Bipartisan Fiscal Commission Third Meeting

Bipartisan Fiscal Commission Third Meeting


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?

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