
Doctor Doug Elmendorf: So I think --
David Cote: It might not have been in those same words.
Doctor Doug Elmendorf: Correct, this has been long foreseen.
I think the one thing I think I want to clarify is the
pig-in-the-python metaphor, people use that a lot.
But it's not that you get to the other side of the pig.
The population is getting older and it's going to
stay older so our projections --
Speaker: That's part of that pig.
Doctor Doug Elmendorf: And I am as well.
But that is a metaphor people use a lot.
But the one thing that could be misleading is that if you think
that means that after the other side of it then the problem goes
away, that's not right.
The population is aging.
The baby boomer, with the existences of that very large
generation has done essentially is to sort of put off the
problem and then it could come very suddenly because that group
was working, it provided a lot of workers relative to the
number of beneficiaries in older groups.
When it moves to retirement, it sharply moves up the
number of beneficiaries.
David Cote: But I guess trying to say it again the issue
is that this is a structural issue that has been coming
for a long time.
Doctor Elmendorf: Yes, that's correct.
David Cote: And that we're just finally at that point where now we
have to do something.
Doctor Elmendorf: Yes, exactly.
Senator: Conrad.
Senator Simpson: Well, actually, Congressman Ryan and then Chairman Conrad.
Representative Ryan: Doug, thank you very much.
As far as the alternative fiscal is concerned it is just helpful,
I think, to illustrate based upon Congress' pattern of
extending AMT patch, doing the Doc fix to see where we stand
to do all these things.
So you have been doing alternative fiscal scenario
for many, many years.
Doctor Elmendorf: Yes.
Representative Ryan: This predates your tenure at CBO --
Doctor Elmendorf: Yes.
Many directors have presented an alternative scenarios.
Representative Ryan: Right. So I think it is helpful.
On an aside, chairman, I think we ought to have a discussion
about what baseline we use for our fiscal targets.
I would argue that we ought to use CBO's baseline instead of
the OMB baseline and I don't think -- I think most people
would agree with that.
And we ought to use the alternative fiscal scenario
because that is the most realistic one.
We just did the Doc fix and so I assume we will do an AMT patch.
So I would just argue for our own practical purposes on
establishing our fiscal targets, we ought to look at what
baseline we use and that is a discussion in a little while
we ought to have.
Erskine Bowles: I thought actually we had already agreed to
use the CBO numbers?
Representative Ryan: Oh, we are?
I thought we were -- the baseline.
We're talking about the baseline for our targets.
We are using CBO numbers but what baseline we use
matters greatly.
Doctor Elmendorf: And the baseline was my comment last week.
Erskine Bowles: Okay, we'll get to that.
Representative Ryan: Okay, on figure 1-5 on page 20,
I just got this, you know, a half hour ago,
walk me through real quickly, then I have just one other
question, the alternative fiscal scenario with crowding-out
effects, what exactly is happening there?
Does the model just crash because it can't conceive
of a way for the economy to continue,
is that what essentially happens?
Doctor Elmendorf: Yes, actually if we can go back to the slides,
I think it is slide 7 and then everybody can --
Speaker: What page are you on?
Doctor Elmendorf: Page 20.
It's the same picture here on slide 7 for those who want to
look at the screen.
So again, the only aspect of the effects of debt captured in this
picture are the crowding-out effects.
The model doesn't crash in that sense.
It becomes in our judgment unreliable.
So we use a rule of thumb estimated over a period
when the debt and deficits have moved in certain,
over a certain range and it is sort of,
I think it would be a mistake to then apply that rule of thumb as
that deficit then moves beyond that range.
We just don't know what the response would be in this case.
Representative Ryan: Right.
So by 2027, there isn't really a conceivable situation in which
with those levels of debt and interest that the economy can
continue on in some kind of a glide path, that doesn't --
Doctor Elmendorf: Emphasis the uncertainty.
At that point debt to GP would be higher in this country than
it has ever been in our history and higher than
it has been in most developed countries at most times.
So we are simply entering un-chartered territory and that,
the risks posed by that I think are a very important
consideration in your work.
Representative Ryan: Okay, then the second question, figure 2-4,
page 42, this is to me a very important one because this is
what is more of an update.
You are looking at your CBO '09 and 2010 projections on
mandatory federal spending on health
care on an extended basis.
Doctor Elmendorf: That is 514, I think.
Representative Ryan: 5-14.
Doctor Elmendorf: Lot better than before on slide 14.
Representative Ryan: So what I'm trying to get a handle on here
are the projections of health care spending pre and post
health care law.
Health care reform.
And it looks to me, you tell me, that the 2010 projection
excluding the effects of the recent health care legislation,
don't really bend the cost curve very much,
that health care expenses are still going up even with the
passage of this legislation, is that correct?
Doctor Elmendorf: So that the light gray line shows our projection
of major mandatory federal health spending last year.
The dashed black line is the projection we would have this
year excluding the effects of legislation and that down
revision reflects a variety of technical changes in our
methodology I can talk about if you would like.
The difference between that line and the solid black line is the
effects of the health care legislation on spending.
As spending goes up relative to the previous law between
basically 2015 and the late 2020's then falls
below prior law.
The slower growth over the 2020s in total spending relative to
prior law largely reflects this slowdown in the growth
rate of payments to providers to Medicare.
Representative Ryan: Is that the I-pad?
Doctor Elmendorf: It's mostly the specific reduction, productivity.
Representative Ryan: The actual provider.
Doctor Elmendorf: It is written in --
Representative Ryan: Okay.
Doctor Elmendorf: And the I-pad is also a factor.
Representative Ryan: That's part of the 5-29, right?
Yeah.
Doctor Elmendorf: And in 2030, then, we at that point,
that's as far out as we looked and we looked at the cost of
the legislation last year and in through March and we said at the
time we didn't think we had an analytic basis for judging the
effects on growth rates beyond that.
So from 2030 to the rest of this picture and then beyond,
and it's the longer term projections,
we apply the same growth rates that we apply in the
absence of the legislation.
Representative Ryan: Oh, I see.
Doctor Elmendorf: That's just a mechanical assumption lacking analytic
basis for doing something better.
Representative Ryan: But the assumption is that health care
costs are not going down.
They are still continuing to go up?
Doctor Elmendorf: Continuing to go up.
The lower level in 2030 relative to prior law is extrapolated out
and that lowers the level of spending but we don't think we
have a basis for judging whether that legislation
changes the growth rate.
Representative Ryan: One last thing,
you and I have had a lot of conversations with your model
on predicting labor force participation and take-up
rates and the exchanges.
Have you run different scenarios on take-up
rates and the exchanges?
It's a trade-off between the tax exclusion and the subsidies in
the exchange and distributional effects of that, have you run,
A, how many people do you expect to be in the exchange
at the end of a decade.
B, have you taken different runs as to different
decisions by employers.
It was your model's prediction that most employers will
continue to compete for labor based on benefits
and therefore continue to offer employer-sponsored
health insurance than what some outside actuarial models
would have predicted.
Have you run different models of that and what
are the results of that?
Doctor Elmendorf: So we have not run different estimates
of the effects of the legislation.
I think we estimated about 25 million people would be in the
exchanges at the end of the decade.
Representative Ryan: End of the decade, 25 million, okay.
Doctor Elmendorf: Only a small amount of employer dropping.
Representative Ryan: Right, so that was mostly non-employer --
Doctor Elmendorf: Most people who would be otherwise uninsured.
Representative Ryan: In the individual market.
Doctor Elmendorf: The individual market would be moving in to the exchanges.
Only a small reduction in employer-sponsored insurance.
We have not run alternatives.
It's -- we need to think hard about how to do that because
with the model, the model employers and employees make
choices of how to get health insurance based on the cost
they see different places.
So, the effects of more employers dropping insurance
coverage, depends on why they are dropping.
In other words, what, from their perspective what aspect of our
model isn't right.
What are we missing?
And you can get different answers because it matters
a lot who drops.
If employers with mostly low wage workers drop more,
then that increases the subsidies by more.
If it is other employers who drop you end up losing,
collecting more tax revenue.
So the nature of the reason for the dropping matters and
will lead to --
Representative Ryan: I think it worth exploring for alternative scenarios
because I'm sure since the passage of this law
everybody else has had sort of the anecdotal conversation with
large employers who say that they're going
to drop the coverage.
I've had dozens of conversations just in Wisconsin like that.
So I think it is worth our while just for our own estimates to
see what kind of take-up rates we're going to have on that.
Thanks.
Doctor Elmendorf: Thank you.
Erskine Bowles: Thank you.
The order which we have seen I think is our Chairman Conrad,
Representative Camp, Assistant Leader Durbin,
Representative Hensarling.
Representative Becerra and Ms. Fudge, if that's all right.
And then Ms. Rivlin, Dr. Rivlin.
And then you, Senator Crapo.
Senator Conrad: Thank you, Mr. Chairman,
Chairman Bowles and Chairman Simpson, co-chair.
First of all, I just want to go back to what I heard you say,
Director Elmendorf, is that the health care legislation does
reduce the deficit both in the short-term and the long-term.
But that doesn't solve our problem.
Our problem is so big that the savings that accrue as a result
of that legislation are not sufficient to solve the problem.
And in fact, as I heard you describe it,
what's going to be necessary to solve this problem over an
extended period of time are either 25 percent increase in
taxes or a 20 percent reduction in spending or some combination
thereof in a future year.
Is that correct?
Doctor Elmendorf: That's the order of magnitude, yes.
Senator Conrad: Then let me go then to the alternative scenario.
And let me indicate, I know others who aren't on the budget
committees don't spend a lot of time looking at CBO's
alternative scenarios, but we've actually found them useful.
Doctor Elmendorf: Thank you.
Senator Conrad: And these started, as I recall,
about five years ago, maybe six years ago,
doing alternative scenarios.
And one of the reasons was simply the tax cuts that
were put in place in 2001 are scheduled to expire.
We all know that some of those tax cuts will not expire.
There is very strong support for extending at least the middle
class tax cuts which are very substantial, long-term costs.
So many of us thought it was useful to have an alternative
scenario in which we would look at what happens if some or all
of the tax cuts don't expire.
What happens if the alternative minimum tax is continued to be
adjusted so you don't have a big tax increase on people
that was unforeseen.
What happens if you continue to fix the proposed 21 percent cut
in doctors who treat Medicare patients?
Aren't all those a part of the alternative scenario?
Doctor Elmendorf: Yes, they are, Senator.
Senator Conrad: So, really, this was an attempt by CBO to
help us look at what might happen if various things
occurred which might actually happen.
That we continue to fix the alternative minimum
tax to prevent a large tax increase from being imposed.
What would happen if some of the tax cuts from 2001
and 2003 are extended?
What happens if we make other changes, for example,
to prevent the cuts to doctors' reimbursement
who treat Medicare patients.
You have added now apparently in health care some provisions that
some analysts have indicated might not be continued.
That there might be a backlash against certain provisions to
try to accrue savings that people might resist.
You know, whether we look at that or don't look at it,
the hard reality for this commission is we're in a
circumstance in which it is just as clear as it can be under any
scenario that we face an unsustainable long-term debt.
And it is going to take adjustments in spending in
popular programs and/or adjustments in revenue
in order to deal with it.
Isn't that the appropriate conclusion?
Doctor Elmendorf: Yes, I think that's right, Senator.
Senator Conrad: And the adjustments needed are really quite large.
We're not talking about just modest changes.
We're not talking about just tinkering around the edges of
major spending programs like Medicare and Social Security
and like the revenue base of the country in order to
address this problem.
And what you're talking about as I understood it was to get a
debt, a publicly-held debt that would be stable at 53 percent of
the gross domestic product of the country.
Doctor Elmendorf: That's right.
That was the particular example that I offered in my comments.
Senator Conrad: Let me ask you this: If instead we adopted
a target which some are proposing to this Commission,
we're going to hear later today, that we would hold the debt at
60 percent of the gross domestic product of the country,
lower debt than we have now, modestly,
would that substantially change your assessment of what would
be needed in terms of either spending cuts or revenue
increases in order to achieve that goal?
Doctor Elmendorf: It would slightly reduce the
changes that would be needed, but not substantially.
We can work out those numbers, of course, for you.
Senator Conrad: And, in fact, the, one final point,
the publicly-held debt that you're referencing,
when we talk about 53 percent of GDP,
you can roughly add 30 percent to get to what would be the
gross debt, so 53 percent would translate into 83 percent to
harmonize with what Carmen Reinhart was telling us when her
study shows when societies, when countries get to a gross debt of
90 percent of GDP they start to meaningfully impair their
long-term economic growth.
Doctor Elmendorf: So I think that's right.
Let me say a few words.
Carmen Reinhart is now a member of our panel
of economic advisors at CBO.
And so I have talked to her on a number of occasions including
our recent panel meeting about this issue.
In the book that she wrote with Ken Rogoff that's received a
lot of attention, they looked at gross debt
of different countries.
Principally because those are the data that were available
in a comparable way across many countries across many
years of time.
Gross debt also captures, as you know, Senator,
some of the implicit obligations in Social Security and Medicare,
but not all of them.
And in CBO's own analysis we tend to focus on debt held by
the public representing the official legal obligations
it accrued to date.
And then look at projections of unified spending including
future spending on Social Security and Medicare and so on.
So we don't generally talk about gross debt.
The study that they performed, they looked at different
categories of gross debt.
They looked at countries, I think,
with gross debt from zero to 30 percent of GDP or 30 to 60,
or 60 to 90 and so on.
They don't have sufficient data as Carmen said to me a few weeks
ago, to try to look at whether there is
a particular tipping point.
So once you view that 90 percent threshold as sort of on one side
the effects are much smaller, on the other side they're much
larger, it doesn't mean that something special
happens at 90 percent.
And as we have seen in European countries recently,
responses to debt depend not just on hitting some particular
number, but also on investors' perceptions about the country's
ongoing policy and the willingness of the country to
make policy changes and so on.
Senator Conrad: And the trajectory that a country is on.
Doctor Elmendorf: Yes.
Senator Conrad: Let me just conclude by saying the reason
I went through this is I wanted to translate for
people who might be listening who heard the discussion of
90 percent gross debt to what you're talking about
publicly-held debt and the translation is to
add about 30 percent.
Doctor Elmendorf: Currently, yes, that's right.
Senator Conrad: So you're talking at 53 or 60 percent debt to GDP,
the equivalent number on gross debt would be about 90 percent.
Doctor Elmendorf: Today, that's right, yes.
Representative Camp: Thank you, those are many of the points I
wanted to raise as well.
You said we surged to 62 percent of GDP by the end
of the fiscal year.
So we're really, and we have been talking in terms of gross
debt in this Commission, so we're at 90.
The treasury report that came out a couple of weeks ago said
in 2015 we'll be at a hundred percent of gross debt GDP.
I'm sure you've seen those numbers.
And I want to thank you for this report.
Obviously we all saw it as we walked in so we haven't had a
chance to fully analyze it as much as we would
like but I very much --
Doctor Elmendorf: It is not meant to be a trick,
of course, we just barely finished this and --
Representative Camp: No, I am not trying -- I just appreciate the
chance to have it and that's why as I am looking at this
figure 2-4, certainly health care spending does go up above
what it would have without the health care law,
at least it looks like until 2023 under your chart.
There is a couple of points I wanted to make,
and one was the Medicare actuaries that warned us that
the Medicare reductions were unsustainable and were likely to
be carried out over time because of the jeopardizing of seniors'
access to health care.
In your alternative scenario, however, though,
that is not one of the assumptions you make.
You're assuming that the health care reductions move forward as
I understand your testimony.
You do not accept those in your alternative budget scenario.
Doctor Elmendorf: So let me try to be clear briefly.
Representative Camp: You're assuming Congress doesn't change the Medicare
reductions in your alternative budget scenario,
from my understanding.
Doctor Elmendorf: Well, yes so we do after 2020.
So in the extended baseline scenario,
the one most modeled after current law,
we assume that the legislation unfolds as written down through
2030 using the estimate we used earlier in the year.
And then at that, beyond 2030 we extrapolate using the same
growth rates for spending that we would have used in the
absence of the legislation.
The alternative scenario we essentially followed our cost
estimate out to 2020 except that we put in the Medicare payment
higher payment to physicians, but otherwise out to 2020 and
then at that, beyond that point we extrapolate using
the underlying growth rate we would have used in the
absence of legislation.
So the legislation, the effects that it has over the first
decade and the level in the decade is of spending
and is extrapolated out.
Representative Camp: All right.
Then in your alternative scenario, there obviously
was a significant increase in Medicaid under the health
care law, almost a half a trillion dollar
increase in that program.
Do you assume that increase is sustained in the alternative
scenario as well?
Do you back that out?
Doctor Elmendorf: Yes, so we treat the changes in Medicare/Medicaid symmetrically.
The legislation had a significant increase in the
category we call Medicaid chip and exchange subsidies,
of course, and significant reductions in Medicare spending.
And in this overall mandatory federal spending on health care
we're capturing both sides of that.
Representative Camp: And then lastly,
I just want to understand finally your long-term
forecasts, what do you project government spending and revenue
to be as a percent of GDP?
And how does that compare to the historical average?
Doctor Elmendorf: Well, so under the -- under either scenario,
federal spending is significantly higher
over the longer run than has been in history.
Under the extended baseline scenario,
revenues are significantly higher than they have been
in our history.
Under the alternative fiscal scenario revenues are not higher
than they have been under our history.
That was the design objective.
Representative Camp: All right. Thank you.
Doctor Elmendorf: Thank you, Congressman.
Senator: Doctor Elmendorf. Thank you for being here.
I am sorry I missed your presentation.
I was on the floor making a speech about deficits.
Here's my concern.
And I will try to summarize it if I can.
We have a pretty tough challenge here in terms of what we have
been asked to come up with.
I don't know if it is politically possible.
As I look around the table here.
These are all nice folks but we kind of view the
world in different terms.
Let's see if we can come together.
I am really concerned about a point that I understand you made
in your presentation and one I'm trying to come to terms with.
This morning in the New York Times,
tells the story Franklin Roosevelt's efforts to deal
with the great depression.
It appears for the first four years even though Lord Maynard
Keynes wasn't a recognized leader at the moment,
he tried the Keynes approach putting money in the economy,
through the new deal, creating jobs,
trying to create more aggregate demand and move the economy out
of depression.
With some success.
But then on a second term he decided it is time to
hit the breaks.
We have got a deficit here.
And we have got to deal with the deficit,
so they backed off the stimulus.
As they backed off, the depression started roaring
forward again with higher and higher unemployment.
And some say we suffered as a nation with that until the
advent of world war two when we started a war time footing
economy with virtually full employment that moved us to
a different place.
I kind of put that historical lesson in the context of today.
As we look at our charge here to bring down our nation's
long-term debt, we do it in the face of a pretty serious
recession, with some 8 million, some say
14 million unemployed people.
With gross domestic product growing at a -- not a fiery
pace but a slow pace.
And concerns about whether or not we are going to sink back
in to a deeper depression if we are not careful.
I happen to believe that we are making some mistakes in
not extending unemployment benefits for example.
Which we have been told over and over again is the best way to
inject money directly into the economy to bring us out of this
recession.
We are going to fail to do that I'm afraid.
Again today, meaning 1.2 million Americans will lose
their unemployment benefits.
Point I am getting to is this, what should be
our starting point?
If we say we are now going to start to move to the austerity
of spending cuts and tax increases.
What should we accept as the starting point to judge that
we are out of the recession, our economy is stable,
and it can now afford to stop spending money,
stop cutting taxes, and start dealing directly with what
is needed to deal with the long-term deficit?
Director Doug Elmendorf: Well, senator, you used word "should" in your question.
As you know, should is not a word that CBO uses.
You should do what you and your colleagues choose to do.
What I said in my remarks was there is no intrinsic
contradiction between providing additional fiscal stimulus today
while the unemployment rate is high and many factories
and offices are under used.
And imposing fiscal restraint several years from now when
output and employment have returned closer
to their potential.
CBO's last economic projection released in January and
maintained in their March under pinning for our March budget
projections was looking for a slow economic recovery.
And that is what we are experiencing.
There in fact GDP growth has been a little stronger than we
expected, unemployment is a touch lower.
In broad terms, our expectation of a slow recovery seems to be
so far roughly on track.
There is a great deal of uncertainty at this point
about whether the economy will gather momentum or whether it
will maintain a slow pace of expansion,
or possibly slip back.
However, we are updating economic forecasts for our
updated budgeted outlook to be released in August.
And at this point, I don't expect dramatic changes.
We are still expecting a slow recovery.
Under that projection, unemployment rate doesn't
come down to the neighborhood of 5 percent for four years.
It works it's way down gradually but it takes a long time.
There are about 8 million people who have lost jobs but several
million who would have gained jobs because of a growing
population over the last few years if we had not
had a recession.
You can think about 11 million people or so who
need to have jobs.
And if you work up the math of that,
you need job gains of hundreds of thousands of months for a
number of years to put all of those people back to work.
Senator: If I can follow-up, to draw the analogy when the doctor
gives you the antibiotic and says take it all,
even when you feel like you are well, keep taking it.
All the way through to the end.
Because our studies show if you quit too soon,
you could get sicker.
And so my question to you, are you saying it will be four years
before the CBO sees our economy stabilizing to the point that we
can consider real deficit reduction.
During that four year period of time,
we still need to deal with increasing debt to stimulate
the economy and grow the GDP.
Director Doug Elmendorf: I think the -- I think what most analysts would say,
is that reductions in spending this year or increases in taxes
this year would slow the economic recovery.
They would say the same thing about next year.
I think most analysts would tell you that reaching an agreement
on longer term reduction in spending or increases in taxes
or some combination as quickly as possible would actually
support the economic recovery, because it would provide clarity
about future policy that is missing when a lot of very
important pieces of legislation on the tax end spending side are
hanging in the balance.
Senator: My last question, can you give us a basic definition
that as premise that we should use and say at this point after
X number of quarters of GDP growth or X percentage of
unemployment, we can now say it is safe to say this economy has
recovered from this recession and we can deal with what is
necessary, spending cuts, tax increases to deal with
our long-term debt.
Director Doug Elmendorf: I don't think I have an analytical basis
for picking a threshold for you.
As economy strengthens, as unemployment falls,
then increasingly it becomes less problematic to implement
these fiscal changes you are discussing.
And increasingly important -- less problematic in a
short recovery sense and increasingly important in
terms of stabilizing debt.
I don't think there is a particular tipping point
that I could identify for you senator.
Erskine Bowles: Thank you.
We are now going to go to Representative Hensarling and
then to Representative Becerra, Ms. Fudge, Doctor Rivline,
Senator Crapo, and Senator Gregg, are the ones I have seen.
Representative Jeb Hensarling: Thank you Doctor Elmendorf.
One statement and then two or three questions here.
Number one, I agree with you that the debate about the need,
the desirability of increased short-term government stimulus
is a debate separate and apart that is necessary to deal with
our long-term structural debt.
Not only have we heard it from you,
we have heard it from Chairman Bernanke,
and many other professional economies that one of the
important things we can do to promote economic growth and
jobs today is put forth a plan dealing with our
long-term structural debt.
Now we can have that debate about the stimulus.
I for one think it has been an abysmal failure
and all I see is debt and the highest unemployment
rate in a generation.
I don't think we want to take up our time having that
debate at the moment.
I would hope that again, we would focus on the long-term
structural debt that we have.
In that regard, harkening back to the health care legislation,
key difference and I am must more familiar on last year's
report, on the long-term budget outlook because I had time to
read it and study it, this one you just presented.
But you are saying the key difference is the health care
legislation passed by congress between last year's outlook and
this year's outlook. Correct?
Director Doug Elmendorf: Well, there are a number of technical changes we made.
We talked very hard about the various assumptions and so on.
We in particularly the alternative fiscal scenario,
the tax side, beyond this next decade in which we follow
basically the almost the same course of assuming
the extension of things that congress is discussing,
beyond that point last year, we worked out specifics sort
of tax changes from the alternative scenario.
This year we took the simpler, we thought the cleaner approach.
We said we don't know what would happen.
Benchmark you all would find useful would be a
constant share of GDP.
Variety of changes for those reasons.
Representative Jeb Hensarling: I was trying to take notes on what you said.
I want to make sure I captured the essence.
I believe you said if all -- if all provisions of the health
care bill enacted were actually -- I am sorry
-- if all provisions were actually enacted,
we would have slightly lower health care costs and I don't
remember if you said in the short-term or long-term.
Is that fair?
Director Doug Elmendorf: If all provisions, the law has been enacted,
if all provisions are implemented, then we have
a slightly lower federal health spending by the late 2020's.
Representative Jeb Hensarling: You are making assumptions about the funding cliffs,
the DOC fix, Medicare cuts that again may or
may not ultimately occur.
Some of which may be reflected in your alternative scenario.
Correct?
Director Doug Elmendorf: Yes.
Representative Jeb Hensarling: Is it a fair assessment though
to say though and we know that the -- I believe that the chief
actuary for CMS may have a different conclusion as to
the ultimate costs of the health care legislation.
But regardless, is it fair to say that dealing with the
long-term structural debt of our nation regardless of benefits,
that purported benefits this is not a game changer.
Because you said I believe that CBO will not change his
long-term health care costs outlook based
on this legislation.
Did you say that?
Director Doug Elmendorf: So we did not change our growth
projection beyond 2030 because of the legislation and I said I
don't think we have an analytic basis for judging the effects
the legislation of that horizon.
That should not be taken as a judgment that there would be not
effect on the growth rate but our inability to determine what
that effect might be.
As I said also the legislation takes steps toward fiscal
sustainability, but small steps relative to the length
of the journey that would be needed to
ultimately achieve sustainability.
Representative Jeb Hensarling: I will use the phrase not a game changer.
Let me ask you a couple of questions about revenues and
I'll yield my time back.
I believe at least in last year's long-term budget outlook,
I have some of your language in front of me.
It says alternatively if spending grew as projected and
taxes were raised and tandem tax rates would have to reach levels
never seen in the United States, high tax raise would slow the
growth of the economy making the spending burden harder to bear.
This is language out of last year's report.
I don't know if it is in this year's report or not.
Do you still stand by that statement?
Director Doug Elmendorf: It is very similar language in this year's report.
Under the extended Baseline scenario,
which is the version that keeps debt below a hundred percent GDP
for number of years, not a huge accomplishment in some sense.
But under that scenario, taxes relative to GDP relatives to
levels which we have not seen before.
And there is some discussion in the revenue chapter of this
outlook about the source of tax rates that would be experienced
on labor and capital.
Representative Jeb Hensarling: I would like to hone in on the
magnitude of the tax increases necessary if we tried to solve
the structural long-term debt on the tax side.
We have had testimony from two of your predecessors,
Mr. Penner and Mr. Reischauer.
Mr. Penner testified before us that by 2040 tax increases
required by the high spending option raised overall federal
tax burden by 50 percent.
And would continue to rise after that.
US total tax burden now considerably below the OECD
average would be higher than today's OECD average by mid
century and within a few years after that would be the high --
we would be the highest tax nation on the earth.
Mr. Reischauer testified in other words raising taxes on
the rich or corporations, closing tax loop holes,
eliminating Wasteful and low priority programs,
and prohibiting earmarks simply won't be enough.
And then in correspondence I believe through Congressman
Ryan and OA, when asked to assume again dealing with
the long-term structural debt, on the tax side,
with no economic feedbacks taken to account,
tax rates would have to more than double.
Lowest tax bracket goes from ten to 25.
25 goes to 63. 35, goes to 88.
The question is, has that -- do you agree where the analysis of
your two predecessors as I quoted in,
in the correspondence that you sent to Congressman Ryan that
has announced it is well over 18 months old.
Is that an accurate analysis of what would be expected on
the tax side?
And if so, at what point do you plan for the negative economic
feedback of less economic growth tax avoidance and tax evasion?
Director Doug Elmendorf: So of course I haven't done our own calculations of each
of those facts of my predecessors, but I have
tremendous respect for them.
I assume they did those calculations correctly.
Once again, I have not gone back to recalculate the numbers that
we sent Congressman Ryan.
I don't think they would be different quantitatively.
If you look for example on page 61 in front of you,
there is a table, table 4-3, page 61.
Sorry I don't have a slide for this.
Estimates of effective marginal tax rates,
under CBO's extended Baseline scenario.
And the top row is the marginal tax rate on labor income.
This is the rate that people pay essentially
on the extra dollar of income.
Again page 61.
In 2010, we estimate that to be about 29 percent.
In 2035 under this scenario we estimate this to be
about 38 percent.
Increase from about 30 to 40 percent.
And if we carry that out beyond 2035, you would
find significantly higher rates as you went further out.
I think qualitatively your point that higher -- that under this
extended Baseline scenario, which current law unfolds
as written, tax rates rise considerably and the report
talks about the tax system one would have,
although it is in current law, would feel very different from
the tax system we have today.
In terms of how much taxes are being paid and who is
paying how much.
An alternative scenario, beyond 2020, we just flat
lined revenues as shared GDP and about 19 percent,
just above the historical average,
and that is just designed to indicate what happens if taxes
are kept in their historical relationship,
the GDP without having to be specific about what exactly
what taxes have to be changed.
Since we are not specific about it,
we can't really do a calculation of what the
marginal tax rates would be.
It depends on how you and your colleagues did that.
Erskine Bowles: Mr. Hensarling, we give -- the house members now
have to go for votes.
To give Mr. Becerra a chance, we'll go to him now if it is
okay with you.
Representative Jeb Hensarling: Thank you.
Erskine Bowles: Thank you.
Representative Xavier Becerra: Thank you, Mr. Chairman.
Mr. Chairman, thanks very much for your comments.
Let me -- let me go to chart, the chart on page 42,
the one Mr. Ryan used to talk about --
Director Doug Elmendorf: That is the one that is up here.
It is on page 42.
Representative Xavier Becerra: Okay.
I want to make sure about something.
This talks about mandatory federal spending on health care.
That doesn't talk about overall national spending
on health care.
It is just the federal government's program
principally Medicare and Medicaid.
That is true -- (inaudible).
So this is just those programs that are under the purview of
the federal government.
You show a decrease in spending long-term,
going in 2035 as -- results of the historic health reform
legislation that we passed this year.
Couple of points on that.
You show a drop in spending overall,
in 2035 even though we will by then have added 30 some odd
million new Americans into health insurance programs.
So at the same time that we are adding new people into those
government sponsored health insurance programs,
we are actually reducing the cost of health care overall.
Director Doug Elmendorf: If all the provisions of the law are implemented as enacted,
then you are both increasing the number of Americans with
health insurance and reducing by the late 2020's federal spending
on -- on health insurance under our projections.
Representative Xavier Becerra: What sometimes gets lost in a
chart and lines and gaps in the different lines and don't look
that significant is that in between the 2009 projection,
blue line and the lowest of the lines,
the projection with the health care historic health care plan
enacted there are 30 some odd million Americans squeezed in
between those lines that wouldn't have otherwise had
health insurance without the health care reform.
Director Doug Elmendorf: Yes. I mean we haven't done the projections to the number of
people out to the second decade.
Your point is right.
Legislation as you know, we are two suspending Medicare and uses
that money and other money to pay for
subsidies for health insurance.
For tens of millions of additional Americans.
Representative Xavier Becerra: Okay.
And my understanding is private sector health care costs are --
have been rising faster than the health care cost for Medicare
for quite some time.
My number -- I have something that shows over -- last ten
years of a period covered 97 to 2008,
over ten years private health insurance spending grew by
6.9 percent, Medicare spending 4.5 percent.
Once again, this chart only shows the spending at the
federal level with federal programs for health care.
It doesn't show the overall cost of health care for the nation
and certainly doesn't factor in private health care spending
which has been rising at as faster rate than Medicare
spending has been rising.
Director Doug Elmendorf: There is a brief discussion in the report about overall
national health expenditures but we explain there we don't really
model the pieces as we model the federal pieces
for obvious reasons.
There is also a table that compares cost growth in
Medicare, Medicaid, and the rest of the health care system.
And the relationship and the growth rates across the
different aspect of the health care system differs overtime.
There are periods where Medicare spending has grown faster than
in the private sector.
There are perioding where Medicare spending has grown
more slowly than in the private sector.
It depends on what period one looks at.
Of course what the underlying dynamics of the system and also
the policies that you and your colleagues have been enacting.
Representative Xavier Becerra: That is a great seg way to my
final area of questioning.
If you could put up I am not sure if it is chart 8.
I see number 8 under your three final points.
Chart that had three final points.
You mentioned in your third and final point.
In your judgment that the health care legislation enacted this
year made a dent in the problem but did not substantially
diminish that challenge.
Once again it made the point that we made a dent but we
are not taking into account the fact that costs for health care
aren't driven by what we pay in Medicare and Medicaid.
Essentially Medicare and Medicaid don't determine
the cost of health care.
What they determine is the level of reimbursement for providers
who provide health care to Americans who qualify for
Medicare and Medicaid.
And so therefore, we could cut Medicare or
Medicaid all we want.
That doesn't result in necessary -- necessarily result in health
care costs dropping the same amount.
Because the private sector may not follow suit and we may find
that a lot of these providers that are accepting Medicare and
Medicaid, may say forget it, we are no longer going to
take Medicare or Medicaid as reimbursement and we are
going to go somewhere else, private insurance,
cash, to get payments.
So we can make a dent in health care costs but we can't resolve
the problem simply by cutting Medicare or
Medicaid in and of themselves.
Director Doug Elmendorf: It depends on what the problem is you
are referring to.
Of course, our projections in the federal budget is
what matters is federal spending.
Obviously one might well care about other sorts of -- other
aspect of this society and economy as well.
You are right that changes in Medicare payment rates don't
translate necessarily in he equivalent economy wide
changes in health costs.
At the same time, of course, about half of health care in
this country is paid for now through the public sector.
And about half through the private sector.
There is a chart in our outlook that demonstrates that.
So the way in which public programs work is very important
factor behind the way that the health care system operates.
Representative Xavier Becerra: And we'll need to figure out
away to get the private sector involved in this effort to
corral health care costs if we are ever going to
have real success for Medicare or Medicaid.
But generally for Americans in terms of how much they'll pay
for health care.
One last point and this is more for those of us,
Mr. Chairman in the -- on the commission.
I think the first point in your final three points Mr. Chairman
goes to this whole issue that I have tried to point out that we
have deficit, but to me the biggest deficit we
have is the jobs deficit.
I think to the point Mr. Elmendorf raises here that
while the unemployment rate is high and many factories and
offices are under used, there is nothing that say it is wrong to
try to stimulate the economy to get it going again.
So that later on when output and employment are closer to
their potential, then you have to really tighten the belts and
get fiscally -- I won't say fiscally responsible.
Hopefully we have been fiscally responsible generally.
But that is when you can go ahead and make those really
tough decisions on how you tighten the budget itself,
but I would hope what we do is recognize that more
people are working.
More of those millions of Americans that Mr. Elmendorf
pointed out that are working, that means
they are paying taxes.
Instead of collecting government services and benefits through
unemployment and elsewhere as a result of not being able to
work, my last and final point is to your second
of your three points: the long run fiscal imbalance.
Some of the members here would like us to use CBO's alternative
fiscal scenario as our Baseline.
Well, I agree that we use Mr. Elmendorf and his shop
to determine the numbers.
I would be very careful about going anywhere near
the alternative scenario.
Because for our purposes, if we are truly serious about having
everything on the table, we will have done I think made a breathe
taking decision to take many things off the table
by saying we are using the alternative fiscal scenario
as our base line.
Because we are thereby assuming, assuming without in absolute
terms without any discussion that we'll extend tax cuts,
that when principally to Americans who are the most
wealthy in this country.
And we are assuming that we will continue tax cuts that help
drive us into these massive deficits that we have today so
to make those assumptions by incorporating this alternative
fiscal scenario as our base line,
I believe is a breach of our commitment to keep everything
on the table until we make a decision on where we go.
Director Doug Elmendorf: I am sorry, Congressman.
What the commission does is up to you.
Not my business.
But I want to clarify something I didn't talk about before so
carefully or carefully enough apparently.
The -- in the extension of the tax cuts,
underlying our internal -- our alternative fiscal scenario,
we use the pieces identified in the statutory pay-go law
-- that actually is tax extending the 2001,
2003 rate cuts for the lower and middle income people,
not extending them for the highest income people.
If they were also extended that would make the alternative
fiscal scenario somewhat worse.
Not dramatically different.
Most of the money in the 01, 03 tax cut extension is for the
people with income below, 200, $250,000.
Representative Xavier Becerra: And, Doug, I agree with what you just said to a
point because there were some provisions in the statutory
pay-go that went beyond helping those who are lower and middle
income that we need to explore.
But for the most part, I think you are right.
Even if it were for the modest and middle income that we would
be taking the conversation off the table,
I think that would still violate our obligations
in this commission to still keep everything on the table because
everyone should be part of the game.
And that means everyone should par take in the pain as well.
Thank you Mr. Chairman.
Chairman: Thank you. We now have Ms. Fudge and Dr. Rivlin, Senator Crapo,
and Senator Gregg.
And Mr. Stern.
Ms. Fudge: Doug, first of all, let me thank you for the analysis
and as someone who more often than not gets reports late in
the game, it is okay.
As long as the information is good.
And flipping through this, page 16 and 17,
there are some charts which show the effect of delaying action.
You didn't really talk about this.
And the reason I want to raise this at this juncture is that
one of the things as we move along in this process,
we have to keep our eye on action.
And as Senator Durbin talked about the need to have 14 of
our fellow commissioners agree on a point of action.
I think it is important for you to talk about
this a little further.
And, secondly, I want to reinforce whether or not
we take the action next year.
It is critically important to have a plan.
Because in business we have to operate with some level
of clarity and where possible reduce the uncertainty in a
world that is becoming increasingly uncertain
to manage in.
Director Doug Elmendorf: So thank you for actually
drawing attention to this.
I didn't want to use too much time,
but I -- if you look at page 16 in the report,
there is a figure which talks about the reductions in primary
spending, not interest spending, or increases in revenues in
various years needed to close the 25 year fiscal gap under
this alternative scenario.
And closing the fiscal gap means what I explained before,
just having a debt to GDP ratio at the end of the 25 years.
So in 2035, it is the same as it was as the end of last year
about 50 percent GDP.
If actions begin next year, left hand bar,
it would require reduction in spending or increase or revenue
or combination equal to 4.8 percent of GDP.
In each year, that in between 2011 and 2025,
you could have different patterns but would have
to end up with the same ultimate effect.
If one waits to begin until 2015,
then it requires changes worth changes worth
5.7 percent of GDP.
One waits until the end of the decade,
then it is required to make changes equal
to 7.9 percent of GDP.
Going from little under five to almost 9%.
Four percent of GDP that is about $600 billion in today's
dollars is the extra tightening you have to do in a decade if
you waited until then to start.
On your other point as I said before, I think many,
many people who could sit here would tell you that the enacting
cuts in spending or increases in taxes right now would slow the
recovery but developing a plan, a credible plan for doing so now
would support the recovery by reducing uncertainty.
in a decade if you waited till then to start.
On your other point, as I said before, I think many,
many people who could sit here would tell you that enacting
cuts in spending or increases in taxes right now would slow the
recovery, but developing a plan, a credible plan,
for doing so now would support the recovery by
reducing the uncertainty.
Erskine Bowles: I think it's worth pointing out just for people who are
not used to thinking in terms of 4% of GDP;
you're talking about about a trillion dollars on a
25 trillion dollar economy at that point in time.
Senator: So right now GDP is about $15 trillion.
Erskine Bowles: But, if you wait, it will be about a 25 trillion dollar.
Senator: Right. It will be bigger.
Ms. Rivlin: I just wanted to come back to a point that Dave Cote made,
and also Chairman Conrad, that this is not a new problem.
We have spent most of our time around this table talking about
the impact of the healthcare legislation on moving the
spending or revenue curve, but the answer is they don't
move it very much.
And we can argue about how much and what the timing is,
but for those of us who've looked at the covers of CBO
publications for a long time, this graph looks an awful lot
like the same graph that was there last year and
the year before.
It has a, basically a current law line,
which doesn't look so terrible, because the tax,
it assumes that the tax cuts, all of them,
expire when the law says they will and that the alternative
minimum tax goes on eating up the lunch of lots more and more
taxpayers every year and brings in a lot of revenue.
So that line doesn't look so scary.
But CBO has been pointing out for quite a long time that
congress probably will and I would say should -- Doug can
say that -- fix the AMT, and that some of these tax cuts
will be extended.
That's what makes that line look so scary, and it isn't.
The healthcare changes which may make the line a little better or
they may make it -- Doug says, and I agree with him,
that they make it a little better.
But, if not everything is carried through,
they might make it a little worse, but it's a little.
The basic problem is still there.
It is a structural problem having to do with healthcare
costs and aging that is -- that we've got to deal with.
Senator Crapo: Thank you very much.
Dr. Elmendorf, I want to go back into some of your analysis in
your alternative scenario.
And, by the way, I appreciate the alternative scenario.
I know that this commission is not bound by any of the
information that we are presented by our witnesses,
but it certainly helps us to try to figure out what is the
reality that we are dealing with and what the numbers do mean.
And I want to go through a couple of the numbers that I
understand you have included in your alternative scenario.
For example, I understand that the Doc Fix or the SGR
adjustments have been included in your alternative scenario.
In other words, assuming that congress will continue to delay
or in some way fix the steep cuts to physician reimbursement.
What was the assumption in the Doc Fix that you used?
Was it a slow growth rate, or was it holding the line stable,
or what was it?
Doctor Elmendorf: We assume the payments of physicians rise with
the Medicare economic index, which basically captures the
costs of the inputs that physicians purchase,
and that's more consistent with what has actually happened in
the past than would be the cuts now under
current law under the SGR.
Senator Crapo: And have you or could you create a graph that
would show the, just the impact of that assumption on the SGR
fix itself so that someone like me or a member of the commission
could on their own play with the parts, if you will,
and add it in or take it out and analyze in that context?
In other words, could you generate such a chart?
Doctor Elmendorf: Oh, yes, we can do that.
We've estimated, as you could imagine, many,
many alternative changes in the Medicare payments to physicians,
the tables posted on the CBO website,
and you can pick the row that you want, and you can call us,
and we'll help you find --
Senator Crapo: Well, maybe you could refer me to those charts,
because there's something like that that I wanted to look at in
not only the area of the SGR fix,
but also the other Medicare cuts.
And could you -- I understand there are other similar types of
Medicare cuts that most people don't have any belief that
congress will allow to happen, and I assume that you've put
those also in your alternative assumptions?
Doctor Elmendorf: So what the alternative scenario, physical scenario,
does is that it follows the baseline, current law,
plus the health legislation over the next decade
and then does this adjustment to the SGR.
But over the next decade, the other,
the provision enacted in the spring's health legislation to
reduce payments to providers.
Those are included as having affect in the alternative
scenario until 2020.
Beyond 2020, we assume that those provisions
don't have effect anymore.
Senator Crapo: And are there charts that you could refer me
to that would show how in 2020 and forward the actual numbers
of what adjustments you are making because of those cuts?
Doctor Elmendorf: I think we can provide -- yeah,
I think we can provide some of that detail.
I don't know exactly what's done,
but we can talk with you and provide whatever we can.
Senator Crapo: And then similarly, with the AMT patch,
what kind of an AMT adjustment are you assuming
in your numbers?
Doctor Elmendorf: I believe we go back to the 2009 -- of course
the AMT patch has expired.
Senator Crapo: Correct.
Doctor Elmendorf: Currently.
So we go back to the 2009 levels given the patch is done 2009,
and then we increase over time the various thresholds in the
AMT with inflation.
Senator Crapo: Okay.
Doctor Elmendorf: And the effect of that is essentially to hold
roughly constant the share of the population that would be
paying the alternative minimum tax.
Senator Crapo: And again, is there a chart or something you
could provide that would specifically show the impact
of doing or not doing that?
Doctor Elmendorf: Yes.
Again, certainly over the next 10 years,
many of these alternatives appear in our regular outlooks.
Senator Crapo: Right.
Doctor Elmendorf: So we've done a number -- now,
the estimates of the effects of particular legislation on the
tax side, of course, come from our colleagues at the south of
the joint tax committee.
But we can work with them to provide whatever you'd
be interested in.
Senator Crapo: All right, that will be helpful.
And then again, I think you've already clarified this,
but with regard to the 2001 and 2003 tax cuts,
your assumptions are that those tax cuts will be extended for
the lower and middle class but not for those making more than
$250,000 a year.
Doctor Elmendorf: Yes, that's correct.
Senator Crapo: All right.
Last question I have is -- I'm just changing subjects for a
minute here and going back --
Doctor Elmendorf: Can I just say before you go on, sir,
you don't have to look at this now, there is a chart, in fact,
on page 56 of income tax revenue under the extended baseline,
and then under the extended baseline but extending the
ATRA^ and JATRA^ provisions you described,
and then a further line showing additionally this
fix to the AMT.
Senator Crapo: All right, good.
Doctor Elmendorf: The data for that are on our website already.
Senator Crapo: That's the kind of thing I'm talking about,
and I'd like to see the charts with the numbers behind that.
Is that the joint --
Doctor Elmendorf: Again, the numbers underlying all the
charts in here were posted to the CBO website at 9 o'clock
this morning when the document went up.
Senator Crapo: Good.
Last question is, and again back to your chart that you're
showing, number 8, I think, of your charts where you talk about
the, the first bullet where you talk about the lack of an
intrinsic contradiction between providing additional stimulus
today and then, in your words, imposing fiscal restraint
several years from now.
I assume when you talk about the need to impose fiscal restraint
several years from now that you are not just talking about
stopping the stimulus, but that you're actually talking about
somehow recapturing that spending so it does not push
the economic consequences out into the out years.
Is that correct?
Doctor Elmendorf: Yes.
And of course the policy choice is up to the congress,
but the point I was trying to illustrate was that one can
widen the deficit now and at the same time implement,
enact policy changes that would recoup that money later.
But all of that would just hold you level relative to
the projections I've given.
If one then wants to address the problems embodied in those
projections, one needs to go substantially
further, of course.
Senator Crapo: All right.
Thank you very much.
Erskine Bowles: Let me just ask one thing before we go to
Senator Gregg, because, you know, my memory -- Alice,
yours is probably better than mine -- going back to the 90's
is not to great, but trying to think about whether the savings
that had been forecast in the new healthcare bill will
actually take effect, if I remember correctly,
the savings in the 90 and 93 actions that the congress did
on Medicare actually all materialized.
And I think the ones we did in 97, the vast majority did,
and I think the savings were actually more than we forecast,
but I'm not positive of that.
But some kind of historical reference
would be helpful to me.
Doctor Elmendorf: So a couple of thoughts in response to that question.
One is that Medicare spending by the federal government came in
below what CBO had projected in the wake of the 1997 balance
budget agreement, and that point has been raised a number of
times by people who think that we had underestimated the
savings from that balance budget act.
It's hard to know, though, just what the source of
our error was.
I mean, the projection was off, so there was an error somewhere.
But whether that was because we underestimated the effects of
that act or whether we had overestimated what spending
would have been in the absence of that act is basically
impossible to tell in retrospect except for a few particular
provisions where we think we understand some particular
dynamic unfolded in a sector of the healthcare system that
we had not anticipated.
But as a general matter, 1997 was right as the managed care
changes were moving across the country.
Overall national health spending slowed very sharply,
and in the baseline projection that CBO made in 1997,
I think not a lot of weight was put on that
as a persistent factor.
So there's at least a plausible story that we had overestimated
the baseline as underestimating the effects of the act.
I just want to say one other thing, which is important here,
which is that given all the legislation that's been enacted
for Medicare over the last decades and the demographic
and economic forces at work, Medicare spending per
beneficiary adjusting for overall inflation has increased
about 4% a year over the last two decades.
Under other projections given both our baseline and before
the legislation of spring and in the legislation,
we projected Medicare spending per beneficiary after adjusting
for inflation will rise about 2% a year for the next two decades.
So it's a very sharp slow down from what has been experienced,
even given all that legislation, and it is because of the
magnitude of that slow down that we wrote a number of our cost
estimates, including the one for the final legislation.
I will quote: "It is unclear whether such a reduction in the
growth rate of spending could be achieved and, if so,
whether it would be accomplished through greater efficiencies in
the delivery of health care or through reductions and access to
care or the quality of care".
Erskine Bowles: Thank you.
I'm not challenging your assumptions.
I simply was trying to remember what the reality
was of what had occurred.
I've never seen a perfect set of projections ever.
Doctor Elmendorf: And you haven't yet; I'm afraid, even with this morning's report.
Senator Gregg: Well, even if they are imperfect, they are scary.
And what's concerning about them, more than concerning,
is that under either scenario you're looking at a debt ratio
which the term unsustainable can be applied to it,
is that not correct?
Doctor Elmendorf: Yes, that's right.
Senator Gregg: And I'm trying to get -- you know,
I use this term unsustainable, and a lot of other people do.
What the heck does that mean?
I mean, what is the event -- you know,
when you guys are sitting around after you do these projections
and you say that public debt is going to 87% of GDP and the toll
debt is over 100% of GDP and that's unsustainable,
and we've historically had a 35% rate of GDP public debt,
what's the event that you folks see that's going to define
un-sustainability or series of events?
Doctor Elmendorf: It's very hard to know.
I went to a meeting sponsored by the committee for responsible
federal budget, which a number of people talked about possible
scenarios, but there was no consensus about this,
and I think there isn't a consensus because there isn't --
Senator Gregg: Well, give us those scenarios.
Doctor Elmendorf: -- much experience to draw on.
The effects of the crowding out proceeds incrementally
from year to year.
They're a sort of slow wearing away relative to what would
otherwise be achievable in the economy.
The more unpredictable -- that's unpredictable enough,
but the more unpredictable part is perceptions of investors
buying treasury securities and the point at which they would
become worried that we did not have the willingness,
a commitment to honor those obligations is a matter of
psychology, as much as of economics,
maybe more so of psychology.
And if you look at the experience of other countries,
and we plan to issue a brief next month that will talk about
this very question, if you look at other countries,
the losses of confidence tend to come quickly.
It is not the interest rates go up by a little bit every
month for many years.
It is something more dramatic happens.
But the point at which that happens is, I think,
almost impossible to really predict, because it depends on,
again, not just the actual level of debt,
but the view of where that is headed and what the willingness
is of the electrid (sic) and the elected officials to address it.
So, the situation in Greece was one that many people were
worried about, but I think that few had an analytic basis for
predicting exactly when it would blow up.
Senator Gregg: Well, the practical implications for John
and Mary Jones on Main Street is that their standard of living
goes down, isn't it?
Doctor Elmendorf: Certainly down relative to what would otherwise have happened.
I mean, we have an underlying, very strong economy with a
tremendous history of innovation and productivity growth.
And if you look at the lines from that chart that we've shown
several times, they go up for a while even as the debt burden is
growing because of the underlying strength,
but ultimately if the debt grows unchecked, yes,
it means declines in people's standards of living.
Senator Gregg: Now, you've sort of laid out what I would call a
two-step dance scenario here.
The first step you're implying is to get the economy going,
and that may mean continued stimulus,
which would mean we'd maintain the Bush tax cuts as they are
without any change.
That's just an editorial comment to try to get people awake!
Wake people up.
(laughter)
Senator Gregg: The second step is to put in place some out-year adjustments
which are very clear and definable that are going to
get under control the debt to GDP ratio by
reducing the deficit.
How do you perceive those being set forth?
I mean, in other words, if we're not going to do them ab initio
from the beginning of a proposal,
you're not going to have an immediate adjustment.
How do you perceive a congress binding future congresses to a
game plan which leads to fiscal responsibility?
Doctor Elmendorf: That's an important question.
I'm not recommending, of course, any --
Senator Gregg: I understand.
Doctor Elmendorf: -- policy.
I'm saying that as a matter of analytics,
one can have a policy that widens the deficit now and
narrows it later.
But, I think you were right that establishing the creditability
of those future cuts would be, in spending or increases in
revenue, future cuts in the deficit, would be difficult,
and difficult in parts because there already are current laws
that would narrow the deficit over time that many people
expect the congress to change.
The extension of at least large parts of the 2001/2003 tax cuts,
continued fixes to the alternative minimum tax,
increases in Medicare payments to providers.
These are a set of features already in current law that
would narrow the deficit that people, many people,
do not expect the congress to stick with.
And I think if your concern is that adding other items to that
list might not be -- those future promises might not
be credible, that I think is an important
and very legitimate concern.
And I'm -- hard for me to judge what the perceptions would be.
I think that it would require -- I think for those future changes
to be credible would require some public commitment from a
large collection of elected officials.
And that's I think what I'm, the group I'm meeting with.
Senator Gregg: Well, do you mean we would have to do -- I don't want
to take too much more time on this,
but wouldn't we have to do very specific initiatives in various
entitlement accounts and various tax policy accounts
that could be scored?
Doctor Elmendorf: I think specificity would be very, very
helpful in establishing creditability, yes.
Senator Gregg: Thank you.
Speaker: Thank you.
Mr. Stern: So on the -- I think you said that you're presuming
that we return to normal economic activity by 2012.
Was that what you said?
Doctor Elmendorf: No, I'm sorry.
Let me clarify that.
The -- we -- our projection from January is that the unemployment
rate gets back down in the neighborhood of 5% by 2014.
Mr. Stern: 14.
Doctor Elmendorf: We do discuss in the report the
fact that tax revenue as a share GEP would,
we project to jump a lot in the next couple of years because of
the first few years of the economic recovery,
but it would not be a complete recovery,
and that's part of the crucial point that we expect to slow,
and we think many other analysts also expect a slow recovery.
Mr. Stern: And are you concerned at all that our failure to do
what you call additional fiscal stimulus today will help or hurt
get to those projections in 2014?
Doctor Elmendorf: Our judgment is that further fiscal stimulus this year or
next year would help the economy, depending -- I mean,
what constitutes stimulus depends a lot on the specifics
of the changes in policy, but if changes in policy were enacted
that really were stimulative, then -- and we've talked about
what sorts of policies we think would fit that bill,
then we think that would strengthen the recovery,
that would move us back faster.
It would not solve the problem overnight,
but it would lead to faster output and employment growth
over whatever period those provisions were in effect.
Mr. Stern: And what were those recommendations that
you thought would get us there faster?
Doctor Elmendorf: Well, again, some recommendations we
don't do, but we have -- we issued a report --
Mr. Stern: I'll learn.
Doctor Elmendorf: -- issued a report in January that looked at
a variety of ideas that had been talked about.
The crucial question is whether the change in taxes or extra
spending leads ultimately to additional private spending.
And so increases on employment insurance benefits or other
benefits directed at lower income people have,
in our judgment and most forecasters judgment,
fairly high bang for the buck, because people in those
situations tend to spend a large share of the money they receive.
Changes in taxes for high ranking people generally have
less bang for the buck in the short run since what you asked
in your question, I think, because high ranking people will
tend to save a larger share of the money they receive.
On the spending side, the crucial question is whether
the spending gets done quickly.
We think that money that goes to state governments,
for example, will tend to be spent fairly quickly,
because the state governments at the moment are in tight
fiscal conditions.
Money that goes for infrastructure spending, though,
tends to spend out more slowly.
And as many years since Alice was running CBO,
looking at these sorts of numbers,
and seeing how that sort of spending just takes a while
to get going.
So, again, it's, I think, a very nice report from January that
looks at those issues, and we'd be happy to talk to
you more about that.
Mr. Stern: My second issue is that I absolutely think the
country needs a fiscal plan, because you can't run anything
without a fiscally responsible plan.
But I'm wondering where this convention of wisdom comes,
that if you make a plan; the market reacts favorably to it.
So you have Japan, which has very high debt to GDP ratio,
which has a plan which people said made a lot of sense,
but we now have made plans in Europe,
which doesn't seem to be making people feel very comfortable and
reacting very well.
So I'm wonder -- and people are invested in the U.S.
for all kinds of other reasons about our security and economic
and political systems.
Why do we think that we will get, you know,
that kind of bounce in the long run simply because we
have a plan?
Doctor Elmendorf: So I think most -- there's several issues there.
It's a very good question, and we discussed at our economic
advisers meeting a few weeks ago the situation in Europe
at some length.
A number of analysts think that austerity plan that Greece has
agreed to will not work.
So, for many analysts, it is not credible,
and that seems to be why it has not calmed fears
about Greek debt.
Mr. Stern: And (inaudible) new plan.
Doctor Elmendorf: So I think the -- I mean,
I think in all these cases there are issues of creditability,
as Senator Gregg grazed.
I think another issue that our advisers thought was important
was the underlying economic nature of the country involved.
In the United States, because our treasury debt is viewed
as a safe asset, when problems develop other places in the
world, money tends to come here, as you noted.
That means that our treasury rates are already pretty low at
the moment, and that makes it harder, in a sense,
to get a direct quantitative sort of thing we can easily
model in which interest rates fall by a certain
number of bases points.
It doesn't make it impossible, maybe harder at the moment
because of the flows of money that have come in.
In the discussion I had with Ms. Fudge earlier,
I tried to be a little vaguer, and I talked about the
importance and she talked about the importance of
a greater clarity.
And I think, you know, a very important aspect of recessions
in early parts of tentative recovers is a lack of confidence.
(inaudible) where consumer confidence was reported
to have fallen.
And, but it's a much harder thing to model analytically.
Mr. Stern: So that when you talk about investors,
are you talking about investors who are investing in our
treasury or investors who are investing in businesses?
I mean, we'd say, we have a plan and we're going to solve this
problem of having confidence.
Since our treasury is so low and people are investing,
it seems like having a plan is not going to particularly change
that in the short run.
Doctor Elmendorf: Yeah.
So I think I mean both in different contexts.
I think when we talk about the risk of a fiscal crisis in the
United States, if we move along the path of an alternative
fiscal scenario for many years, then I was referring,
but I should have been more clear,
to investors in treasury securities.
I think in terms of the benefits that a credible plan might have
for the short-term economic situation in the United States,
then I mean generally confidence of businesses in investing and
businesses in hiring and families in buying houses
and spending money.
Mr. Stern: One quick last question.
So, as we see that the amount of money we're spending on paying
off the debt continues to increase under almost every
scenario, unless we do something,
and what is the advantage or disadvantage of having some
kind of surcharge to try to pay the debt off faster
that we've accumulated.
What economic impact does that have?